MBA-2002-UAR ..........Marketing 501


Chapter 1

Marketing Overview


Section (1.1) Introduction.

Section (1.2) Macromarketing.

Section (1.3) Marketing Management.

Section (1.4) Business Orientation.

Section (1.5) Political Influences.

Section (1.6) Societal Influences.

Section (1.7) Organizing for Marketing Management.

Section (1.8) Ethics in Marketing Management.


Section (1.1)



The topic, which we are going to examine, is marketing. This is a process that is used by virtually every organization--both business and non-business, in the world. Originally developed by profit-seeking institutions, its use has spread to charities, religious organizations, politicians, special interest groups, and others.

Stop a number of people on the street and ask them what marketing is and, in all likelihood, you'll get a variety of answers, most are wrong (and some unpleasant): "Marketing is what I don't have enough money to do at the supermarket every week"; or "Marketing is selling"; "Marketing is advertising." or, perhaps, "Marketing is a way for rich establishment business people to fleece the consumer."

You can see that it's no use stopping people on the street. Actually, marketing is a process, vital to all organizations, that exerts a strong influence on our society. Like so many words in the English language, marketing is derived from the Latin, where "mercari" means, "to trade". In fact, some dictionaries trace the word "market" back to Sanskrit, so essential has the process been from our very beginnings.

A general definition of marketing is that it consists of the activities involved in creating goods and services and directing them to consumers. As you might imagine, this is important to society as a means of maintaining and improving consumers' standards of living. Consumers--who are the individuals that utilize economic goods--require a variety of goods and services. Marketers are charged with the responsibility for creating goods and services and getting them to consumers.

Detroit auto producers design products and decide on their prices. In addition, the producers attempt to persuade consumers to buy the automobiles, arrange for their distribution from factories to dealer showrooms, and arrange for servicing after purchase. All these activities are necessary for the consumers to fully enjoy the use of the automobiles, and for the producer to make a profit and create new products.

The complete definition of marketing is that it is the process of planning and executing the conception, pricing, promotion, ad distribution of ideas, goods, and services to create exchanges that satisfy individual and organization objectives.

It is apparent that marketing is a rather all-inclusive field, involving many activities and all types of organizations. This definition is very long and complex, so we are going to break it down into parts and study each part.







Marketers plan--They formulate objectives and decide how to attain these objectives. They also implement or carry out plans. The plans cover:

1. Conception: creatively developing new products and ideas.

2. Pricing: developing price schedules for old and new products.

3. Promotion: deciding how to sell products and ideas.

4. Distribution: formulating ways of getting goods and services to customers.

One of the major ways in which marketers plan is to decide what new products should be made available. Consumer needs and desires change continually. This change creates a need for new products and services. In addition, there is always demand for new offerings that fulfill needs and desires more effectively than do existing products and services. Consumers want automobiles that are more fuel-efficient than their predecessors, computers that have more functions and cost less, and substitutes for aspirin that do not irritate the stomach lining.

Marketers also have to make plans on the targets of their products. Should a grocery chain stay in one region of the country or should it go national? Should a fast food chain expand to Russia? Should a gift shop try to cater to upper or middle-income consumers? Should automobile dealers focus on men or women as targets?

In reality, marketers make plans in these and many other areas. It is essential that planning have a major place in the activities of top and middle level executives.

A widespread opinion is that marketers only handle products. But that is only part of the story. They also sell services, as in the case of airlines, income tax services, credit card purveyors, restaurants, automobile repair shops, and insurance companies. Nonprofit organizations, such as charities are also involved in this activity.

The United States Army uses marketing when it attempts to recruit personnel for its ranks.

The definition of marketing highlights the importance of exchanges. These are at the heart of marketing. Consumers are willing to part with money in exchange for goods and services, which satisfy their objectives. In turn, companies satisfy their profit objectives by selling them goods and services. If the exchange is carried out fairly and efficiently, both parties to the transaction can make gains.

Exchanges contribute to the standards of living of consumers. A manufacturer of cake mixes persuades consumers to try a new recipe, through end-of-aisle supermarket displays. A producer of steam boilers makes arrangements with a railroad to move boilers to various electric utility installations. A hardware dealer shows a consumer how to repair his sailboat hull with fiberglass. A magazine advertisement explains the safety benefits of a new motorcycle helmet. All of these activities have as their final goal the satisfaction of consumer needs, in exchange for a profit.

In addition to delivery of a better standard of living, exchanges also result in higher rates of employment. If marketers do not deliver goods and services satisfactorily, consumers will not purchase them, resulting in a decline in sales and profits and, as a consequence, the dismissal of workers or failure to hire new ones. Business and other organizations must have revenues in order to provide employment. In turn, exchanges are the major source of revenues.

Those countries with the highest unemployment rates are also the countries with the most backward marketing systems. While one cannot trace a direct cause-effect relationship to this phenomenon, most experts agree that marketing is the driving force behind the level of employment. Governmental officials in both major political parties agree that low unemployment is a fundamental goal of the economic and political systems in the United States today. Foreign governments generally agree with this position.








The activities that marketers perform are collectively called the "marketing mix". These consist of:

1. Product planning: Making decisions pertaining to the products or services to be offered.

Some examples are:

· What products or services to sell: Running shoes? Walking shoes?

· Will the company design different products for different classes of consumers? High quality running shoes for advanced runners and more comfortable shoes for beginners?

· What attributes should each product possess? What sizes and colors are appropriate? What levels of workmanship are best?

· Should the company put brand names on its products? If so, what names should it use?

· What kinds of packaging and labeling should the firm use?


2. Pricing. What amount of money should be charged to consumers and intermediaries (wholesalers and retailers)? This requires looking at:

· Demand. How much will buyers pay for the good or service?

· Cost. The good or service should at least cover costs, in most cases.

· Competition. If competition is heavy, prices may have to be lowered.

· The law. There are governmental regulations over many pricing matters.

3. Distribution. How will the products be moved from the producer to the consumer?

· Physical distribution. The firm must decide how to transport and warehouse the goods and how to handle order processing.

· Channels of distribution. What (if any) wholesalers and retailers will assist in serving customers?

4. Promotion. How will the company sell its products and otherwise communicate with customers?

· Advertising. The firm may use this form of mass communication to reach large numbers of customers.

· Personal selling. Sales representatives are useful in delivering an intensive message to individual customers.

· Sales promotion. Non-recurring promotions, such as contests and in-store demonstrations can be helpful in reinforcing the advertising and personal selling effort.

· Publicity. Free promotion, delivered by means such as newspapers and television can promote the product.

These marketing activities have a large impact on society. They influence the prices consumers pay, for instance. In most companies, marketers are the central decision-makers when it comes to setting prices. Also, inefficient marketing can produce higher costs, leading to higher prices, and the resulting inflation increases the cost of living. This both penalizes U.S. consumers and hinders the efforts of U.S. firms to compete in foreign markets.

In every economic system, someone must set prices. In some communist and socialist countries government bureaucrats do this. In the United States and in other capitalist countries business, guided by marketers, have this task. The responsibility is substantial, as it has an impact on every member of the public.

It should be recognized that the marketing mixes which companies employ affect the values and ideals of society. Advertisements, for instance, sometimes convince the consumer population into feeling that it is desirable to appear and feel young or, on the other hand to relax with a particular beverage at the end of a hard day. They can communicate the ideas that helping the disadvantaged overcome economic problems and that wearing fashionable clothing are both desirable.

Some critics of marketing feel that its influence over values is too great and is directed to the wrong ends, that marketers encourage values such as materialism, selfishness, greed, shortsightedness, and lack of thrift. Marketers usually counter that these values already exist--that they are instilled by institutions such as the family and schools--and that marketers only design marketing mixes that are compatible with the values.




Section (1.2)



Think of how marketing affects the general public. Then look into this section to further develop your thoughts.

A large aircraft producer dominates the economy of a large United States city. To a large extent the city and its residents are dependent upon the marketing activities of this firm. The company takes orders from a large number of subcontractors; so many small and medium sized companies depend on the aircraft producer for their profits. Competition is very severe in this industry, so the marketing personnel must be very astute in staying abreast of the major rivals.

If this firm's marketing activities fail and competitors get the big orders, unemployment surges and city revenues plunge. Not surprisingly, most of the citizens of the city follow the marketing efforts of the producer very closely.


Basically, macro marketing refers to the processes where marketers accomplish or do not accomplish the objectives of society at large. The goal is to develop and use a marketing system that works well in satisfying the needs, both material and non-material, of the population.

In some societies, the macro marketing system does not work well. Goods are scarce and the few that are available are of low quality. Food is wasted in obsolete warehouses and inefficient transportation systems deliver goods to the wrong places. Many products are produced but never purchased, because consumers do not like them. Advertisements do not accurately inform consumers about products. While some of these problems probably exist, at least to a minor degree in all societies, an effective macro marketing system can minimize their existence.

From a macro vantage point, marketing adopts the perspective of the economy at large. It includes all business activities that link production of goods and services to satisfying needs and wants of buyers. It also includes the organizations, as they evolve over time and perform these activities. The process of specialization and exchange are at the root of marketing.

Marketing has developed because of specialization and exchange. Specialization and its resulting efficiency can benefit everyone. For example, large companies manufacture pens in quantity and sell each at a nominal price. This is much more efficient than if we all were to try to produce our own pens. We all reap the advantages of specialization, provided that exchange takes place.

The difficulty is that exchange does notautomatically follow specialization. Because of specialization, consumption and production are separated. A large manufacturer, for instance, makes transparent tape in Minnesota, but relies on a host of organizations and users around the globe to distribute and consume the product. The greater the specialization the greater is the gap between specialization and exchange. In turn, exchange will not occur unless the gaps are successfully bridged.

In modern economies such as the U.S. there is a potential gap in the macro marketing system because exchange may not develop to support specialization. The economy needs specialization because the costs of production are much smaller than they would be in a subsistence economy. But individuals and companies cannot specialize unless exchange exists, so they can acquire needed goods and services that are produced by other individuals and companies. Otherwise, those who produced computers would have nothing but computers at their disposal--they would lack food, shelter, and other needs that other companies create.



The gaps between producers and consumers have several dimensions, each of which is related to one of the five components of a product's total value or "utility" to potential buyers; form, awareness, place, time, and possession.

1. Form utility means the physical properties that result from production. Automobiles that have the desired design and performance to meet the demands of buyers are likely to sell well.

2. Awareness utility refers to the degree to which customers learn about the existence and nature of a product and how it might satisfy their wants. Auto buyers must become aware of new models before they will buy them.

3. Place utility relates to product availability at locations where customers expect to find them for sale. Automobiles are distributed around the world and located in various dealerships to result in sales.

4. Time utility means that product must be stocked at the right times and places, that customers must be made aware of their presence when they are available, and the products must be displayed adequately for sales to result.

5. Possession utility results from activities designed to facilitate purchase, such as providing credit and accepting charges, implementing return policies, providing instructions for use and installation, and making arrangements to transfer title. A strong warranty, for instance, increases the value of an automobile.

In order that marketing managers can develop the exchange process to its fullest potential, they must design a "total product"--the mix of all utility dimensions--to satisfy customer needs. Production plays an important role in this process by converting resources into forms wanted by users, but there are other equally important functions required to bridge gaps between producers and customers.

An oil field supplies company sponsors advertisements in oil industry trade publications. These are capable of producing awareness utility. They will indicate to petroleum explorers and producers what products--such as drill bits--are available. They also will describe the supplies and their performance and provide information helping potential buyers to determine if the supplies will satisfy their needs. Without awareness utility, the supplies are of no value to these potential buyers. As far as they are concerned, the supplies do not exist.


A system is a set of interdependent components, where a change in any one of them affects the status of the others as well as the entire set. A marketing system's components are of two types: the functions to be performed and the various participants that emerge over time to perform them.

There are three broad categories of marketing functions needed to develop exchange. These are merchandising, distribution, and facilitative.

Merchandising means bringing together (assembling) collections of goods and services. For example, an income tax preparation firm buys forms and equipment, rents office space, hires people, and does other things to be able to offer tax services. The merchandising functions are buying, standardizing and grading, pricing, and promoting.

1. Buying--the process of purchasing goods and services--is vital for all businesses. Some of the most successful merchants and producers owe much of their success to acquiring high quality products and services at reasonable prices.

2. Standardizing and grading means categorizing items such as shoes, canned foods, and meat. Branding products (naming them) also relates to this function as it serves to identify product offerings.

3. Pricing consists of setting prices high enough to cover costs and earn a profit yet low enough to attract buyers.

4. Promoting means communicating with potential buyers about an item's existence and uses. Automobile advertisements, for instance, inform consumers about the performance of various models.

Physical distribution is a second important function. It consists of transporting, storing, and materials handling.

1. Transporting means moving items from one place to another, as by truck or rail.

2. Storing means collecting a quantity of items at various places, such as a collection of cars in a dealership lot.

3. Material handling means transferring items from transportation to storage facilities and vice versa.

note: difference between transportation and material handling.

A third important element is the facilitative function. This includes financing, risk bearing, and obtaining information.

1. Financing means arranging for purchases, as through consumer or trade credit.

2. Risk bearing refers to taking risks due to errors in judging needs, theft, obsolescence, and other threats.

3. Obtaining information refers to learning about user needs (often referred to as "marketing research").

In the United States economy merchandising is an important function. It involves bringing together collections of goods and services. It includes buying, categorizing items and identifying them for consumers, setting prices, and communicating with buyers about product existence and uses. This is the function where the firm assembles the resources necessary to reach its goals and objectives. These resources will be used to produce goods and services for customers.


The second arm of the marketing system consists of the entities that perform the functions: buyers, producers, and intermediaries.

1. Buyers are made up of consumers, government units, and industrial and other product buyers. Consumers are the people who buy items for personal use. They are purchased because consumers can use the goods to satisfy their individual and family wants not business needs. Also consumers around the world comprise increasingly attractive markets.

2. Government units are federal, state, and local bodies who make purchases from Air Force bombers to green beans.

3. Industrial and other product buyers collectively buy every conceivable item so that they can perform the organization's task. Included are profit seeking companies and not-for-profits such as charities.

Producers are those who manufacture goods and services. They play a dual role of buying and resource conversion.

Intermediaries are specialists who perform marketing activities for several producers. They include selling intermediaries such as wholesalers and retailers that buy goods and services and later resell them for a profit. They also include facilitative intermediaries, who do not sell, such as advertising agencies, marketing research companies, and transportation carriers.








Section (1.3)

Marketing Management:


Marketing management is a widely employed term in business circles today. Try to define what the term means to you.

Most large packaged food marketers today are masters of the marketing management function. They spend large amounts on advertising, which informs consumers about products and persuades them to buy the products. These firms set prices that smaller rivals find hard to meet. Yet the prices are high enough to yield attractive profits. These large enterprises employ staffs of well-trained sales forces that are aware of the needs of the market. Further, these companies have contacts with the better wholesalers and retailers in the country. And their physical distribution systems are very efficient--providing for timely and inexpensive delivery. Any firm that is interested in improving its marketing management is well advised to consider what the large packaged food marketers are doing.


Marketing management refers to the activities involved in managing the marketing function within an individual business. This is the realm of micro marketing--the activities of a particular company.

A key element in marketing management is the target market, sometimes referred to as target customers. The concept of selecting a group of customers to target is based upon recognizing the different needs that exist in the marketplace due to the great variety of values and lifestyles. A company risks failure if it tries to become "everything to everybody" because people's needs differ substantially.

There are many different kinds of target markets that can be selected. Some companies aim at particular age groups. One of the major TV networks, for example, focuses on consumers who are in their 20's. On the other hand, a travel network attempts to serve those who are 50 and over. Many magazines choose target markets based upon personal interests. There are magazines designed for computer novices and others for advanced computer users, those who want to build a house, those who like cigars, and many other groups. Some companies strive to serve particular income groups. Most shopping centers, for instance, are looking for the middle income families.

Marketers should choose their target customers carefully. Members of the target should have a need for the product or service. Many older people suffer from arthritis, for example, so this group is a good target for painkillers. Many users of the internet have a college education so suppliers of internet services address this group.

The target group should be large enough to make up a suitable market. Many companies aim at the baby boomers (born in the years after World War II) because this is a huge group. On the other hand, the group born in the 1930's is small because these were mainly depression years and many couples did not have children.

Also, members of the target should have sufficient income or other buying power to pay for the product. There are a number of foreign countries with large populations and many needs, but few marketers target them with products because they do not have the purchasing power to buy an adequate volume of the product to justify the costs of marketing it.

Most successful department stores select a market target because they find that they can very effectively satisfy the needs of a smaller group, but if they compromise and try to satisfy everyone, they will end up satisfying no one. The needs of particular customers differ too much to satisfy everyone. A store may decide to target the upscale trade by offering expensive merchandise and services. Another might orient itself toward bargain hunters. Both can be successful, provided that they offer what their target customers want.

Sometimes, however, what they want is not obvious, and it is necessary to conduct marketing research studies to uncover this information.


Focusing efforts on target customers involves blending a number of activities into an integrated "marketing mix" aimed at a target market's needs. There are four major groups of activities that make up the marketing mix: product, price, promotion, and place. These are often called the "4 P's of marketing.

1. Product. It is marketing's responsibility to coordinate with production so that the offerings match the needs of target customers. Decisions cover both tangible (color, size, performance specifications, etc.) and intangibles (warranties, guarantees, image, etc.)

2. Price. Besides covering costs and generating a profit, prices should be set to reflect the needs of the market.

3. Promotion. Organizations must effectively communicate messages to target customers when they coordinate all promotion activities, including advertising, personal selling, sales promotion, and publicity.

4. Place. This involves selecting and maintaining a channel of distribution--a collection of intermediaries through which products flow as they move toward final customers. It also involves the formulation and operation of physical distribution systems to handle the physical movement and storage of products.


note how "place" involves the operation of handling the physical entity.

Most progressive companies today recognize the value of "integrated marketing". This means coordinating the parts of the marketing mix in such a way that they all work together in tandem toward satisfying the target customer.

A supermarket chain located in the North Atlantic section of the country practices integrated marketing. The chain's target customer is upper income and educated. Prices are high but high quality products and services match these. Store interiors are designed with low-shelving, muted lighting, and carpeted floors. Classical and semi-classical music is beamed through the public address system. The stores offer only top quality merchandise and many specialties, such as antelope meat and venison in the meat department. Store employees are well trained and are very courteous.

Not only should the overall marketing mix be integrated, but each of the four components should also follow this pattern. It is important, for example, to coordinate the various promotion activities. The messages which advertisements carry should reinforce what sales representatives are saying. Sales promotion campaigns should carry the same themes as do advertising and personal selling. If all promotion elements work together, the result is a strong effort toward achieving marketing goals.

A paint manufacturer would have several elements in the marketing mix. The marketing mix is made up of activities that are used to satisfy the consumer. To be included in the marketing mix, the activities must fall within the categories of product, price, promotion, and place. In other words, activities in areas such as production, engineering, finance, and human resource management is not part of the marketing mix. This is not to say that they would not have an influence on the mix, but they are not an integral part of it.


In a sense, all marketing decisions counterbalance or act as tradeoffs to each other. Hence, they should all work together and reinforce each other. Typically, unclaimed freight stores are situated in low-rent districts of major cities. They offer few services or amenities, but are able to attract customers at rock-bottom prices. Customers sacrifice convenience and prestige shopping locations for low prices. Similarly, the use of very aggressive wholesalers (which are usually costly) can make extensive advertising unnecessary and thereby keep overall marketing costs down.

There is a need to coordinate all marketing mix decisions to yield a total product offering that satisfies a selected target market's needs at a profit. The evidence to date indicates that this process definitely increases an organization's chances for success in the marketplace.

The marketing manager is the individual who must take steps to ensure that all marketing mix decisions are coordinated. It is this individual who should have an overall view of the entire marketing operation and make sure that everyone in the marketing department works together.

If the marketing manager fails to communicate the importance of coordination, a company's situation can easily get out of hand. Insular interests may prevail. Advertising people may go one way and sales people another, each one pursuing its own individual goals. While this situation is obviously undesirable, it is interesting how easily it can happen if the marketing manager does not exert strong control.

A clothing store offers only high-quality fashion merchandise. The clothing store is offering high-quality fashion merchandise, so its target customers are probably well-to-do prestige conscious individuals. In order to satisfy this target the store management is well advised to do everything it can to convey high-status. The store should be located in a prestige location, should employ highly- qualified sales help, should charge high prices, and should promote the high quality and exclusive nature of its offerings. It is a mistake to do anything that will impair the image of the store or the products and services it offers. Promoting a bargain appeal would work against the store's interests.


At one time, marketing was defined as consisting of transactions and marketing was said to take place when two parties exchanged things of value at one point in time. When a sales representative closed a sale with a prospect, a transaction had taken place and the marketing task was completed. When a customer responded to a magazine advertisement and sent in money for a product, there was a transaction. After this transaction, marketing did not take place until the next transaction.

Today most progressive marketers reject the transaction theory of marketing. Rather, they believe that effective marketing involves developing relationships with customers. Much of the marketing effort should be directed toward producing good relationships, rather than just striving for transactions. In developing relationships, marketers make an effort to get to know their customers. They study their needs and develop a marketing mix that should satisfy these needs.

Relationship marketing does not end when a sale (a transaction) is made. Instead, the marketer follows up after the sale to make sure that the customer is satisfied. If the product is a computer, it is preferable to make sure that it is properly installed. If the buyer wants help in this task, it is better to provide help, rather than just leaving boxes containing the computer with the buyer. Similarly, post-sale customer service may be needed for returns and allowances, repair of the product, and even in training the buyer and/or the buyer's employees on how to use the product. Some of the more effective marketers contact customers after the sale to determine if they are having any problems with the product. Another useful practice is to thank the customer for the order and, in some cases, to congratulate the customer for making a wise purchase.

A great part of industrial selling involves developing relationships with customers. A sales representative may make multiple trips to a prospect's place of business to study needs, spend money entertaining the prospect, and act as an unpaid consultant to the prospect. It may be necessary to do all these things and more before trying to get an order. The relationship is developed first and it is assumed that a transaction will take place later.

A producer of light fixtures practices relationship marketing. An example of this activity is contacting customers after the sale to see if they have problems with the product. The idea is to develop a good relationship with customers. A good relationship will not result if the customer buys the product and then has problems with it. It is doubtful that this customer will want to buy again from the company. And it is likely that he or she will mention the unfavorable experience to others in other companies and the marketer will lose goodwill.

The way that marketing management is carried out depends heavily on the philosophy of business which the company operate under. Next, we will consider various philosophies of business.


Section (1.4)

Business Orientation:


Reflect for a few minutes on your philosophy of business--What, in your opinion, are the overriding objectives of a company?

A small New Mexico based company has an effective philosophy of business--it attempts to produce products that consumers demand. The owner designed custom cat collars for her own cat and found that many neighbors admired these items. The cat owner decided to sell similar collars to neighbors and friends. She asked them for their preferences and designed products accordingly. This effort was successful; leading her to list the products in catalogs widely read by consumers.

By keeping her ear to the market and designing only collars that are in high demand, this individual has managed to earn substantial profits.


Long run success requires that a company find and maintain some type of "differential advantage" (superiority over competitors, in the eyes of consumers) over its competition.

There are four managerial orientations or "business philosophies" that suggest how managers can develop this:

a production orientation,

a sales orientation,

a marketing orientation and

a societal orientation.

In this case the "orientation" means the major objective of the business. Is the major objective to produce, to sell, to market goods and services, or to maintain the physical environment? A company's orientation can be discovered by asking management to answer the question: "What are you in business for?" Quite different answers will come from different companies, revealing major disparities in philosophy.

1. A "production orientation" holds that the key to business success lies in solving technological problems. Managers who embrace this philosophy may insist on product quality, but they do so from a technical perspective, seeking products that are viewed as useful or important by engineers and other specialists. They seek standardization and place little emphasis on designing the right product to meet unique customer needs. They also de-emphasize the importance of promoting the product, securing the right distribution, and other marketing activities.Essentially, the philosophy assumes that good items will sell themselves. Some of the U.S. auto manufacturers held this philosophy in the years prior to the 1970's. They were generally engineering oriented. But, major inroads by foreign competition forced a change in management and the adoption of a marketing orientation. Managers with this philosophy may over-engineer a product. This means creating an offering that has more features and costs more than consumers want. It is possible to create toys, for example, that are so durable that they literally will last a lifetime. But the cost would be exorbitant for most parents. Most of these buyers would rather pay much less and take the chance that their children will break or misuse the toy.A machine tool producer with the production orientation might believe that good products would sell themselves, and act on this. Followers of the production concept accept the philosophy that "If you design a better mousetrap, consumers will beat a path to your door trying to get it". They see little or no need for marketing activities. In an economy where consumer goods are very scarce but demands for such goods are great (such as in China today) this concept may work. But it has little chances of working in advanced economies such as the United States, Canada, and Germany, where consumers seek products that satisfy their unique needs.


2. A sales orientation is the second guiding business philosophy. Based upon substantial personal selling and mass promotion activities, its emphasis is on persuading potential customers to buy the firm's products. As with a production orientation, management does nottailor products to meet unique customer needs. Instead, the thrust is on convincing as many prospects as possible that the company's items are what they want. Some used car dealers adopt an extreme form of this philosophy by exaggerating--even lying--to obtain sales. They feel that if they are sufficiently glib, marketing success will follow. This, of course, is not true. It may be evident that a sales orientation shares some of the defects of a production orientation. Both are myopic, focusing on the needs of the seller rather than the needs of the buyer. Retail managers who embrace either philosophy, for example, are likely to carry easy-to- handle products and schedule their store hours and services for the convenience of management instead of customer preferences. Thus, both are risky strategies indeed since long run success is based upon building lasting customer relationships where both the firm and its customers are satisfied. Not surprisingly, a chief executive who came up through the ranks through sales, leads many companies that have a sales orientation. In fact, sales representatives learn many of the people and product knowledge skills on the job that are needed to become the top ranked officer in the company. An ex-sales representative or sales manager can easily slip into the trap of thinking that the world revolves around sales. The sales orientation is a result. A manufacturer of expensive precision-built clocks is dominated by the sales concept and would believe that the key to its business is to design creative advertising, or some like belief. Followers of the sales concept, such as the clock company management, do everything they can to stimulate sales. This means major emphasis on advertising, personal selling, sales promotion, and publicity. They are not concerned about whether or not the products meet the needs of consumers. Many companies in the United States in the 1920's embraced this philosophy. If they could employ aggressive sales force and conduct large advertising campaigns, they felt that they were on their way to success.


3. The marketing orientation (also called the marketing concept) is a relatively new philosophy of doing business, but an increasingly important one. A firm that advocates this orientation attempts to attain its objectives by organizing and integrating all activities around satisfying its customers' needs. Management realizes that customer satisfaction is crucial or else the company will not achieve its objectives.Companies that employ the marketing concept try to determine the needs of target customers. Some use marketing research to determine these needs; others use judgment, intuition, and marketing theory as guides. After determining customer needs they develop products or services designed to fill these needs. These firms also formulate pricing and place patterns intended to appeal to target customer. Finally they promote the products or services in a manner designed to convince these consumers that transactions with the firm are need satisfying.Under the marketing concept, all employees of the company, not just those in marketing, attempt to satisfy consumers. At the same time, they attempt to earn a profit for the company. There is no point in satisfying consumers if the company goes out of business.Coordination is a key to implementation of the marketing concept. Marketing should coordinate what it does with production, finance, engineering, personnel, and any other department that might have a role in satisfying customers.Companies that practice the marketing concept often involve their sales forces in "consultative selling". This means that the sales force acts as consultants for prospective customers, helping them discover problems, define needs, and satisfy needs. Sales representatives work as partners with prospective customers, rather than trying to sell to them in a combative struggle.If a store remains open 16 hours a day because many customers work and must shop during evening hours, this is an illustration of the marketing concept. Many store hours are dictated by the needs of the managers and the employees, rather than customers. These stores are closed on weekends or after 5:00 p.m. These hours may be fine for the manager and employees but pose a real inconvenience for working people. The supermarket industry found that it was necessary for stores to stay open more hours to meet the challenge of convenience stores. Appliance stores are confronted with the same kind of competition, in the form of discounters and mass merchandiser stores. Failure to do this will not allow the appliance retailers to implement the marketing concept.


4. A fourth orientation is the societal orientation. Here, management strives to satisfy various publics, such as society at large, employees, and minorities, in addition to target customers. The idea is that satisfying customers is of paramount importance, but other publics must also be considered. This orientation also holds that the long run interests of consumers should be considered. Consumers may demand some products now, but these products may not be in their best interests in the long run. Many consumers, for example, demand delicious food. But, if this food contains harmful fats that cause disease, marketers may have a moral responsibility to keep them from the market.However, some observers have pointed out that it is not the job of marketers to decide what is good for people. If consumers want fat in food, they should get it according to this view. Marketers should not be the ones that act as dictators and tell others what they should have.This is a controversial issue and one that is not likely to be resolved in the near future. Those on each side of the issue raise strong arguments. Marketing and management theorists and practitioners have argued about this for some time and consensus has still not been reached. Believers in the societal concept are also often believers in maintaining the physical environment. They believe that firms should take efforts to abate pollution, litter, the depletion of scarce resources, the population explosion, and other environmental problems. They believe that the needs of society at large, rather than just the immediate wants of consumers, should receive prime consideration. Pursuing a societal orientation may be unprofitable, of course. Failure to give consumers what they demand may result in loss of market share and profits, because consumers will go to competitors to satisfy their needs, if a company fails to do so.


Section (1.5)

Political Influences:


In 1995 the United States became a party to NAFTA--the North American Free Trade Agreement. This agreement called for the gradual dissolution of tariff and other barriers between companies in the United States, Mexico, and Canada. This has affected marketers in many ways. Some have found that they now have increased competition from Mexico and Canada. Others have found newly profitable markets in these countries. As the agreement continues to take effect, increasing numbers of companies will find that they must take efforts to align their marketing efforts in novel ways to take advantage of opportunities and avoid problems. It is possible that political leaders in the U.S. will extend NAFTA to other countries, particularly in South America. Should this happen, the effects of the agreement would be substantially magnified and U.S. firms would have added pressures to adopt. Government actions can have a large impact on the marketing activities of all companies. One of the most important of the political variables is government's overall attitude toward business. If government and society are reasonably satisfied with the performance of the business sector, the political climate tends to offer a large number of marketing opportunities. On the other hand, if there is public displeasure, businesses face the threat of punitive or restrictive legislation and regulation. To a large extent, government's attitude toward business is positive in the United States today. However, there is a trend toward more control of business practices. Several reasons for this exist. A relatively small number of businesses are engaged in unethical and illegal practices, such as misleading advertising and unsafe products.

Second, production and sales oriented managers often generate ill feelings among customers by using high-pressure selling techniques. Finally, some market segments are not being served properly, in the eyes of the government. An example is in the health-delivery field. Often, the media portray business unfavorably. The result of these phenomena is increased regulation of business in some sectors.

Some members of congress favor increased regulation of automobile dealers. The overall attitude toward this industry has become less positive. One of the prime reasons for this feeling in congress is public displeasure brought on by overzealous and often misguided advertising and personal selling in the industry. Consumer distaste for these practices has led to pressure on members of congress for more regulation. So long as the sales and production orientations guide managers, public pressure of this kind can be expected to continue. Already, many dealerships have recognized the potential problems and are altering their philosophies to meet modern demands by the public.

Treaties and trade agreements also enter the political environments of many marketers. Treaties are formal statements of alliance between two or more countries. While they may have mutual defense as their underlying rationale, they may also serve to benefit the economies of the allies. Treaties usually have an impact on a broad number of issues, both political and economic. Thus, treaties deal with such matters as the exchange of scientists and students between two or more countries, the sharing of scientific knowledge, and the observation of human rights and violations of these.

Trade agreements, on the other hand are typically narrower than treaties and cover only economic issues. Their effect is to regulate inter-country trade usually by establishing tariffs or import and export quotas or offering relief from them. Sometimes trade agreements allow workers in one country to flow freely to other countries to acquire jobs. Also, trade agreements frequently provide for the free exchange of currency across international borders. Some have restrictions on the non-tariff restriction of imports, as when one country bans goods from another country when they are contaminated.

The United States has treaties and trade agreements with a number of foreign countries. Basically, their effect is to broaden the overseas market for some U.S. firms and to impose competition from abroad on others. Various parties, such as labor unions and trade associations have taken strong positions on the pros and cons of trade agreements, and have argued vociferously as to their value to the U.S. economy and to the effect on employment in this country. Political parties have taken positions on the issue, some arguing that these agreements favor U.S. industry and others proposing that the effects are mainly negative.

Basically, the impact of the North American Free Trade Agreement on U.S. trucking company marketing managers will be to impose competition from Mexican and Canadian trucking firms.

One of the major impacts of NAFTA will be to impose competition on United States marketers. This will happen if and when Mexican and Canadian companies in various industries enjoy differential advantage over U.S. companies, as through lower wages or other operating costs. Some foreign truck firms pay lower wages to drivers, own less expensive trucks, and have less exacting maintenance and safety standards than do U.S. companies. Hence, the foreign companies will impose substantial competition.

Government affects marketing in another very significant way--it has a large number of rules and regulations. In fact, there are few marketing activities that are not regulated in one way or another. We will focus on some of the more important areas.

One important area of regulation is that of monopoly. Congress long ago decided that competition between business firms was desirable. This body has passed many laws intended to preserve competition and to prevent one or a few marketers from dominating an industry. Among the major activities which are prohibited are:

Making agreements with competitors over prices and other terms of sale.

Charging retailers, wholesalers, or industrial buyers different prices for the same goods, thereby restricting competition. This is called "price discrimination" legislation.

1. · Engaging in unfair competition, such as deliberately setting prices below costs to drive rivals out of business

2. · Monopolizing an industry--taking steps that give the company control of a market.

3. · Requiring that an intermediary purchase one good as a precondition for buying another good sold by the supplier.

These actions are prohibited by the federal government in cases where the marketer is engaged in interstate commerce. Most of the states have similar laws that apply to marketers who do business within their states.

A marketer of sewing machines would not want to agree with another sewing machine rival to the effect that they would not compete with one another in certain regions and specific cities of the country. Federal antimonopoly laws are quite stringent about making agreements with competitors on terms of sale. The law prohibits cases where rivals agree on prices to charge, territories to compete in, and delivery charges. One of the major prohibitions is against territorial agreements, where companies promise that they will not invade certain regions, providing that competitors will not invade other regions where the company does business. This tends to inhibit competition.

The federal government also has enacted a number of laws designed to protect the consumer. The reason for this legislation is that some firms have engaged in activities that were clearly not in the interest of consumers and the public at large. Among the major prohibitions are:

1. Misleading consumers through advertising and other forms of promotion.

2. · Selling products that are unsafe.

3. · Selling foods or drugs that have not been tested for adverse side effects.

4. · Failing to provide adequate warnings about product use on packages and labels.

5. · Mislabeling products, such as clothing and furs, about what materials they are made of.

6. · Failing to inform consumers about the actual interest rates that they are charged when they purchase a product or service on credit.

Individual states also have passed a number of laws that are designed to protect the consumer. Some closely parallel the federal laws, while others are rather unique. California and Oregon have traditionally led the way in imposing more restrictive legislation than have other states. In the view of some observers, this has forced other states to follow suit. Others are of the opinion that these state laws have merely prompted businesses to curtail their business operations in those states.

There are also various municipal and other regulations that have been created for consumer protection. Many cities for instance have "Green River" laws, which prohibit or closely regulate door-to-door selling in their jurisdictions.

Consumer protection legislation is extensive. This is one field where legislatures are continuing to pass new laws and further prohibitions of actions that harm consumers are likely.

A producer of headache remedies would want to avoid selling a product that has been found to create stomach irritation among many consumers. Such practices run counter to consumer protection laws.

Consumer goods marketers who sell foods and drugs are subject to strong regulation, under the Food and Drug Act and its amendments, to test products for undesirable side effects and to avoid selling these products if the side effects are deemed to be sufficiently undesirable by the Federal Food and Drug Administration. Products in this category are subject to more stringent regulations than are many other consumer goods.

The federal government has designed several policies to protect the general public and existing businesses by issuing patents, which grant the holder 17 year exclusive rights to a particular product or process. It also allows copyrights, which provide lifetime exclusive rights to the creator of original literature, musical, and artistic works. In addition, the government allows trademarks, which are essentially the same thing as copyrights, but protect brands (including words, phrases, and pictorial designs such as company logos.

When a company, such as an automobile manufacturer, seeks protection for the name of a product, it should apply for a trademark, which prevents other companies from using the same name or others that closely resemble it. Competitors, for instance, would probably be found to violate the trademark laws if they used names such as Fjord, Lasabre, or Grande Prix. Using such names probably would deprive their owners of the full benefit of their trademarks and would deceive consumers into believing that they were buying a product other than the one they are receiving.

These protections restrict competitors from copying the results of a company's efforts. Violating protected rights can produce significant penalties, such as refunding all related profits plus punitive damages. Thus, these regulations encourage companies to incur the high cost--sometimes running into millions of dollars--of developing new products, ideas, and artistic works.

You now have an idea of the federal laws that impact marketing management. The next section deals with the impact of societal forces on marketing.



Section (1.6)

Societal Influences on Marketing Management:



Think about some of the major ways in which the ideas and values of society in general affect marketing management.

Many members of society today are concerned about the physical environment. They desire to purchase goods and services that do not use excessive non-replaceable resources, that does notcause litter, and that do not bring about pollution. These "green" consumers make a special effort to buy products that are environmentally friendly. Companies are finding that more and more consumers have this value. Accordingly, they are producing increasing numbers of products and packages that are ecologically sound.

Not all of these products have delivered as promised, however. Some "biodegradable" trash bags, for instance, have been found to be capable of surviving in garbage dumps for decades. This has led state (led by California) and federal authorities to impose specific restrictions on the environmental claims made by companies. More of these restrictions are on the horizon, too, as lawmakers attempt to decide what standards should be imposed.


Marketing managers do not make their decisions in a vacuum. Rather, they consider what is happening in society. Societal considerations are those imposed by groups, among the most important of which are cultures and subcultures.

An important environmental input upon marketing strategy originates from the culture within which the company operates. Marketers who are aware of and understand trends and developments in culture are in a position to develop new strategies through better satisfaction of existing markets and penetration of new markets.

Basically, culture is that combination of values and norms that govern behavior in a large group and is passed on from generation to generation. It is the design for living and adaptation to the environment that is specific for a particular society. It includes morals, customs, taboos, laws, beliefs, and knowledge.

Members of a culture receive rewards, in the form of economic benefits and the approval of others, when they adhere to values of that culture. Deviation from these values is often followed by various forms of punishment, including subtle consequences, such as the loss of esteem in important groups, such as social classes. Hence, there is considerable incentive to conform.

It is important that marketing executives formulate strategies that are in accordance with the cultural values of the society in which they operate. The culture is an important determinant of consumer behavior, law, ethics, and the conduct of intermediaries, suppliers, employees, and other groups. Marketing strategies that are not in agreement with important cultural values often fail. It is in the self-interest of marketers to become students of the cultures in which they operate.

Culture is that part of human behavior that is passed on from one generation to another. It is universal--affecting all members of the society, not just particular social classes. In the United States, the traditional culture holds values such as individualism, hard work, thrift, and freedom. These are traditional values, of course, and they do change over time. Younger generations learn and pass on older cultural values and norms, but they also change them. Teenagers today, for instance, have different concepts of normal life goals, daily pursuits, and occupational goals than did their predecessors.

The impact of culture is evident in the purchase of consumer goods. In the U.S. individualism is an important goal--people want to be different from others, at least to a degree. The producers of many products, including clothing, toys, and automobiles appeal to the fact that their products are distinctive. In some other cultures, as in Japan, conformity rather than individualism is stressed, and one of the better ways to sell a product is to advertise how popular it is.


There are a number of values that have emerged as being very important in modern U.S. culture. Many consumers are concerned with the quality of the physical environment--the ecology. Another important value is physical health--including weight control and fitness. Also, many consumers value convenience. Their leisure time is in short supply and they seek means of accomplishing daily tasks without consuming large blocks of this time. They are willing to pay higher prices for convenience store goods, prepared foods, drive-in establishments, fast food restaurants, and other organizations that provide more convenience.

Consumers today are also very home-oriented, spending large amounts of money and time directed toward improving their homes and the quality of life within them. This is related to another important value. Consumers fear crime, the loss of jobs and earning power, and other threatening events and desire protection from these forces. Security is emerging as an important issue in many different walks of life. Numerous consumers, for instance, are spending less time shopping in malls, because they have heard about or directly experienced, criminal acts.

All of these values have a direct bearing on the products and services that consumers buy and use. Increasingly, marketers are becoming students of consumer culture.

An emerging value is spiritualism. A large number of consumers today find that material goods do not provide the answers to life's great questions. Paradoxically, they are buying goods, such as religious tapes and books, personal accessories such as necklaces with crosses, and clothing that reflects religious beliefs. This trend has affected industries such as the religious music industry in Nashville.

Other values will become more important in the future. It is a mistake for marketers to assume that these are static. They are well advised to stay attuned to major trends in these variables.

Modern U.S. consumers place a very high value on convenience. And the convenience store appeals directly to this value. These stores are located near homes, places of work, schools, and other assemblages of potential buyers. They have easy access and ample parking. It is relatively easy for consumers to find their way around the store, where they find an assortment of items that they want to be available without much search effort. Waiting time at the cash register is minimal. Many of these conveniences are not available at supermarkets and conveniences stores have prospered as a result.


Adaptation to culture requires that effort be exerted toward determining the dominant values, customs, beliefs, attitudes, and forms of behavior of each society within which the company operates. Following this, management adjusts the marketing mix in a manner that reflects these elements. This process can be difficult for companies that operate in numerous and diverse cultures. They may have to modify the basic strategy in each one. Thus a toothpaste producer may find it necessary to develop and promote a tooth-whitener for one culture and a cavity prevention method in another.

Marketers who sell abroad will find it necessary to adjust their marketing mixes so that they are compatible with foreign cultures. The color green is taboo in some countries, since it symbolizes the jungle and attendant danger. Food products made of beef are not popular in India. Many Europeans, particularly older ones, prefer shopping in small neighborhood stores and shun supermarkets and department stores.

Language can be a problem. Some English words, when translated directly, constitute profanity in a foreign tongue. Also, some English words have religious significance in foreign countries that are not well recognized by United States marketing managers.

Marketers have found that tradition is an important force with which to contend. In many European countries, for example, consumers treat shopping as a social event, where one visits with shopkeepers and other customers. This has made it difficult for some U.S. retail chains to penetrate these markets, because their impersonal way of doing business is resisted by some consumers, especially older persons, who tend to respect and retain the old ways of life.

A societal problem that most marketers who operate abroad must recognize is cultural diversity from one society to another. Societies differ significantly in their cultures. This is due to differences in history, religions, ethnic makeup, customs, and outlooks. Marketers who assume that they can apply the same marketing mix on a worldwide basis are not facing reality. The product or service that succeeded in one country may be a complete failure in another.

Many citizens of Moslem countries, for instance, are fatalistic. They believe that their personal histories cannot be changed--that they are preordained. Thus, efforts by American companies to sell self-help books and other self-improvement projects in countries that are mainly Moslem has not been very successful.


Every culture is made up of subcultures. There are African American, Hispanic, college student, middle class, catholic, old south, teen-age, and many others of these. Marketers should make an effort to determine the specific values and customs of the subcultures that they plan to include in their target consumer groups. Often these subcultures are unique and demand products and services that differ from those demanded by others. Even though they share the values of other subcultures in the overall culture, they have some unique demands.

Learning the values of subcultures is not always easy. If marketers are not members of these groups, they may be unfamiliar with what they value and the marketers may assume that all consumers are very much alike. This ignores reality. Constant study of the attitudes of subgroups is necessary, since these are subject to change.

College students are an interesting subculture to many marketers. They tend to conform to subculture norms in areas like dress and music. Generally, most are not brand loyal and what was once the "in" restaurant or bar becomes a "has-been" overnight. These individuals are good credit card customers and make many purchases of luxury goods on impulse.

It is important to determine what subcultures are most powerful in their impact on consumers. Most belong to more than one. Thus, a given individual may be male, Hispanic, college educated, a member of a church, and a member of a specific social class. Each of these groups impacts upon his behavior, but some have more influence than others have influence. Marketers should probe into the issue of which group or groups are most influential.

Many companies have found that placing members of the subcultures to which they are appealing in marketing management positions is a good way to develop strategies for penetrating these markets. If the firm is making an effort to appeal to African Americans, it may be a good idea to have some members of this group in marketing management. These individuals often have insights that are difficult to acquire in other ways. This practice is becoming increasingly common in the ranks of successful companies. One toy company even has a child in its executive ranks. The child is responsible for creating and evaluating new product ideas.





Section (1.7)

Organizing for Marketing Management:



Try to envision the best way to organize a marketing department.

Many companies in the U.S. and abroad are now using the team approach to organizing. They do not want the marketing department to operate independently from the production, engineering, finance, and other departments because independent action leads to lack of coordination and cooperation.

A large producer of industrial valves typifies this trend. When a new product is being developed, the task is assigned to a team, made up of members of the marketing, logistics, production, and finance departments. The job of the team is to work together in a coordinated fashion such that the new product is developed in a reasonably short period of time and with the full cooperation of all departments. This is contrary to the experience of companies that operate with each department acting as a separate unit. Such companies often experience inter-departmental infighting, bureaucratic delays, and failure to develop products that meet the demands of the company at large.


In a contemporary marketing department all marketing functions are organized under one head-typically a vice-president of marketing. Under this individual, the rest of the department can be organized in several ways: according to the functional tasks to be performed, around target markets, around products, or through teams.The term "function" refers to a set of major related activities that need to be performed, such as advertising or physical distribution. Accordingly, the simplest and most common marketing structure is to organize along the various marketing specialties. A common arrangement is to have a sales manager, an advertising manager, a distribution manager, and a product manager, each of whom supervise and coordinate the personnel assigned to his or her respective unit. In turn the individual managers all report to the marketing vice president.The idea behind functional departments is to group specialists together. Under this arrangement, all of the people that are responsible for advertising, for example, work together in one work unit. Some of the personnel specialize in selecting media, others in creative work, and still others in research. By combining their efforts, they attempt to produce superior advertising. In turn, their work is coordinated with other marketing departments by the marketing manager. It is up to the latter to make sure that all the departments work together. Sales representatives can present a special problem. In many companies they feel that they are the ones that are doing the real work--going out and closing sales and bringing in revenues as a result. To them, the work of other personnel may seem to be relatively trivial. The marketing manager may face a major challenge in convincing the sales force that they are members of a marketing team that must all work together.


A manufacturer of screen doors utilizes a functional organization plan for the marketing department. This means that the department is organized by activities to be performed. Marketing departments that have a functional organization place all personnel who are responsible for an activity within one division of the department. A screen door manufacturer probably would find sales to be very important, so a sales manager would head up the sales division. If the firm engaged in substantial advertising, it probably would have an advertising manager. Since the products are relatively bulky and are sold to industrial users, intermediaries, and consumers, distribution would be important and the company probably would have a distribution manager.


The functional type of organization is the traditional one--for many years many firms utilized this pattern. Over the past two decades, however, some companies have discovered that this structure does notmeet their needs. They have discovered that the functional structure worked for the firm for a while, but with the passage of time this arrangement became outmoded. Functional organizations are relatively uncomplicated. They work well for small and medium size companies. They nurture the internal development of experienced specialists and the organization is structurally straightforward and simplified. However, the members of each functional group may become myopic and see themselves in competition with other groups for funds. Also, adequate management of an extensive product mix can become difficult because the specialists tend to concentrate their efforts on high-volume key products, which may lead to neglect of new products and new markets. In many companies that are organized among functional lines, members of each department come to see themselves as the "in group" and others as "out groups". Sales personnel sometimes view marketing research operatives as "number crunchers" (staff personnel who do not have a real feeling for what really happens in the marketplace).Advertising people may view themselves as "creatives" who do not have to lower themselves to mundane duties such as those performed by the sales force. If the members of the same department are housed in adjacent offices, have frequent formal and informal meetings, and socialize with one another, the "in group" feelings are solidified. A manufacturer of newsprint is considering the use of a functional organization plan for the marketing department. A possible disadvantage of such structures is that they may lead to excessive competition among divisions. Each one may view the others with suspicion and fail to cooperate with them. The divisions may feel that they must fight for resources, such as employees and budgeted funds and, as a consequence, attempt to maximize their own goals, at the expense of other divisions and the well being of the company. This organization pattern is simply not designed to foster cooperation and coordination.

Market-structured organizations are set up around the markets themselves. One division of a telephone equipment company, for instance might serve nonprofit organizations such as universities, another division might serve manufacturers, another might serve retailers, and so on. Some large producers have as many as 100 divisions. In this type of organization, employees specialize by market, rather than by function. They become experts in satisfying the needs of particular customers. Market managers serve each division. They are responsibility centers for specific markets. They are charged with developing plans and strategies, implementing them, and of earning a profit. In short, this pattern involves marketing personnel who have the specific responsibility for developing certain market segments. This makes assessment of their achievements more effective. If the company is not effective in penetrating particular segments, there is no question as to whom failed. This structure has several advantages. It formalizes the process of fine-tuning marketing activities for a particular market segment, it makes someone directly responsible for keeping abreast of changing conditions in a market, and it provides an excellent training ground for personnel. These individuals are given a variety of responsibilities in serving the assigned market segment and this promotes effective training. Yet there are disadvantages. There is a risk of creating considerable internal conflict as the various market managers compete for internal resources while lacking full authority to totally control activities within their areas. A degree of inefficiency can develop, as efforts are duplicated by the addition of more managers performing similar tasks. This can be a special problem if the firm serves a large number of markets and has a managerial and operating staff that is charged with the responsibility for each one. Recently, a large producer of industrial maintenance supplies elected to structure the marketing department by market. An advantage is a market organization might work for this producer because it does make some individuals responsible for changing conditions in a market. This is not the case for functional organizations, where personnel are responsible only for certain activities. The individuals who work in a market organization become specialists in serving a particular market. They develop specialized knowledge on that market and follow its activities carefully, noting trends and new developments and reacting to these trends. This is an important advantage.


Some companies sell many different products to the same or similar market segments, such as food processors, that market many processed foods to consumers. A major management concern is to devote sufficient attention to each of their products. It would be easy, for instance, for the sales force to push fast- moving and well-established items and to forget about slow-moving ones. To prevent this from happening, many companies have found it advantageous to assign responsibility for specific products to a particular manager by developing a product- centered marketing organization. These are similar to market centered organizations, except that the specialists are responsible for products and not markets. These organizations employ product managers (brand managers) to make all of the marketing decisions for a particular product. These individuals are responsible for product development, pricing, advertising, other promotion, channels of distribution, and physical distribution for their assigned product or products. The advantages and disadvantages of a product centered organization practically parallel those of a market centered one. A distinct advantage for some companies is that a product-centered organization fosters product champions--people devoted to mustering internal support for a product, which helps develop each product to its full potential. Another advantage is that it helps create "intrapreneurship" among large organizations. This means that the large company has an entrepreneurial spirit, one where individual effort is not stifled by lengthy lists of rules and procedures. Consequently, products do not get lost in the crowd amongst the red tape and lack enough support to gain their potentials. A disadvantage is that if top management allows product managers to operate very independently, they may pursue goals contrary to company objectives. Top management can overcome this, however, through careful control measures, such as periodic meetings with product managers to discuss goals and ways to meet them. A manufacturer of electronic equipment for chemical processors is considering a product-centered organization for the company. Under a product centered organization plan, product managers focus their attention on only one or a few closely related products. They sometimes develop the attitude that their product is all that counts, and lose sight of overall company objectives, which relate to the sum total of products and not just one. Hence, these managers may have little incentive to cooperate with other managers. The results can harm the overall corporate marketing effort.


Some organizations have moved away from functional, market centered, and product centered organizations and have developed a team approach. Here, individuals from different departments, such as marketing, production, engineering, and finance work together as a team for a particular market or product. The team assignment may be permanent or temporary. This method has major advantages. Members of different departments work together rather than at cross-purposes. Bureaucracy and red tape are minimized. Often the team can bring new products to market faster than is possible under the other approaches. Different members of the team are able to provide insights to other members that would not otherwise be possible. The major disadvantage is that some personnel would prefer working with others with the same specialty. A producer of pulp board uses a team approach in the marketing department, whereby personnel from different departments are assigned to a new product, rather than a function of the company. A manufacturer of pulpboard probably would find that a team approach to organizing the marketing department is advantageous because bureaucracy and red tape are minimized. The team members work together on a day-to-day basis, at the same setting. They can discuss issues on a face-to-face basis, rather than having to go through the chains of command. Often informal discussions will provide solutions to problems. The team members will get to know each other over time and learn how to work with other team members.





Section (1.8)

Ethics in Marketing Management:


Answer this question for yourself: "How can marketing managers operate ethically?"

A packing company has a large sales force. One senior sales representative has long been one of the stars in the sales force-- consistently leading the others in sales and profits. But over the last few years, this individual has slowed down considerably. He appears to be calling only on large-easy-to-sell customers and neglecting new product development. Would it be ethical to fire this individual... to demote him to a lesser territory? He has been a loyal and productive employee for years. Should he be rewarded for this or should he be punished for his lack of effort? This case brings out a number of ethical issues--the subject matter of this section.


Ethical issues often arise in marketing. Ethics refers to what is morally good, right or wrong, according to accepted standards of behavior. A department store employee, for example, might not try to sell an expensive vacuum cleaner to a low-income consumer, because he believes that the ethical thing to do is to demonstrate an inexpensive model. An advertising agency manager might not use overly thin models in television commercials because he feels that this induces young girls into eating disorders. An executive for a supermarket chain might open stores in depressed areas because there are few good stores there.

The field of ethics is related to the rules of acceptable actions that one employs as a guide for day-to-day behavior. In marketing, ethical conduct is based on dealings with other parties and is guided by moral principles and codes of personal conduct. Basically, it relates to what is good behavior.

Marketing ethics is sometimes a cloudy issue because different individuals have different ideas as to what is ethical. There are no fixed answers to most ethical questions and marketers must select a standard of conduct that fits both their personal codes and their environments. To some degree, marketers learn ethical values from their culture. They also learn these values from the specific company for which they work. Each firm has a culture that includes a set of ethical standards.

The sales force for one auto dealership may have an ethical code that says "Anything goes--say whatever you want as long as you get the sale". Most new employees will quickly learn this code or leave the company. Another auto dealership could have the opposite code and strive for customer satisfaction.

The marketing concept can provide some ethical guidelines. This philosophy indicates that marketers should make decisions that result in customer satisfaction and company profits. Numerous marketers feel that when they provide customer satisfaction they are meeting the needs of others, not just their own needs, and that this is ethical. Likewise, generating profits fulfills the needs of stockholders and represents ethical conduct.

Ideas about what is ethical in marketing differ widely from one person to another. Some marketing personnel feel that it is not dishonest to take small items such as pens and writing paper from the office for personal use at home. Others feel the opposite. Some advertising personnel use very slim models to sell clothing. Others believe that this is unethical, since it may contribute to anorexia and bulimia (food disorders) among girls and young women. Some product managers introduce new models every year, just to make old models appear to be obsolete and to increase sales. Other managers avoid this practice, on ethical grounds.


There are a number of ethical theories available to guide marketing managers. Marketing managers can find that some of these theories can be useful guides (not necessarily specific rules) in guiding them to morally correct conduct. They normally discover, however, that ethics is not a science but an art. A theory that may seem to be very acceptable to one manager may violate the principles of another. Sometimes, a combination of ethical theories helps particular managers in such cases.

Some of the more widely employed theories are:

1. Idealism:

...which states that there are certain universal and abstract moral rules that must always be followed. One rule for instance is not to behave in a way that would be harmful if everyone behaved in that way.

2. Stoicism:

...which relates that persons should endure hardship and personal sacrifice and should avoid overly emotional behavior. They believe that individuals should sacrifice personal need satisfaction to the needs of others.

3. Libertarianism:

...which indicates that individuals should do what they can to protect the liberty and freedom of others. It relates that it is unethical to interfere with these freedoms.

4. Hedonism

...which indicates that individuals should pursue what they personally desire--that individual goals are guides to ethical behavior. However, hedonists feel that if people really think about what their personal goals are, they will agree that achievements such as world peace and the alleviation of hunger and other forms of human suffering are their real goals.

5. Utilitarianism

...which promotes the idea of "the greatest good for the greatest number" as morally desirable. The word "good" in this context means satisfaction.

6. Judeo-Christianity

...which proposes that authority for ethical behavior derives from God. This theory presents a number of rules for correct behavior that God has prescribed, as in the Ten Commandments. This theory stresses an attitude of caring for others and providing for their needs.

7. Instrumentalism

...which proposes that there are no abstract moral principles. Rather, individuals should adjust their behavior to the situation that exists at the time the ethical decision must be made. Believers in this theory think that what is "right" should be based on judgment and intuition.

8. Hegelianism

...which indicates that moral behavior is that which agrees with the customs and laws of the society in which the decision-maker lives. Believers in this theory are likely to propose obeying the law or not going against the group, in deciding what is proper. Often they will confer with other members of groups that are important to them, such as coworkers, and seek advice on ethical problems from them.

A marketing manger for a heating and cooling equipment wholesaler feels that he should not interfere in the personal lives of employees, as by monitoring their extra-marital affairs and drug consumption. Based on this, it would appear that he is a Libertarian.


Every ethical theory has practical applications. Some of these are:

· An Idealist product manager might avoid the production of inferior quality products since this could harm consumer standards of living if all companies did this.

· A Stoic marketing manager might work long hours to improve the profit position of her company. She would make decisions designed to improve sales and decrease profits.

· A Libertarian sales manager may rule out pencil-and-paper honesty tests for potential salespersons, feeling that such testing infringes on the right of the individual for privacy.

· A Hedonist marketing manager might make a strong effort to preserve the dignity of coworkers. She would make a special effort to avoid hurting the feelings of others.

· A Utilitarian who is a product planner for a furniture producer might believe that it is better to produce low-priced furniture for large numbers of low-income consumers than to produce a smaller amount of high priced furniture for the wealthy.

· A sales representative who follows the Judeo-Christian theory could make a strong attempt to determine the needs of each of his prospects and then work diligently to permit accomplishment of these needs. The representative might pass up the opportunity to sell an expensive item, but would advise the prospect to buy a less expensive product that would be more need satisfying.

· An instrumentalist has to decide whether to fire an employee who was once very productive but now has slowed down. The manager might decide not to terminate the employee because this does not"seem to be right".

· A Hegelian store manager might consult his _______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________





Chapter 2

Marketing Strategy


Section (2.1) Mission, Objectives, and Goals.

Section (2.2) Company Capabilities.

Section (2.3) Product Positioning.

Section (2.4) Selecting Strategies.

Section (2.5) Planning and Controlling.

Section (2.6) Market Segmentation.

Section (2.7) Technology Considerations.

Section (2.8) Economic Considerations.


Section (2.1)

Mission, Objectives, and Goals:



Try to provide a statement of what you believe to be the primary mission of a company. Then go into this section for further details.

An H M O organization located in the Southwest has, as its primary mission, the preservation of healthful human life. All of the resources of this organization are devoted to this end.

The H M O, like many others, has a set of staff doctors who work with management to treat illness and injury. Beyond this, the staff is highly motivated to promote health. The organization conducts seminars, on a monthly basis, that provide extensive information on topics such as proper exercise, nutrition, and mental health.

Those individuals who participate in these seminars receive reductions in their monthly fees.

Doctors receive reimbursement for office calls that exceed the payments of other H M O's. This is designed to induce them to spend time with patients, rather than to try to devote themselves to surgery and other duties. The doctors have training in health and nutrition, as well as their specialties and they have pledged to engage in preventative medicine.

This H M O has many clients, as word of mouth publicity has informed many citizens in the community that the organization has this devotion to health. Further, the organization has experienced fewer and less severe illness and injury rates than have most of its competitors.


At what point does marketing management really begin? How do marketing managers establish the framework for effectively achieving company goals? In this section we treat these questions.

A niche in a market is a portion of the market that the company has carved out to penetrate. It is a part of the market that management feels the firm can successfully satisfy and defend from rivals. Without a strong niche, it is difficult for a company to reach its profit goals.

If a firm hopes to establish a strong niche in the market, it should effectively differentiate its product offering from those of competitors. The niche is a "beachhead" or position of strength, from which to make further penetrations and to resist counter thrusts by competitors.

The objective of a marketing orientation is not to create differentiated products for their own sake--it is more self serving. A marketing orientation helps a company increase its chances for success. The way for management to bring this about is to identify the company's market alternatives and then try the most promising of these.

To society, business exists for the express purpose of providing goods and services to satisfy needs. While there are far too many needs for any single business to meet, a firm is destined to fail if it does notprovide enough satisfaction to generate sufficient sales to cover costs and produce a profit. This is the primary purpose of strategic management: to narrow the field of possible alternatives until management finds one or more where the firm has a differential advantage and there are a sufficient number of prospects having such needs to sustain required sales and profit levels.


The first strategic marketing decision step is to establish a firm's overall direction.

An old saying cites: "If you do not know where you want to go, any road will take you there." Experience proves that management cannot expect effective results from its actions without first determining what end is desired. "Why not spend two million dollars on advertising?" "How about adding wholesalers to the channel of distribution?" Managers cannot intelligently answer these and similar questions about each marketing decision without the help of a realistic mission and set of goals and objectives as a guide.

The company's "mission" establishes the general direction it intends to take in the marketplace. A mission statement answers the question: What is our business?" and "What ought it to be?"

. A small retail grocer's mission is to furnish food and related items to neighborhood customers.. An oil producer's mission is to satisfy energy needs.. An auto producer's mission is to provide vehicles to satisfy surface transportation needs.

A company's mission should be neither too narrow nor too broad. Too narrow a definition unduly restricts action and results in lost opportunities. If an oil producer, for instance, defined its mission as only supplying petroleum products, management would likely overlook key alternative energy opportunities. On the other hand, too broad a mission fails to furnish much direction to management in decision making. If the oil company defined its mission as providing combustible items to society, the mission would not provide a strong focus for management.

A company's mission should also focus on long-run opportunities. Sustained success does notcome from frequently changed missions. A sufficient time span should be devoted to the firm's mission to enable it to develop expertise and create a niche in the market. However, management should also continually monitor environmental shifts to assure that the mission is not outdated. Impending petroleum shortages, for instance, suggest that recreational vehicle manufacturers consider redefining their missions toward oil-efficient products at some time in the future.


Management should establish objectives and goals, within the general framework of the company mission, that relate to where the company wants to be at the end of a particular time period, in concrete and measurable terms, and should not be in conflict with one another.

"Objectives" are broadly defined statements of the company's intended status, usually within a long-range time span. Profitability, for instance, is usually one of a company's objectives. "Goals" are generally more concretely defined and measurable targets, and they typically span a shorter time period. A ten percent return on investment next year, for instance, is a possible goal.

Regardless, goals and objectives serve four specific functions for management;

1. they define the organization in its environment,

2. they establish a means of coordinating company actions,

3. they provide standards for measuring results, and

4. they communicate to employees what the company strives to accomplish.

What is the specific objective of a business? It depends on the particular company. Traditionally, many scholars have argued that it is, or should be, maximum profit. However, most modern business and economics experts cite ample evidence that many other factors are included as basic objectives of business. Some of the more important include:

· Survival--to stay in existence over the long run.

· Profit--stated as some return on investment.

· Stock valuation--to obtain some particular price/earnings ratio.

· Technical and market leadership--Stated as so many new products per year and as a percentage of market share.

· Social responsibility--often stated as the number of dollars committed to community developments or to anti-pollution programs, such as product testing.


Goals serve to coordinate the efforts of all employees toward desirable standards of behavior. Often, personnel in various functional areas of a business are at odds with each other. Production managers often desire to operate at a constant volume, financial managers desire restrictive credit practices, and sales managers often want just the opposite.

Effectively communicated goals ands objectives serve to balance the interest of each of the functional areas in terms of spelling out what is best for the entire company. Once established, a firm's goals serve as boundaries to which each of the functional areas should conform.

A reasonable question is: "Who should set the objectives?" In large firms an executive committee made up of managers of various functional areas accomplishes this task. The chief marketing officer should be one of the key members involved in formulating the company objectives. Companies simply fail if they do not satisfy their customers' needs. Because the marketing process ties the firm to potential customers, the chief marketing executive should playa key role in setting objectives.

Objectives are useful in yet another respect: they provide measures which management can use to evaluate performance. If performance is in adequate, management can take corrective action that may be necessary before it is too late for remedy. This is related to the principle of "management by exception" which states that management should direct its efforts toward those areas that are not meeting expectations. In turn, objectives serve to establish those expectations.

A manufacturer of cellular telephones is setting corporate objectives. The chief marketing officer should be on the objective-setting committee because the marketing process ties the firm to potential customers. Companies simply fail if they do not satisfy their customers' needs. If competitor cellular telephones are superior in delivering the utilities that customers want, its efforts will not be successful. It does not matter how well the production, finance, accounting, engineering, and personnel departmental objectives are achieved. If the customer does not purchase the telephones the company will go out of business.


Section (2.2)

Company Capabilities:


Answer these questions: Why don't auto producers produce bicycles? prefabricated homes? Household appliances?

In formulating objectives and goals, management must assess the strengths and weaknesses of the company. A large producer of oil field supplies, tools , and equipment made a far-reaching decision in the 1980's--management decided to go into the business of producing helicopters. It was believed that the company technical and marketing personnel were sufficient to permit effective penetration of that market. Several years of experience dispelled that notion, however.

The production and engineering staff lacked the technical expertise to manufacture precision parts and to assemble competitive helicopter models. The marketing staff lacked the expertise and the sales contacts to convince potential buyers to purchase company models. After several years of disappointing sales, the company abandoned this line of business.


If it is to be effective, strategy must reflect a firm's resources and capabilities. because a firm's capabilities are a function of both its own characteristics and the tasks necessary to follow through on an alternative, management should assess each opportunity separately.

It is possible to classify all of a firm's tasks into one of two functional categories: general management, marketing, and finance, on the one hand, and research and development and operations on the other.

Managers and other employees of the company gain expertise in their fields of specialization. Large food processing company executives, for instance, become thoroughly knowledgeable about the consumer products industry by the time they rise to higher echelons. Hence, these companies have a strong experience base among their managers from which to draw when considering new consumer items.

The experience of marketing managers is especially significant. For instance, distribution channel marketing experience is often crucial. Some people naively believe that intermediaries are anxious to accept virtually any new item. Such a belief is totally unfounded. To the contrary, sales representatives of many producers barrage wholesalers and retailers in an attempt to get them to carry new or revised products. But shelf and inventory storage space is a limited resource and getting intermediaries to handle an item is no easy task--one that requires managerial expertise.

Many companies cannot pursue opportunities because of a lack of capital. it may cost several hundred million dollars to build a modern steel plant, for example. Few companies beyond those already established in the steel industry have the ability to obtain such funds. Capital lending markets heavily favor existing enterprises with extensive experience and large size.


A defense products manufacturer wants to diversify and enter the market for home security devices. Probably the best individual to hire to head up marketing for this new division is one with experience in selling over-the-counter drugs to retailers.

When a company which produces goods for government or for industrial use decides to enter a consumer goods market, it is important that the firm have on its staff executives with experience in selling consumer goods..get this.!!!


In the latter 1980's and early 1990's, the federal government severely cut back expenditures on defense related goods and services. This left many companies that had been heavily in this market with sharply-declining revenues. Some decided to refocus on commercial and industrial targets. Others opted to aim at consumer markets. Some have been successful and those that did all hired marketing executives with long experience in the consumer goods market. Some came from the food industry. Others came from the tobacco, jewelry, soft drink, automotive, computer, and other industries. All had one thing in common--their experience with consumer goods.


Companies who have capabilities in research and development and in operations are in a position to capture marketing opportunities. A firm's capability to obtain and maintain appropriate levels of technology is of primary importance in evaluating some potential market opportunities.

Many apparently promising opportunities are really available only to a handful of firms that possess or can obtain the necessary technology. For example, nuclear, solar, and oil shale energy sources are potential future opportunities, but their complexity precludes all but a few firms (such as large oil and utility companies)from succeeding.

Research and development (R & D) activities do not pertain solely to physical technology but include all areas of technical and specialized knowledge. The ability to conduct marketing research and forecasting, along with knowledge of buyer behavior, are important factors to consider in assessing whether or not a company has a differential advantage in a particular field.

A company's current structure of operations sometimes restrains decision making. Organizations, especially large ones, become bureaucracies with established and often rigid rules, procedures, and policies for the conduct of business. These restraints are desirable in order to attain current goals and to achieve efficiencies in operation, but they can inhibit making the changes needed to effectively tackle a new opportunity.

Small firms frequently do not labor under such burdens. One small company located in the Southwest, for example, successfully dropped its ailing skateboard product line and substituted a line of hang gliders in less than a month. Management of large companies, however, should generally avoid drastic shifts from routines and standards. The greatest competitive advantage for these firms is generally found in areas where the new operations are similar to the old ones.


A company should not enter a market unless it has a strong potential for developing a favorable differential advantage over competitors and establishing a long-run market niche. The concept of synergy is useful when management is assessing the potential for differential advantage offered by various opportunity alternatives. Companies attempt to integrate various activities to produce an organized effort. Synergy exists when, because of the combination of activities, the value of the combined effort is greater than the value of the sum of the parts. For example, if the value of one activity is 2units and the value of the second activity is 2 units, synergy exists when 2 + 2 = 5.


To illustrate, a retailer with an established reputation for selling moderately expensive electronic equipment and components to hobbyists expanded into personal computers and achieved considerable synergy. A producer of aircraft offers a number of management development programs for executives in other companies. It developed the expertise needed to produce these programs in the process of conducting training programs for its own employees.

The typical view of synergy is that it is either zero (nonexistent)or positive (present). When choosing strategy, though , management is well-advised to view synergy using a negative-to-positive continuum, i.e., 2 + 2 might equal 3, 4, or 5, depending on the circumstances. For example, both the retailer that sells electronic equipment and components and the aircraft producer would both likely experience negative synergy in producing and marketing cashew nuts. Each operation (electronics and development programs and cashew nuts) would contribute little, if anything, to the other, resulting in added overhead and a probable detraction of effort from both. From this perspective, a company is likely to attain positive synergy in only a few areas.

A retailer which rents videotapes might achieve considerable synergy if it decided to sell soft drinks. This is because people often use both products at the same time. They watch videotapes and consume soft drinks. The two products seem to fit together and many consumers will buy them at the same time because the purchase of one places the consumer's perceptions so that they are "set" to purchase the other.

Marketers often find that they can achieve synergy when both existing products and the proposed new venture assist each other in promoting sales. (This is often called cross-selling). To illustrate favorable synergy in this case consider a small grocery store that sells both ground meat and hamburger buns. Such a store probably sells more of each item than if it stocked only one of them. Ground meat sales are helped by the buns and vice versa.

 Section (2.3)

Product Positioning:


Indicate how you think companies should describe their products to target markets in order to achieve differential advantage.

Define Differential Advantage...____________________--

Most consumers believe that grapefruit is a breakfast food. Very few eat it with other meals or at times of day other than morning. The major growers have made an attempt to position the product differently. They have attempted, through advertising, to get the idea across that this is a delicious and nutritious food that can be consumed with lunch, dinner, or as a snack. Advertisements point out the health benefits of grapefruit--attempting to take advantage of current interest in health, personal appearance, and weight control. It is difficult to change this image, however, as many consumers continue to view the product as solely a breakfast food.


Product positioning involves placing the product uniquely in the minds of target customers, relative to rival offerings. Management may position products according to target customers, product characteristics, or product benefits. In all of these cases, they attempt to create an image among target customers of what the product means and how it should be viewed.

Some clothing designers position according to target customers, as by aiming at high-income groups. Others focus on the youth or baby-boomers market(those who are currently in the age 50-60 range).The youth market is often a preferred one because older consumers sometimes imitate the clothing patterns of teen-agers, after the latter have introduced the new styles.

A candy bar producer positions according to product characteristics. Since one major competitor produces very sweet candy bars and another offers candy bars that are low in sugar content, this marketer positions its products between the two, with an intermediate sugar content. Some automobile producers position according to the power and acceleration of their products. Others emphasize style.

A credit-card company positions according to product benefits. Management positions the firm as the one providing the most conveniences to customers. This is in contrast to a rival, that positions itself as a provider of funds in emergency situations. Some shoe brands are positioned for comfort, others for appearance. Still others are intended to improve athletic performance.


In positioning the product, managers can take efforts to discover what product attributes are most valued by consumers. A producer of soft drinks, for instance, might discover, through a consumer survey, that the degree of sweetness and the fullness of the flavor are the two factors which are most valued for this beverage.

After determining what factors are most important, the marketer probably would want to learn how the company brand fares on the factors. Management also would desire to learn what target customers desire as to these two factors. Do they want a very sweet product? Do they want one that has a light flavor? In other words, what combination of these two factors do target customers look for. Then management could take steps to find out how competitors compare with the company as to this ideal.

Assume that management discovers that a large group of target customers want a not-too-sweet (tart) and light flavored product. If the company product has these attributes, it would appear that it is well-positioned. This may not be the case, however, if there are several large competitors who also offer tart and light flavored beverages. Such a situation may mean that there is too much competition in that sector of the market.

The company could be better off with a tart and full flavored beverage if there is a large group of target consumers who want such a beverage and if there are few competitors in that market.

It is apparent that marketing research can be useful for product positioning. It can indicate what product attributes are sought after, the product attributes of the ideal brand, and the attributes of the company brand.

A snacks food manufacturer is introducing a new baked potato chip offering to market. Management wants to position the product. Before anything else can be done management should find out what factors are most important to target customers for potato chips. Once these factors are known, management can begin the effort of determining how the company might place itself against competitors in a meaningful way.

In positioning a product, management begins by uncovering information on what factors are most important to target customers in selecting the product under study. A producer of fine glassware did this by assembling small groups of target consumers and asking them to discuss, in an informal manner, what they liked and disliked about fine glassware.

The results were interesting to management, which had always assumed that texture was an important feature to most target consumers. This turned out not to be the case, however. Rather most members of this group were interested in the tint and the weight of the glassware. This convinced management that the company's offering should be positioned along these dimensions.


Further marketing research is needed in order to progress with the positioning strategy. This requires selecting target markets, and is a very critical step because it will determine the nature of the marketing strategy which the firm will pursue.

Once management is familiar with relevant segments and competitor positions, it is able to select a target where a favorable market niche can be created. After discovering a combination of marketing functions that numerous target consumers find to be their ideal and that competitors are not providing, management should take steps to determine the characteristics of consumers in that position.

A survey might discover that there is a large group of target consumers who prefer a very sweet and full flavored soft drink and that there is not a competing beverage that satisfies this market segment very well, prompting management to find out who these individuals are. A survey might reveal that these individuals tend to be pre-teen boys who are active in sports and other out door activities. Management's task would be to design and implement a marketing mix that appeals to this group.

A contemporary greeting cards manufacturer is positioning a line of its products. Management has commissioned a marketing research firm to uncover information on product functions that are desired and on the positioning of competitor products. This has led the company to decide to appeal to younger consumers with a line of humorous cards. The next logical step for the company to take is to plan and carry out a marketing mix for the company cards.

The last step undertaken by marketers in positioning a product or group of products is to formulate and actually implement a marketing mix. A producer of heating pumps for industrial use recently pursued these steps. Management decided that it would offer heating pumps that were state of the art--of higher quality than any competing make. Prices were set at high levels, with discounts for high volume purchasers. Management decided to sell the goods through its own sales force, backed up by advertising in three trade magazines. It was decided that existing company warehouses and the company fleet of trucks would provide very competitive distribution facilities. The company implemented these decisions and found that market reaction to its new line was very favorable.


There are a large number of cases where a manufacturer has not adequately positioned its products or a retailer has not effectively positioned company stores. This tends to be most common for small businesses, but there are some large firms that have performed poorly in this area.

Failure to clearly position a product will leave the company in a position where consumers do not know what a product stands for. Without a clear position, the product will not stand out from others. It will be confused with other company's' products and many consumers will not know if the product fits the description of something they want or not. Failure to position a retail store or chain of stores will have the same consequences.

Some manufacturers and retailers do not position adequately because of indecision. At one point in time they may orient their marketing mixes at blue collar workers and, later decide that this was a mistake and focus on white collar. Then they may switch back again. Or they may position themselves as a company that provides many customer services and later switch to a stance of low prices and few services. Such indecisive behavior can severely harm their images.

It should be emphasized that positioning is something that takes place in the mind of the consumer. It does notrequire physical changes in the product. If advertisements convince consumers that a product occupies a particular position, that is all that is needed.

A wheelchair manufacturer has not positioned its major product--a low cost mechanized chair. This is likely because company promotions have not pointed out the advantages of the product. The strong points of the chair are not important to consumers if they do not know what they are. Advertising, personal selling, and sales promotion are needed so that consumers can visualize what this chair means, relative to products of other companies.

After the company has decided upon a market position, it is necessary to select a strategy which will enable it to successfully satisfy target consumers at this position. In the next section we will examine some possible strategies.


Section (2.4)

Selecting Strategies:


Think about this: Once a company has selected a position for its product, what strategy can it use to appeal to consumers at this position?

A motel chain which started out in the Pacific-northwest section of the country (mainly Washington and Oregon) decided to expand its operations to other parts of the country. Basically the company product positioning had been to offer basic--not fancy--and low priced lodging to commercial travelers and others who were operating on a low travel budget. In expanding to new regions, management had to decide what to offer and what target customers to serve.

Management decided to upgrade its offering as it moved into new geographic areas. The rooms were made larger and were provided with more amenities--better furniture, better room service, and free breakfast. It was reasoned that these utilities would enable the firm to make inroads on several major competitors whose offerings were very basic. The new strategy was well-publicized on network television and turned out to be very successful. The move into new parts of the country resulted in a large increase in share of market for the chain.


It is essential that management take steps to attain the company objectives and goals through satisfying the needs of target customers. This requires selecting the most appropriate strategy for this task.

The three major strategies that a firm may select are:

Market expansion,

market entry

and retrenchment.

All three are widely-used and each has its particular strengths and weaknesses.

Market expansion:

is generally the safest and most conservative of the strategies. It is based upon trying to improve company performance by more fully satisfying an existing market target, as opposed to selecting new or additional ones. Many firms are attracted to this strategy. It keeps them in the same markets as they were in the past. This being the case, it is more comfortable, both to managers and to operative employees. Both are likely to feel that straying into new fields is risky. In fact, this often turns out to be the case--risk is closely associated with the degree to which the company extends its efforts into new areas.Conservative firms that are not prone to take risks are drawn to Market expansion. They view preservation of the status quo and slow growth as desirable goals and prefer not to depart from that which has been successful in the past.This strategy can be quite effective. However, it is only effective to a point. Further growth can become difficult, if not impossible, once a group of target customers" needs become saturated. Management needs another strategy at this point. Otherwise the firm will not keep pace with competitors.

An example of Market expansion is where a producer of compact disk players decides to improve the quality of its offering. Here ,management is attempting to better satisfy current customers , rather than striving for new ones. This is a very common strategy today.When a company engages in Market expansion, it continues to serve the same market target that it did in the past-

it does not seek new types of customers.

The idea is to improve on company product quality, services, pricing, or some other element of the marketing mix that will satisfy existing target customers better than in the past. Normally, this strategy is less risky than trying to branch out to new types of target customers. Often a good way to implement Market expansion is to improve product quality. Several marketers of disposable diapers have been successful in this regard. They have added waistbands to their products, which has been well-received by parents who have grown weary with diapers that unexpectedly slip down the legs of their babies. Management decided to upgrade its offering as it moved into new geographic areas. The rooms were made larger and were provided with more amenities--better furniture, better room service, and free breakfast. It was reasoned that these utilities would enable the firm to make inroads on several major competitors whose offerings were very basic. The new strategy was well-publicized on network television and turned out to be very successful. The move into new parts of the country resulted in a large increase in share of market for the chain.

DETAILS:........Market Entry:

With market entry, a company attempts to improve its performance by expanding the scope of its operations. Product development, market development, and diversification are the principal market entry modes.Product development involves attempting to further satisfy a current market through major modification of a total product offering. In other words, the firm continues to serve the same market but offers new products to its line. A watch manufacturer, for example, could add watch bands to its list of offerings.When a company tries to satisfy new targets with essentially the same product as it uses to serve old markets, the strategy is termed market development. A company that positions its computers mainly for the commercial market, for example, could expand into the consumer market. Such a strategy could involve some changes in the firm's basic product offerings, such as by making the computers more user-friendly. Another possibility would be to offer a stripped-down version of the computers at a lower price.

Finally, diversification involves sentering

new markets with new types of product offerings. Many tobacco companies have diversified into food products over the past decade, for instance. This type of market entry is usually the least desirable because it requires moving into an area in which the company has neither operating nor marketing experience. The chances for positive synergy are consequently quite low.

Companies can accomplish market entry in several ways.

One is internal development, which relies on the company's own staff to develop the offering (Which can be time consuming).

Another is acquisition--buying another company that has the ability or experience to deal with the intended offering.

Finally, there is joint venturing, where the company forms a partnership with another firm to produce and sell the new offering. The appropriate strategy to use, of course, depends on the costs involved, the timing implications, and the capabilities of the company.A producer of industrial abrasives is considering various kinds of market entry. A rather dangerous target is producing tools for the consumer market.

The most risky market entry mode is diversification, because this involves both a new product and a new market. This means that the company lacks experience in both of these domains. There have been a few notable successes of market entry through diversification, but there have been many failures.

A large jewelry product chain found this to be the case during the mid-1980's. Management decided that the firm should purchase a shoe product chain and a sporting goods product chain. Both of these two new acquisitions were in areas of the country which were not served by the jewelry stores. The results were financially disastrous, and the company had to resort to a sale of both of the new acquisitions at a staggering loss.


Retrenchment is the last strategy that we will consider. Most gardening buffs know that they must sometimes prune an infected limb to save a tree's life. Similarly, in business management it is sometimes necessary to withdraw from unprofitable or cash-draining situations. Retrenchment is a strategic effort to withdraw from peripheral market segments to positions where the firm has its strongest niche.

In retrenchment a company may simply stop producing or selling a product or service. A less extreme strategy is to reduce promotion expenditures for an offering but continue to offer it. This can increase cash flow when a product is not doing well in a market. After a company is stabilized, it may again be in a position to expand.

A grocery chain has engaged in retrenchments, from time to time. It has experienced heavy competition and low revenues in some states and the opposite in other states. This has led management to sell stores in regions where the firm was having difficulty and placing the resulting funds in areas where it had strength.

An example of retrenchment is where a grocery store chain sells all of its stores in New England.

In the case of retrenchment, a company moves from a position of weakness to a position of strength. It pulls out of markets or product lines where it is experiencing financial difficulty and reallocates its resources to areas where it is financially strong. While this appears to be logical, it can be difficult, since many managers are reluctant to drop or de-emphasize a product or service that the firm has offered in the past.

In many cases, management has some degree of emotional involvement with the product or service.

A large retail chain recently decided to drop its catalog business. This business had been unprofitable for some time, but management resisted the retrenchment move. Internal fights between various groups of managers broke out. Several committees, made up of high level executives were formed to study the situation. Finally management became convinced of the absolute necessity for the firm to rid itself of the catalog division. In turn, this decision enabled the company to stem large financial losses and to concentrate on its profitable retail store business.


Retrenchment is an avenue which has been pursued by some international marketers. They have rushed into some foreign countries without adequate research on the potential of those markets. Later, after experiencing less than attractive returns, they have decided to move out of these markets, sometimes at great losses.Abandoning a foreign market has implications in addition to the loss of revenues. The firm's image in the industry may suffer. What was once looked upon as a market leader may now be viewed as a weaker contender. The company may have trouble retaining and obtaining good wholesalers and retailers, as they may now have questions regarding company performance. The firm may have trouble gaining funds from financial institutions and credit from suppliers. These consequences sometimes cause managers to think twice about moving out of foreign markets.

It should not be assumed that companies retrench only because they did not adequately plan what markets to enter in the first place. Sometimes a good market turns bad and this is not the fault of the marketer. A large supermarket chain recently retrenched from California. The4 reason was that the market had weakened, as a result of a decline in the economy and natural catastrophes, including earthquakes, fire, and flood. In addition, competition in the California market had become more formidable. Retrenchment from this state allowed the company to plow back its managerial talent, funds, and other resources into more promising areas of the country.

Ordinarily companies will retrench only after other strategies have failed. Some managers feel very negatively about pulling resources out of what was once a profitable segment of the business. They view this as a form of defeat for the company and victory for competitors.

A producer of pasta is moving out of the East European market. A probable reason why it made a mistake in going into the market is inadequate research on the potential of the market. Most mistakes of this kind result from quick decisions on the part of management that are based more on intuition and judgment than they are on careful research.

Research will uncover shortcomings such as inadequate purchasing power, excessive competition, restrictive regulations, and other shortcomings in the market. When management short-circuits the research process, mistakes can easily happen.


Section (2.5)

Planning and Control:


We use the words "planning" and "control" many times during our day-to-day affairs. Just what do these terms mean in marketing?

A regional candy producer has decided to enter the national candy market. This necessitates planning in a number of areas. It will be necessary to develop plans as to how the company can arrange for physical distribution of its products on a national scale. Also, plans are necessary as to how the company can use advertising to develop consumer awareness in areas of the country where the product line is unknown. Determinations will have to be made as to what wholesalers (if any) and what retailers will be included in the channel of distribution. Price schedules will have to be developed and refined for specific geographic areas. All of this must be carefully planned.

A slip up in one of the areas may mean that the effort to expand nationally will fail.


Companies cannot just sit and wait to see what will happen in upcoming periods. They must try to predict what is likely to happen and develop ideas as to what actions they will take if various circumstances occur. Firms that do not plan or plan poorly must be reactive--they wait and see what happens in their markets and then try to adapt to these events. Good planners are proactive--they have positive programs designed to lead them to the achievement of important goals.

A plan is simply a blueprint for the future. It requires one or more goals and a set of actions to achieve the goals. Planning is central to all aspects of life and it is especially important to marketing. An important characteristic that distinguishes many successful businesses from unsuccessful ones is the considerable attention that the former devote to careful planning. Detailed plans describe the activities a company will use to accomplish its goals as well as how funds will be used to implement them.

Good plans specify detailed goals for each marketing activity as well as the means to attain the goals. A company's strategies provide very useful guides for goal setting. Beyond just providing direction, goals should spell out the specific tasks that each activity should accomplish.

There are innumerable types of plans. Companies may plan the introduction of new products, implementation of new advertising campaigns, creation of rebate programs, dropping of some intermediaries and replacing them with others, and many other programs. Normally a given company will have multiple plans in operation at any given time.

An example of a good marketing goal for a regional candy company that desires to expand to the national market is to expose thirty percent of the target market to company advertising within one year. The plan sets forth a numerical figure to which actual achievement can be compared and it sets forth a schedule--one year.

One of the hallmarks of a good plan is that it specifies exactly what a company wants to do, how it will do it, and when it will do it. This provides action prescriptions for the personnel who must carry out the plan--it furnishes them with a blueprint as to what actions are necessary.

Many unsuccessful marketers do not incorporate such detail into their perspectives. Rather, their plans tend to be vague and even confusing.

A company which sells health and beauty aids to retailers prides itself in the detailed plans which enable it to provide efficient and timely distribution of its products. Timetables are set as to exactly how much of each kind of each product must be shipped to each retail store, when the products should leave company distribution warehouses, and when they should arrive at the retail store. This has enabled the company to develop a distribution system that is the envy of the industry.


Plans spell out specific actions that the company should undertake in each activity, along with a timetable for accomplishing them. They indicate what activities will be performed, who is responsible for them, when they should be accomplished, how they will be performed, and where they will be carried out.

Lack of detail in any of these areas is likely to result in actions by marketing personnel that are not in accord with company objectives and not coordinated with the activities of other divisions of the company.

If company personnel are confused as to what action to take in a given instance, they can refer to the plans for guidance. The plans should be articulated in such a way that they are meaningful to company personnel--they leave nothing to guesswork.

There is considerable merit in committing important plans to writing. This provides a permanent record of what can be done that is available to any manager who needs this information. Further, requiring that plans be written forces managers to be specific and to think through the planning process carefully. Managers know that their written plans are open to the scrutiny of others.

Implementation of the plan is often more successful if those who will be responsible for carrying it out are involved in its development. Managers who helped produce a plan are likely to be motivated to see it work. Also, if they have participated in the planning process they are familiar with it and do not need instruction as to the makeup of the plan.

A furniture producer is developing plans for expanding its product line to include dinette sets. The plan should provide for who is responsible for each activity, when each activity should be performed, and where each activity should be carried out.

Effective plans do not necessarily have to specify why each activity is to be carried out. Such detail is unnecessary and may unduly complicate the planning process. It is necessary to spell out the other details of the plan, however, if company operations are to be coordinated.

If the regional candy producer wants to expand its product line, management should specify details of media advertising (how many and what kind of TV ads to sponsor),sales force activities (the amount of time which each sales representative will spend in developing a certain number of new accounts) and other related marketing actions. Management should coordinate all actions so that they complement each other in an integrated effort centering on profitably servicing the selected target market.


Changes in technology, competitor actions, consumer needs, and environmental conditions are among the many factors affecting performance and opportunity. Consequently, a firm's initial plans often do not result in achievement of its goals.

To combat falling off the intended mark,

management must periodically engage in controlling and revising company activities-

often as important as the initial planning itself.

A company's overall objectives and goals, along with specific marketing goals, serve as a basis for controlling ongoing efforts. They represent guidelines against which management can compare actual performance. In turn, significant variances from planned results signal the need to evaluate problem areas.

For example, if a five percent growth in annual sales is a marketing goal, the firm should determine whether or not a problem exists if sales are stagnant during the first quarter. Perhaps the goal was unrealistic, possibly the marketing activities were inappropriate, or the firm's overall strategy may need revision due to faulty design or recent environmental changes. With proper control measures, however, the company can develop revised programs before it is too late to keep operations on track.

Many companies have "contingency plans"--backup plans that can be put into motion if the original plans turn out to be ineffective or unrealistic. A firm might expect that industry sales will increase and have a product introduction plan that is based upon that assumption. It might have a different product introduction plan that could be put into effect if industry sales are disappointing.

A paper manufacturer is in the process of setting up control procedures in its marketing department. Management could control the goal: The sales force should increase the number of its new accounts by three percent" to actual performance.

Control means contrasting actual performance against something. In the case of marketing, the "something" usually consists of objectives and goals. This underscores the importance of having well-conceived objectives and goals. Earlier it was stated that objectives and goals are important components of the planning process. Now we see that they are also essential for control.

A large manufacturer of shower massage devices has instilled a system where objectives and goals are developed annually and revised on a quarterly basis. Actual performance is compared with the objectives and goals each quarter and variations from planned effort are red tagged for investigation. In many cases these variations alert management of the need for changes in the marketing mix, often for changes on the part of the sales force, such as calling on accounts more frequently or adjusting sales messages to meet competitors' actions. The company marketing manager is of the opinion that this system of control is essential if the enterprise is to stay competitive in this market.


Plans are often developed in light of what is expected in the future. Companies monitor the environment, look for trends, and try to plan for them. A major environmental trend that is now taking hold, for example, is the "graying"--growing older--of the population. This will affect virtually every industry--from prescription drugs to furniture and clothing.

As people grow older, most develop arthritis. Some companies set their plans accordingly. Some pain-killers, notably aspirin, are useful in dispelling inflammation of the joints that accompany this disease. Other pain-killers do not. However, some of the producers of the latter are now preparing plans for introducing anti-inflammatory ingredients in their offerings in the future. They realize that this is needed, in order to remain competitive.

Many of the more successful companies study environmental trends and formulate plans that are based upon these trends. Some examples of these environmental phenomena are:

1. Concern about the quality of drinking water--promoting the sale of bottled water and other natural beverages.2. Concern about crime--promoting the sale of innumerable security devices and systems.3. Concern about animal species--bird feeding is one of the leading leisure activities in the United States today.4. Focus on spiritual values--promoting the sale of religious music and symbols such as jewelry crosses for necklaces.5. Desire to assert oneself--promoting the sale of such items as cigars and bumper stickers.

These are only examples. A glance at any daily newspaper will reveal many others.


Section (2.6)

Market Segmentation:


Answer this question: Should a company restrict its efforts to only serving certain types of consumers or should it try to satisfy everyone?

A unique store sells upscale and state of the art children's items in San Francisco's trendy Union Square. It contains several stores-within-a-store, laid out in a series of boutiques that feature everything from clothes and hair-styling to books and computers. Store sales are rising rapidly. Inside the store are toddler-height counters, low handrails, and free diapers in the rest rooms.

One of the store's success secrets is what it does notcarry. There are no sex-typed toys on the shelves, each book in inventory is screened for violence, and all violent toys and books containing violence are banned. The store only carries clothes with natural fibers and handles the city's widest selection of European shoes.

This store is exclusive in its target selection, focusing on customers with money who view themselves as contemporary and success-oriented. Most store customers are college educated. In short, this successful enterprise appeals to only a limited group, and does it very capably.


Market segmentation is a strategy in which management produces and carries out programs designed for groups of potential buyers that the company is able to satisfy. Rather than trying to satisfy everyone, management aligns its efforts toward the unique needs and characteristics of particular groups. A large New York based bank, for instance, appeals mainly to small and medium sized companies with operations in Europe.

Firms that use market segmentation strive to serve market targets that they are able to satisfy, not just any group of buyers that represent a sizable market. They sell to "segments" (groups of buyers) that the company is in an especially advantageous position to please. The children's store described earlier, for instance, is not in a position to satisfy bargain conscious low income consumers.

The advantages of segmentation are of sufficient magnitude to lead numerous marketers to pursue this strategy. Segmentation results in the creation of a specific marketing mix for each subgroup of potential buyers that the company intends to satisfy. Management's goal is to produce goods and services that furnish substantial need gratification to selected groups of potential buyers.

When it is successful, segmentation leads to high customer loyalty for the brand and the company. Rivals will experience difficulty in winning away the patronage of target customers. Those marketers who have carved out particular portions of the market and who serve these portions well are in a relatively secure position.

Like any other strategy, market segmentation has its drawbacks. It leads management to a position where it directs the marketing effort to only a portion of the population and neglects other portions. A radio station that broadcasts rock music and attempts to appeal to teenagers, for instance will not be effective in reaching the 40-and-older group.

A second disadvantage of market segmentation is that it may increase the company's costs. A firm that pursues two or more segments normally has to develop and offer two or more different marketing mixes. If the company appeals to two different segments, for instance, it may have to design two individual products or services, physical distribution systems, channels of distribution, price structures, advertising programs, personal selling programs, and sales promotion programs.

A paperback book company appeals mainly to non-working females in middle class homes (with a series of romance books). An advantage of this strategy is that it has a good chance of uniquely satisfying the desires of these consumers. If the company tried to branch out and appeal to men, teenagers, senior citizens, or other groups, it probably would not satisfy its target market. By orienting all company efforts to that target, however, the company maintains a high share of the book market.

Segmentation allows a company to provide substantial utility to a segment by isolating a particular group, taking steps to discover the unique needs of this group, and then creating a marketing mix which satisfies these needs. A running shoe manufacturer, for instance, produces a shoe that is heavily padded. This provides protection to the feet while running and satisfies consumers who have or worry about having foot and knee problems. Such consumers are highly pleased with the company's product. On the other hand, it does notfit the needs of another group that prefers minimal padding to make the shoes light in weight for races.


The firm must fulfill four conditions in order to implement a profitable segmentation program:

1. There must be subgroups of potential customers whose anticipated reactions to marketing efforts are similar but different from those in other subgroups.

2. The subgroups must be reachable through either promotion media or channels of distribution.

3. The marketer should be able to acquire information that determines the subgroup to which each potential customer belongs.

4. Segmentation should provide an adequate profit return.

If all potential customers will react the same, there is no point in designing a unique marketing mix for each one. In the computer field, for example, departments of large corporations react differently than do small businesses, so they are separate segments.

For successful segmentation, management must reach target customers through either promotion media or channels of distribution that have direct customer contact. For instance, management can reach children through Saturday morning television commercials. Or they can elect to use distribution channels, as when producers of clothing for petite women sell dresses through special small-size stores.

A requisite to segmentation is that management is able to identify the subgroup to which each target customer belongs. This is not difficult when the target customers are easily located, as when the members of one group reside in a particular suburb and the members of other groups live in other suburbs. Problems arise in the identification process, however, when the firm employs variables such as behavioral characteristics of potential buyers as a basis for developing subgroups.

A fourth requisite to segmentation is that it yields a higher level of profits than is the case without segmentation. To some degree, management can forecast anticipated profitability by discovering the number and volume of purchases that potential buyers in each segment make.

A producer of high quality kitchen appliances plans to introduce a new line next fall. It could reach consumers with an interest in health through both channels of communication and promotion. There are health food stores that serve this segment, providing one avenue for reaching it. Another avenue is through magazines and television programs that target those with an interest in health.

Effective segmentation requires that the company be able to reach target customers through either promotion or channels of distribution. A marketer of exercise equipment has been very successful in using both. There are a number of magazines and television programs that appeal to health conscious consumers, allowing the company to reach consumers through promotion. Also there are a number of retailers who appeal to health-conscious consumers, permitting the company to reach them through channels of distribution.


Marketers employ a variety of variables or bases for segmenting markets. Whether or not they utilize a particular variable depends on its success in meaningfully discriminating one group of targeted buyers from others. If each resulting group has different needs and motivations, then such a variable is relevant. The major segmentation variables include the following:

1. Demographic characteristics

2. Geographic characteristics

3. Lifestyle characteristics.

4. Buyer benefits.

5. Volume

Demographics are objectively measurable characteristics of human populations. Some examples of demographic characteristics are age, income, occupation, education, family size, gender, and race. For companies that sell industrial goods, some demographic characteristics are customer type, customer size, and customer location.

Considerable demographic information has been collected and published by parties such as the government and universities and by individual companies. Hence this information is widely available. Many companies use demographics to effectively segment markets.

The biggest disadvantage of this method is that it does notalways cluster the market into subgroups with similar reactions to marketing efforts. It may not be useful to choose senior citizens as a segment for rocking chairs, for instance, because some seniors are sedentary but others are very physically active.

Geographic segmentation involves subdividing the market into geographic areas and orienting the marketing mix to the potential buyers located in each area. The value of this strategy is most obvious when segmenting foreign markets. In some countries tooth paste is purchased for its ability to brighten teeth. In others, stained teeth are a mark of distinction. Within the U.S., ZIP codes are sometimes used to segment markets. People who live within a zip code area are often very similar to others in that area, making the areas targets for segmentation.

Markets can be segmented by lifestyle. This means utilizing subgroups that share certain psychological characteristics, such as consumer attitudes, opinions, behavior, interests, activities, or a combination of these. Some examples of such characteristics are:

1. Activities: work, social activities, hobbies, entertainment, vacation, shopping

2. Interests: job, family, home, fashion, food.

3. Opinions: personal, social issues, business, politics, the future.

Frequently marketers find that consumers with particular lifestyles are heavy users of a product, but that other consumers are not. Heavy users of Scotch whiskey, for instance, are urban business people, active achievers, older urban sophisticates, and pleasure-seekers.

A travel magazine management wants to segment the market. Probably the most effective basis for this segmentation would be lifestyle. People of both sexes have reasonably similar travel frequencies and preferences, although there are some differences. Likewise the state of residence and occupation probably are not especially predictive of travel preferences. Lifestyle, however, could be an excellent means of segmentation. The magazine could collect information on the lifestyles of people who are frequent travelers. These lifestyles might include interest in history, art, and some sports that are available overseas. They might include mastery of foreign languages and interest in world affairs, as well as religious beliefs. An analysis of these and other related variables could provide a very good basis for segmentation.


Buyers can be segmented by benefits. Here, marketers subdivide potential buyers by assigning them to subgroups comprised of those who want particular benefits from the product or service in question. Some individuals, for instance, buy toothpaste to brighten their teeth. Others, however purchase the product to prevent decay, to prevent plaque, to improve their breath, or because of its pleasant flavor.

Benefit segmentation makes considerable sense, because the benefits are the major reason why individuals purchase the product. It seems logical that those who desire similar benefits would respond in a similar manner to a particular marketing program. Other methods of segmentation do not necessarily have this advantage.

Volume segmentation, the last method that we will examine, takes place when marketers group customers according to the degree to which they use the product in question. During a typical time period, some potential buyers use the product a great deal, others frequently, others sparingly, and still others not at all. Hence, marketers can create groups based upon the amount of use: for example, heavy users, average users, light users, and nonusers.

In a segmentation study for professional basketball, the categories included non-attendees, low attendees, and high attendees, based upon the frequencies of games viewed. After the membership of the usage groups has been ascertained, the demographic, geographic, and/or lifestyle characteristics of each can be compiled and a search begun for differences in these characteristics between user groups.

A manufacturer of fishing poles aims the product line at consumers who desire a light-weight yet durable pole that is suitable for fly fishing. This is segmentation by benefits. The company is aiming its marketing mix at people who want the same benefits in a fishing pole.

A number of companies have successfully segmented their markets by benefits. This method often results in a marketing mix that very effectively satisfies target customers. In the beverage industry, for example, those who are weight-conscious desire low-calorie soft drinks. Fruit drinks furnish a natural, non-chemical thirst quencher for those who are concerned about good health. Non-carbonated drinks promise a means of avoiding that "too full" sensation.


Section (2.7)

Technology Considerations:



Read and react to the following treatment of technology as it affects marketing strategy. Then try to predict: "What technology-related changes will marketers face in the future?"

The internet has exerted quite an impact on marketing and is becoming an ever-increasing force. Once a communication device for the use of various scientists, this network has become a major marketing tool. The number of websites sponsored by companies is rapidly expanding as more and more consumers get on the net. This represents a means of reaching more upscale consumers, who are most likely to be users. Interestingly, small companies are using the internet to a large extent--this is not just a tool of the large corporations.

A small producer of ceramic animals to be placed in flower and plant pots sells her wares through the internet. She contacted a company that specializes in setting up home pages and using the internet as a means of advertising. This firm designed a very dramatic home page and has guided the company owner into the creation of a series of fascinating facts about the company and its products. Sales have expanded rapidly and the firm has found that it can generate more revenues in this way than it could through magazine and direct mail advertisements.


High-tech is a term which is often heard today. Most people think that this activity is restricted to production, however. They think of computerized production lines, robots on the assembly line, laboratories doing biogentic research, and similar activities. Many people are not aware of the extent to which technology has penetrated marketing thinking and practice, however.

Technology has affected practically everything in modern life. Synthetic fibers in clothing, new ways of printing books, the advent of the internet, the invention of CD ROM's , and the ever-widening influence of the computer are but a few examples of items technology has made possible. Because technology is like a mist penetrating every stratum of culture, marketers should be constantly alert to its change.

Technological breakthroughs often have far-reaching implications for marketing opportunities. Laser beams, for instance, have dramatically altered telecommunications, certain metal workings, surgical procedures, defense systems, and many other processes. Over the past two decades, many small high-tech firms in industries such as bioengineering, electronics, computers, and health science have appeared almost overnight, producing significant innovations>for consumers.

Technological change can affect virtually every marketing mix element. To illustrate; a number of firms sell space on direct-broadcast satellites to television programmers; "Scratch-and-sniff" chemicals have brought aromas into advertising. Toll-free telephone numbers have created a free business communications network for consumers. Electronic funds transfer technology (the remote transfer of funds from one account to another) has the potential to dramatically change retailing and create a cash-less society.

The list is almost endless. Companies that do not adjust their marketing mixes to reflect this rapidly changing technology are often destined to failure.

What elements of the marketing mix does technology affect? As evidenced by the activities of a producer of lawn furniture, technology affects all of the elements of the marketing mix. This company employs engineers who design products primarily by computer. The sales of these items are forecast through sophisticated computer software. The products are shipped on railroad cars and trucks in large containers that permit efficient handling. Most of the ordering and billing is done by computer. All of the firm's sales representatives carry laptop computers that make them invaluable sources of information to customers. Technology has benefited this firm significantly.


Technological change is occurring at an unprecedented rate. Of importance to marketers is the fact that this pace of change is not abating. Within the past century, the incubation period required to bring ideas from technical feasibility to commercial potential has dropped from an average of seven years to only five. It appears that this trend will continue into the indefinite future.

Two factors account for this acceleration. First, as in a nuclear reaction, technological developments tend to accelerate due to the self-feeding nature of technology. As a greater base of technology becomes known, ideas interact and provide the basis for still further research, as well as practical applications. Second, industry's commitment to research has expanded rapidly. Consequently, today's managers are faced with a different technological environment requiring some adjustment in the firm's marketing mix. Those unable to adjust are likely to be left behind.

Many of the recent technological developments have come from small, rather than large businesses. Often several employees of a large firm will see an opportunity and realize that they can take advantage of it through their own efforts. They resign from the large firm and set up their own entrepreneurial enterprises in pursuit of the opportunity. Many of the technological developments in computer hardware and software, biotechnology, and robotics have emanated from such efforts.

Marketers are discovering that the rate of technological change is increasing. One reason is the self feeding nature of technology. The computer industry is evidence of the self-feeding nature of technological change. With advances in technology, more organizations develop an interest and commit more resources to this function. Individuals interact with each other and develop further applications, which in turn develops more interest. Computers increasingly have advanced memories, more applications, enhanced user compatibility, and other important features. And the process goes on, at an increasing rate.


Management must anticipate future technology in a timely fashion--when both market opportunities and capabilities develop. This requires forecasting ability. But forecasting technological change is by no means a simple task. Technological developments are usually the domain of physicists, electronic engineers, and other technical experts and many marketing managers are unfamiliar with these fields.

It is not that marketers are inexperienced in forecasting. But their expertise is primarily in forecasting future data, such as sales, share of market, and profits. Many firms employ experts in preparing estimates of these variables in the future. But these are quantitative forecasts. What is needed to forecast technology is qualitative(non-numerical) estimates. And this is the domain of futurists and others who try to employ intuition and judgment tempered with facts to make their projections.

Marketers can develop the ability to forecast technological developments. But they need skills other than statistical analysis. The skills that are needed are creativity, imagination, knowledge of particular technologies, and sometimes just common sense. The firm that employs individuals with these skills has a valuable asset that may not be in the grasp of its competitors.

A producer of electronic components is interested in forecasting future technology. An impediment to this is that marketing managers who make forecasts are not experts in electronics. Many, even those who are employed in the industry, have little or no technical knowledge. Further, many are interested in other things, such as personal selling and advertising, and direct their efforts in these directions. It is apparent that there is a need to coordinate the thinking and efforts of marketing and technical experts in such industries.


Complicating forecasting, experts in the technical areas are generally unfamiliar with the marketability of new or potential developments. Consequently, an integrated, closely coordinated effort involving both marketing and research and development personnel is essential to the successful development and introduction of new offerings.

A carefully integrated effort meshes smoothly with the two basic approaches to technological forecasting. The first of these, exploratory forecasting, is technique oriented. With this procedure, forecasters makes estimates concerning developments by examining expected future production capabilities. Technical experts conduct analyses of new patents, project recent trends in production capabilities, study research findings and, based on these estimates, they produce forecasts of technological developments. Managers then assess the expected impact of the technology on market opportunities.

The second approach, termed normative forecasting, is to identify current and expected future needs with the assumption that these needs could trigger new technological developments for fulfillment. Following this procedure, managers critically appraise how well needs related to their firm's overall mission are currently being satisfied.

The major assumption underlying this method is that, when there are needs, technology eventually will solve these. The method requires identifying the major needs which target consumers have, and then projecting how these needs will be satisfied. But technological forecasting has its limitations. Both exploratory and normative techniques are rather subjective, using the opinions of various experts as primary inputs. Since this is the case, the optimism or pessimism of the analysts easily can influence the results. Further, forecasters have difficulty in estimating the current status of technology. Companies are not eager to share their private research findings with others, for obvious reasons, and often try to conceal them.

An example of exploratory forecasting is analyzing new patents in the chemical industry. These provide evidence of the progress of chemists and related scientists in advancing the state of the art in their fields. Patents provide detailed written evidence of what new innovations are appearing and the technology that underlies their output.

Exploratory forecasting involves making estimates by examining expected future production capabilities. For example, guided by progress in genetic research, a large manufacturer has created a "super-bacteria" capable of digesting crude oil. This breakthrough could significantly improve the world's ability to clean up oil spills. Once informed of such capabilities, marketers should try to assess the potential market opportunities as well as the anticipated effects on current marketing mixes.


Section (2.8)

Economic Considerations:



Answer this question: "How does the behavior of the economy affect marketing strategy?"

During the mid 1990's, the Federal Reserve Board held interest rates at reasonably low levels. The rationale of the board was to keep inflationary threats in check. This policy was valuable to numerous marketers, especially those who sold expensive durable goods. Most of these are purchased on credit and low interest rates make their products less costly.

The low interest rates were very useful to a manufacturer of swimming pools. Most buyers must borrow to finance these purchases and interest rates are an important consideration. Despite the fact that some of its costs rose during the mid-1990's, the interest rate situation allowed the manufacturer to maintain reasonably low net prices. The result was a positive sales picture.


Obviously, the demand for goods and services can be greatly affected by economic conditions. Fluctuating prices for home fuel, for instance, have altered the market for products such as home insulation, storm windows, solar water heaters, and solar space heaters.

Astute managers carefully follow economic trends and shape their decisions accordingly. Recent cutbacks in national defense have led a number of large high-tech firms to shift from producing weapons systems to civilian goods--both industrial and consumer products. More casual dress patterns at the workplace have led producers of clothing to shift from formal to informal attire in offices. Changes in food preferences have led fast food operators to offer more chicken and fish and fewer beef entrees.

The United States has the largest gross domestic product of any country. It is about four times that of Germany or Japan--making the U.S. the world's largest market for goods and services. American per-capita gross domestic product is about 28 times greater than that of the African country of Tanzania. Significant differences, though not so dramatic, exist within each region, state, and city of the U.S. Marketers should take these differences into account when assessing opportunities.

Economic fluctuations are just as important to decision making as the levels themselves. Change patterns affect future demand. U.S. economic expansion has been running between 3 and 6 percent per year.

All managers should be aware of the relationships between the growth rate of the nation or a particular region and trends within their own companies. Sales in the forest products industry, for instance, typically follow overall patterns in gross domestic product. Other industries, such as those providing home entertainment and motion pictures, find the reverse to be true, with booms during economic slowdowns and declines during periods of expansion.

Knowledge of the relationship between company sales and economic fluctuations can help management plan marketing actions. Even otherwise sound strategies can fail if a firm launches them at the wrong time.

It is naive to assume that all industries will prosper when the economy is advancing. Rather, management should analyze historical patterns to determine the relationship between GDP and company revenues. The cable television network is an example of an industry whose revenues are inversely related to economic growth.

Home entertainment industries often do well during times when the economy is stagnating. Consumers, finding that their incomes do not stretch as far, avoid expenditures on categories such as eating out, travel, and attending professional sporting events. They divert their discretionary income to entertainment at home.

One of the larger cable networks has analyzed viewing patterns and has found that its audiences expand considerably during economic downturns. Consumers simply stay at home more, and many tune into cable programming. Larger audiences, of course, translate into larger revenues, as advertisers take advantage of the situation and increase their use of cable advertising to reach target customers.


The importance of government's policies to the economy cannot be understated. The federal government is the largest single buyer of goods and services in the world. Further, this body controls the money supply. Decisions over both of these variables can greatly affect market opportunities. Accordingly, marketers of all sizes monitor the activities of Washington very carefully.

In some cases, marketers are involved in lobbying for legislation which can promote their welfare. They may do this as individual companies or through their trade associations. This can be a valuable tool, provided that seasoned lobbyists are retained. Effective lobbyists can convince governmental policy makers to construct dams, build roads, adopt new weapons systems, change laws that restrict certain industries, and a host of other actions. The more successful lobbyists often draw very attractive fees for their services.

Fiscal policy includes all government taxing and spending actions, both to buy operating items and to bring about economic stability. Changes in fiscal policy directly affect specific marketing opportunities. To illustrate, if congress allocates increased funding to urban renewal, construction firms in major cities benefit considerably. Likewise, oil depletion tax credits affect the profitability of industries related to oil exploration and regions where these activities take place. Gasoline tax changes can heavily impact on the trucking industry. Postal rate changes have a major effect on catalog retailers.

For some time, under the auspices of both political parties, fiscal policy has stimulated business. The federal government has operated with a deficit--spending more than it receives. Recent periods have brought outcries against this policy. If the government reverses its policies this could have a strong effect on specific industries and companies.

A move by the federal government to spend more on welfare will assist television producers significantly. Consumers at all income levels are purchasers of television sets. The low income consumers(many of whom are welfare recipients) allocate substantial portions of their incomes to buying television sets. They are not heavy consumers of new automobiles, frozen low calorie dinners, and jewelry.


In contrast, monetary policy is the deliberate exercise of the government's power to expand or contract the money supply. In the U.S. this authority rests primarily in the hands of the Federal Reserve Board, a separate federal agency.

While fiscal policies directly affect specific marketing opportunities, monetary policy's impact tends to be more widespread and indirect. When the Federal Reserve Board tightens the money supply, for instance, this tends to raise interest rates. Higher interest rates, in turn, produce higher borrowing costs, which affects business and consumers a like. As a consequence, practically all industries may experience a slowdown. Generally, marketers should remain alert to patterns of fiscal spending and proposed changes in the money supply so that they may be in a position to make appropriate changes in the marketing mix.

If the Federal Reserve Board increases the money supply, this can stimulate the economy. Demand for goods and services increases, as consumers have more income. Eventually, however, this policy can create inflation which, when carried to extreme, can have a negative effect on both consumers and businesses as they see their purchasing power fall. One positive effect of inflation and a falling value of the dollar is that United States exports become more competitive with exports from other countries and this can assist American exporters.

The federal government would likely bring about a significant increase in the demand for a large soft-drink company through a decrease in income taxes. Government can increase the demand for most goods and services by a reduction in income taxes. Even producers of such products as soft drinks and clothing benefit. Consumers have more money and this leads them to increase consumption, especially for items that are not necessities. They are more inclined to indulge themselves with increased expenditures on durable goods, non-durable goods, and services. They may feel free to drink as many soft drinks as they desire with their enhanced take home income.


Of course, considerable technical training is required to be able to fully assess fiscal and monetary policies, but managers do not need to be formally trained economists in order to make all of the required assessments. Some companies do employ professional economists who are experts in analyzing the outcomes of anticipated policies. These companies make their predictions and suggestions available to managers for only a nominal fee. Major banks provide projections to their commercial customers. Likewise, some trade associations and universities, as well as the Federal Reserve banks themselves, also provide professional forecasts.

But this does notmean that managers can afford to sit idly by and wait for economics experts to tell them what the future holds. Managers can combine easy-to-acquire information inputs with their own judgments. Business magazines and newsletters print anticipated governmental policy changes. Past experience and a basic understanding of federal policy and what its effects can be expected to be should enable managers to better prepare for influences on their target market and marketing mix.

In recent years both major political parties have favored monetary and fiscal policies that assist business firms. Public pressure for more jobs and higher paying jobs has prompted these parties to assume a pro-business stance--one that has not always been in existence. It is probable that the politicians will continue to pursue this goal.

The president of a small construction company who wants to keep abreast of fiscal and monetary policy changes that might affect the prospects of the company could do several things. These include analyzing trade association publications, contacting universities, and reviewing bank publications.

Marketers can avail themselves of a vast amount of information on the economy and anticipated changes brought about by changing monetary and fiscal policy by taking advantage of free or low-cost information sources. These are produced by banks, trade associations, universities, foundations, newsletter producers, consultants, magazines, and the federal government itself.

A manufacturer of overhead room fans utilizes most of these sources. Management realizes that it could not analyze the data as well as the experts employed by the organizations mentioned above. Many employ highly-educated and experienced specialists who devote the bulk of their efforts to making projections, often aided by sophisticated computer models. Consequently, their work is state of the art. Few if any individual companies can match such expertise.




Chapter 3

Consumer Behavior


Section (3.1) Overall Consumer Behavior.

Section (3.2) Economic Insights.

Section (3.3) Psychological Insights.

Section (3.4) Sociological Influences.

Section (3.5) Industrial Buyer Purchasing.

Section (3.6) Selling Industrial Offerings.

Section (3.7) Joint Decision Making and Approaches to Exchange.

Section (3.8) Government Buying.


Section (3.1)

Overall Consumer Behavior:



Answer this question: "Why do consumers buy goods and services?" Then pursue this section to find answers.


Facing a steady decline in birthrates since the late 1970's, a large producer of infant and preschool toys, cut back its advertising programs. But then in the mid-1980's, the preschool market suddenly became more attractive, due to a resurgence in the birthrate: the "baby boomers" of the 1950's were beginning to have children. As it had in the past, the company began to astutely tailor its marketing strategies to meet these new trends. Aggressive marketing efforts by competitors have made this segment one of the most hotly-contested in the toy industry.

The company made several aggressive moves in the mid-1990's. With at least 60 new toys presented at the 1995 February Toy Fair trade show in New York, the director of advertising predicted that 1996 would be a very bright year for the company. To augment the new line of products the company increased its advertising budget by over 90 percent.


Consumers are the focus of most companies. In this regard, profitably satisfying consumer needs is at the heart of successful marketing. Understanding why consumers purchase certain items, avoid others, and how they make their purchase decisions is of vital interest to marketing managers.

Consumers are people, acting as individuals or in small groups, who buy goods and services for personal purposes--in contrast to industrial buyers who buy and use items for commercial purposes.

Those with an interest in consumer behavior look at a number of variables. A very important one is the population. Trends in population have a great effect on marketing decisions. To illustrate, many colleges and universities have begun to market continuing education programs to adults, primarily because of large increases in this group. Similarly, a surging birthrate has lead to increasing competition in the toy market.

Populations shift from one area of the country to another is significant for marketers. Some of the high growth states are Florida, Arizona, and Nevada. To the contrary, New England states have lost population. This provides indicators of how new opportunities are available to marketers who adjust to these shifts. The ski industry has boomed, for example, with increases of the population in the Rocky Mountain region.

Marketers study Metropolitan Statistical Areas (MSA's) to monitor trends within specific areas. A MSA is an integrated social and economic unit having at least one city with 50,000 or more inhabitants or a U.S. Census Bureau defined urbanized area of at least 50,000 inhabitants and a total MSA population of at least 100,000. In all, there are about 270 MSA's in the U.S. They account for approximately 75 percent of the population. Governmental agencies and numerous other organizations, such as universities and foundations, collect large volumes of data about population, income, expenditures, and other variables in the MSA's.

Most companies focus their attention on specific groups of people. Some travel agencies concentrate on senior citizens. Several soft drink producers target consumers who are in their 20's. Various handgun producers have designed one line for men and another for women. These companies study these specific population groups, then, rather than analyzing the entire population.


If a company wants to introduce a new line of infant's wear, management would want to determine what areas the company effort should target first. This could be accomplished by examining the age breakdown of the population, categorized by MSA. This would reveal how many infants reside in each MSA, and would be useful in indicating where the company should concentrate its efforts. There are substantial differences in the age distribution of the country, from one area to another, so this analysis could be very revealing.


There are many theories of consumer behavior. Some come from economics; others derive from psychology and sociology. Which one is correct? Which one predicts consumer behavior better than the others? The answer to these questions is "They all do." Some aspects of consumer behavior are best explained by psychological theories. Others are best explained by sociological theories. It is necessary, then, for us to be familiar with a number of theories in order to understand consumer behavior. No one theory will explain everything.

All of the theories use some form of the following model:

Stimuli--Mental Processes--Behavior

This simple model indicates that stimuli or cues trigger mental processes of the consumer and that this results in behavior. Stimuli are objects or events that take place and spur consumers to alter their thinking. Mental process are the thoughts that consumers experience because of the stimuli and their past experiences. Examples of mental processes are perception, memory, and reflection. In turn, the combination of the stimuli and the mental processes produces some form of behavior, such as making a purchase.

All of the theories follow this general pattern. They differ in what stimuli, mental processes, and behavior they study and how they organize these three elements.

When a fast food chain employs billboards to direct motorists to their restaurants, the billboards serve as stimuli. The chain can use other stimuli, as well, of course. These other stimuli include distinctive signs, attractive exteriors, and aromas of food cooking.

One of the major things that marketers do is to introduce stimuli to consumers, as a means of influencing their behavior. A cereal marketer relies heavily on stimuli. It sponsors advertisements in magazines and television, which bring company products to the attention of consumers and attempt to convince them that these offerings taste better than competitors' cereals. The firm has engaged packaging consultants to design packages which help sell the products on store shelves and build a quality image among consumers. The product itself serves as a stimulus. Its taste, consistency, and composition all affect how consumers react.


Explorers of consumer behavior have proposed a number of models describing buying processes and how these processes develop. A model is simply an abstraction of the phenomenon it is intended to represent. In effect, it specifies the essential elements that the analyst deems to be important, represents the interrelationships between them, and spells out how behavior results from these elements.

While no consumer behavior model is perfect, models offer several advantages making them worth using. They provide frames of reference for analyzing variables related to consumer behavior and the interrelationships of these variables. They furnish a means of fitting together information in a meaningful way. They serve as guides for future research. Models also provide guides for establishing marketing plans and actions.

Most marketing managers find that no single model of consumer behavior explains everything. By using several of these together, however, considerable understanding of the consumer is made possible.

A producer of headache remedies uses several psychological models to explain consumer behavior. The models can be very useful but they are only abstractions of reality. Consequently, they cannot be expected to predict consumer behavior perfectly. The study of consumer behavior is an inexact science, unlike other fields such as physics and biology.

A producer of headache remedies has found that several psychological models are useful in predicting how consumers will react to company advertising efforts. The models predicted that the firm should run its television commercials over many times (a repetition strategy) in order to change consumer attitudes substantially. This strategy has been successful and management is now a strong believer in the usefulness of repetition.


Some students of consumer behavior believe that different models can be integrated by using some overall theory of consumer behavior. One of these is the problem solving model. It proposes that all consumers make purchase decisions in a fashion that resembles the processes that people use to solve problems

Problem ___ Search for___Sources of ___Decision___Post Purchase

Recognition Solution Information Activities

According to this model the consumer recognizes a problem-a difference between desired behavior and actual behavior. It could be that the problem is that a family's hot water heater is not producing enough hot water for everyone. It seemed to work well before, but this is no longer the case.

In search of a solution, the husband drains the tank and cleans it. This does notcorrect the problem, however, so he confers with several friends. They advise him that the appliance probably should be replaced. He calls a plumbing and heating retailer, who echoes the advice--it should be replaced.

The sources of information in this case could be many. These would include the friends, the plumbing and heating dealer, advertisements, brochures, other dealers, "Consumer Reports" magazine and, of course, the past experience of the consumer that is stored in memory.

The consumer probably will check with several dealers for the best price and quality combination. This will result in a decision to buy a particular model from a particular dealer.

The consumer behavior process does notend here. There are various post-purchase activities that will take place and affect the response of the consumer toward the product and retailer. The activities include delivery, installation, and billing. If these are accomplished effectively the consumer is likely to be satisfied. In turn, he may tell other friends about the positive outcome.

This model brings together the various steps that consumers go through when they make a purchase. It probably describes the processes that most people employ for this purpose.

A sales representative for a resin manufacturer is calling upon another manufacturer that makes kayaks, canoes, and other boats for consumers. Based on the model of consumer behavior, the first task of the sales representative is to convince the buyer that a problem exists. The sales representative might point out that the buyer is paying too much for competing resins or is getting an inferior product or substandard service. The goal is to show that there is a substantial difference between a desired state (high quality goods and services at a reasonable price) and the actual state of the buyer. Once the problem is recognized, other steps will logically follow.



Section (3.2)

Economic Insights:


Try to imagine the ways in which the economics discipline might explain consumer behavior. Then pursue this section for more insights.


Some consumers are very careful shoppers. They decide exactly what they want to purchase through careful deliberation. Then they make a careful search to find the product or service that will fulfill their needs. They may read advertisements, talk to sales representatives, solicit the advice of friends, read "Consumer Reports", and visit retail stores to examine various potential purchases. Their objective is to get the best quality product at the lowest price. These consumers are pursuing a purchasing strategy that economists believe to be descriptive of how people buy.


In discussing marketing, we are dealing with one aspect of "microeconomics"--the study of the individual units that make up the economy (as against macroeconomics, which is a systematic investigation of the overall economic system and governmental policy related to it).

The classical microeconomics theory provides a useful starting point for the student of consumer behavior. Assuming that the individual is a rational being, fully aware of his or her desires and needs and able to determine the best way to satisfy them, the classical economist believes that the consumer will acquire the items having the most utility (ability to provide satisfaction) relative to their costs and the consumer's financial position. The theory presents a picture of the efficient and rational problem solver who attempts to get the most for his money--to maximize utility.

A truck maintenance firm provides a valuable service to owners of truck fleets (such as soft drink bottlers, dairies, and bakeries). The company operates several trucks which travel to the places where the client trucks are parked, after working-hours or on weekends. The maintenance crew checks the oil, gaskets, grease, and other elements that may need maintenance. If work is needed, the crew proceeds.

Basically, the clients of this firm behave as classical microeconomics theory predicts they will by seeking out low-cost, convenient, and effective maintenance for their trucks. Most of them have even made rather careful evaluations of the ability of this firm to provide the utilities, in comparison to alternatives such as self- maintenance and service station maintenance.

A buyer of industrial supplies behaves according to classical microeconomics theory. This means that the buyer is fully aware of his or her needs and desires. The microeconomics theory assumes that consumers act rationally. In order to do this they must have goals. But it is not possible to develop goals without detailed knowledge of personal needs and desires. These must be well-developed before buyers can determine which products have the most utility, because some items have utility to one person but not to another, as the two may have differing needs and desires.


Economists have called this model the "marginal utility" model. It is also sometimes called the "economic man" model, since it predicts that consumers will respond only to economic stimuli.

The model uses three factors to explain decision making: consumers' perceived utility of each item, the price of each item, and consumers' budget levels.

One of the variables included in the model is "marginal utility". This is the satisfaction that the consumer receives by consuming one more unit of the product or service. Economists assume that marginal utility declines as consumption increases. A consumer might receive considerable satisfaction from eating an ice cream cone (very high marginal utility). The second cone might taste very good, but would not bring in as much satisfaction as the first, because the consumer is less hungry (marginal utility is declining). A third ice cream cone probably would produce even less utility. If the consumer is satiated, it might even bring in negative marginal utility--over satiation.

More specifically, the model states that individuals buy items to maximize the benefits they receive from a given budget level. That is, the model asserts that people allocate their incomes so that the benefits derived from ( marginal utility/ price) for all items is equal. If any good or service offered less utility relative to price, consumers would increase the total satisfaction from a given budget by purchasing less of that item and more of some other.

A husband and wife behave according to the classical microeconomics theory when they buy groceries. They allocate their incomes so that marginal utility/ price for all items is equal. In this way, they will be spending their incomes in such a manner that total utility is maximized, given the level of income that they receive. If the price of an item rises but marginal utility stays the same, they will consume less of that item and more of other items. In this way they will maximize their satisfaction.


There are several limitations to the classical microeconomics model. One limitation is a psychological one. In reality consumers are not fully aware of the nature and importance of all of their needs and desires since many of these lie in the subconscious. This means that the individual is not aware of their existence. This makes objective calculations of satisfactions difficult.

Another weakness is the assumption that consumers have complete knowledge of the various ways to satisfy their needs and desires. Automobile purchasers, for instance, probably are unable or unwilling to gather complete information on the various models available, their performance and styling, and the total costs of each. It would be nearly impossible for grocery shoppers to attain complete knowledge about the various alternatives available ands the utilities and costs of each one.

The theory does nottake into account some very important influences on behavior in addition to the subconscious needs and desires, such as: the influences of other individuals and groups (such as family and friends), an individual's emotions, and the effect of product purchase and use upon future purchasing. An illustration of the influence of emotions and friends, for instance, is the hardware store owner who signed a contract with a wholesaler because the owner of the wholesale outlet was a cousin and the hardware store owner believes in helping out "the little guy".

A food processing buyer behaves according to the classic microeconomics model. This means that she makes an effort to learn about the quality of the items that she buys. Only in this way can she make a determination of the marginal utility of each product, compare this to its price, and then choose among alternative products. The buyer would not be behaving according to the microeconomics model if she is influenced by subconscious needs and desires, family and friends, or emotions. All of these are assumed away by this model.


The classic microeconomics model focuses more upon how consumers should act than on how they really do act and has been the basis for many criticisms aimed at marketing activity. Critics have scolded marketers about the use of emotional appeals in advertising, about annual changes in product styling, and variety in product offerings. These criticisms lose much of their validity when it is recognized that they are based upon what some economists believe should be, rather than upon what is.

Unfortunately, some legislators and public officials use the classical microeconomics theory in developing and interpreting regulations of marketing activity. They believe (often incorrectly) that the solution for the ills of society is to provide more and more information to consumers. Once the regulations are in effect, they are amazed to find that the bulk of the consumer population does notuse much of the information so hardly fought for.

These problems do not mean that the classical microeconomics model is useless. It does stress the fact that people pursue their own self-interest, which is one insight that is important in understanding consumer behavior. And, most consumers do have goals, even if they are not perfectly understood, even by the consumer. Most consumers do try to gain at least some information about price and utility, even though they do not make precise calculations of marginal utility and price for all items under consideration. In other words, this model provides us with a starting point for understanding consumer behavior. But it is only a beginning. Other models are needed to supplement this one.

A hardware dealer believes that the classical microeconomics model accurately predicts consumer behavior. One reason that it may not, however, is that it assumes that consumers can calculate marginal utility. It is doubtful that consumers will be able to make precise calculations of this variable. Their calculations will vary depending upon a number of factors, such as their emotions, their physical states (such as when they are hungry or full, on the one hand, or fresh or tired, on the other), the time of day, and numerous other variables.




Psychological Insights:


Answer this question: "How can the discipline of psychology help us understand consumer behavior? Then go through this section to build a framework for using psychology to analyze consumers.


A construction worker always stays at the same motel chain, regardless of what city he is working in. He has found the rooms to be clean, the price economical, and the employees to be accommodating. He is appreciative of the free breakfasts which this chain provides. Over the years this individual has developed a brand loyalty to this chain. Only under exceptional circumstances will he stay in another motel.

Habits such as these are explained by the discipline of psychology. Next let's examine how these habits develop.


Psychology is the study of individual behavior. It has made innumerable contributions to the consumer behavior field. We cannot cover the entire field of psychology here. Rather, we will focus on some of the aspects that are most useful in analyzing consumers.

The stimulus-response learning theory is of considerable value for our purposes. This model indicates that behavior is explained by the model:


A stimulus is a cue that activates a drive. Examples of stimuli are an advertisement, a salesperson's message, and the smell of french fries being cooked. A drive is an internal state of attention--a need that demands satisfaction. Examples are hunger and thirst. A response is the action or behavior that results from the combination of drive and stimulus. Finally, reinforcement takes place when the response to the stimuli and the drive is rewarded.

This model assumes that consumers learn to buy certain brands, just as students learn in the classroom. If purchase of the product is sufficiently rewarded over time, consumers learn to become loyal to that brand. They develop a habit of using it. And such habits are likely to persist unless the reinforcement stops or becomes negative.

The stimulus response model indicates that learning increases with advances in the intensity and frequency of reward. Acting upon this belief, some stimulus response believers have utilized repetition in advertising as a tactic. They beam the same television commercial or idea to the public numerous times. This is the reason that many advertisements are repeated.

Sometimes consumers generalize--they give the same response to two or more similar stimuli. This being the case, some marketers give the same brand to two or more products. Some food processors, for instance, use "family brands" as when they use the same brand name for mustard and ketchup.

Marketers who employ this model should take steps to insure that the right stimuli are directed at consumers who have drives that the company's product can satisfy. These marketers should attempt to provide strong and consistent reinforcement to consumers. Finally, they should analyze consumer responses and make sure that these are positive.

Consumer behavior begins when a security conscious consumer sees an advertisement for a fire extinguisher. The advertisement acts as a stimulus. If the stimulus combines with a consumer drive, this sets off the entire consumer behavior process.

Consumer behavior is incited when the consumer has a drive that is activated by one or more stimuli. A hungry consumer, for instance, may be driving home from work. His hunger is a drive. The drive is activated by a sign which advertises a fast food chain (a stimulus). The consumer parks and enters the restaurant (a response). The food is delicious, the employees are friendly, the restaurant is clean, and the price is reasonable (reinforcement). The consumer is rewarded and tends to build a positive attitude toward the chain. This behavior may be repeated, and if positive reinforcement continues, the consumer may learn to repeat the behavior quite often--he learns brand loyalty.


Another important psychological contribution derives from The Gestalt model. It focuses on the way in which consumers perceive objects and ideas that confront them. Perception involves both attention and interpretation. Individuals attend to some stimuli and not to others. Further, they interpret stimuli according to their own particular theories about reality.

Gestalt researchers have found that individuals perceive items or ideas as parts of a whole, rather than as isolated segments. Marketers should use this as a guideline to coordinating the marketing mix. A store that has gone to considerable effort to building an image of quality and prestige may be making a mistake if it runs frequent sales, for example. The idea of having sales may be incompatible with the prestige image.

Research has shown that consumer perceptions, not reality, are what is really important to marketers. If consumers believe that a golf club is of high quality, management is in a position to charge a higher price than if they think that the quality level is low. Marketers should monitor these perceptions and take corrective steps if they become negative.

An important aspect of Gestalt psychology is "cognitive dissonance". This takes place when consumers perceive a substantial difference between what they perceive (experience) and their attitudes. After making a major purchase (such as a new car) many consumers feel dissonance. They may fear that their purchase was ill-founded and that they have made a mistake. It is important that marketers take steps to stem this feeling, as by informing consumers through advertisements or contacts by sales personnel that they have made an excellent purchase.


Since consumers perceive items or ideas as parts of a whole, retail stores should carefully coordinate their marketing mixes. One variety store chain that has been very unprofitable in recent years has violated this principle. Store advertisements basically target blue collar workers. But the merchandise which the chain offers (computers, computer supplies and accessories, formal clothing, and quality linens) is more appropriate for white collar workers. The stores are located in upscale shopping centers but feature frequent low price appeals. Basically, this marketing mix is not coordinated and has not been effective in reaching either blue or white collar workers.


Another psychological contribution is the psychoanalytical model. It relates that the mental apparatus of humans is composed of three elements: the id , which is the reservoir of the instinctive impulses , the ego, which is concerned with the perception of the outside world, and the superego, which represents the inhibition of instinct which is characteristic of humans. Basically:

1. The id is the instinctive, "pleasure seeking" element.

2. The ego is the intellectual or control element which attempts to maintain a balance between the id and the superego.

3. The superego is the moral and ethical element, the conscience.

According to this model, the id constantly seeks to attain pleasure and avoid pain. This is in conflict with the superego, which tries to block the pleasure seeking activity of the id. The ego is the rational part of humans and attempts to resolve this conflict.

The psychoanalytic model maintains that the process of id-superego conflict and ego conflict resolution explains human behavior. Behavior depends upon the relative strengths of each of the three elements in the personality and the particular ways in which they combine to produce solutions to problems.

If an executive is thinking of buying an expensive new suit, the psychoanalytic model might predict the following: The executive inspects the suit and finds that its just the color and style he wants. He puts it on, looks in a mirror, and is impressed. He believes that the suit would impress his wife and his friends too. (The id is aroused). However, the superego may act counter to the id. The executive may recall that his wife needs more clothing and that one of his children has been asking for a motorcycle, but family funds are limited. Purchase of the suit would make it impossible to buy the wife's clothing and the son's motorcycle. Thus, the superego imposes pressures not to make the purchase. Its "not the thing to do" in light of the needs of others.

The id and the superego are in conflict. The function of the ego is to resolve this and to provide a decision that the consumer can accept. Thus, the ego may entice the consumer to realize that he needs a new suit to impress the company vice-president

If the vice-president feels that the executive is not well-groomed, the expected promotion might not be forthcoming. If he is promoted, he can buy the suit, his wife's clothing, and the motorcycle with his credit card.


Another psychological contribution--the self concept model--holds that consumers behave in a manner consistent with their self concepts, that is:

.The kind of person that one believes he or she is and, .The kind of person that one believes that others think he or she is.

According to the self concept model, consumers develop lifestyles (patterns of behavior) that are in accordance with their self concepts. They purchase and use goods and services that are congruent with their self concepts. Also, they reject offerings that seem to be inconsistent with their self concepts. A teenager whose self concept is that of a rebel, for instance, is likely to reject goods and services that his parents and other "old people" prefer.

The objective of the marketer who employs this model is to identify the self concepts embraced by target customers and provide a marketing mix that is compatible with such self concepts. Marketing research studies on the self concepts of target customers can be useful in this regard.

A Realtor has the self concept of being trendy and in touch with the latest developments. She is likely to be a purchaser of a convertible automobile.

People buy goods and services that dovetail with their self concepts. One possible self concept is that of the "jet setter". Such an individual is likely to have a lifestyle that includes a modern high rise apartment, a sports car, up-to-date clothing, and a variety of sports equipment. On the other hand, one with the self concept of a "devoted father" may make multiple purchases of toys for the children, fishing gear for the family, expenditures for family vacations, and substantial investments in life insurance.




Sociological Influences:


Think about the major ways in which the groups to which consumers belong influence their behavior. Then pursue this section, which covers the topic of sociology.


Four men meet every Saturday morning for a round of golf. They have been doing this for several years and have become good friends in the process. All are good players, but one always scores better than the others. He is especially astute at long drives and at chipping. The others are well aware of his prowess and realize that they probably will never be able to achieve his level of expertise.

The best golfer of the four has emerged as an opinion leader. The others look to him for advice, not only on how to hit the ball, but on a variety of subjects including what kind of clubs to buy, the brands of golf balls to use, and the best brand of golf carts.

The top golfer is not an opinion leader on other subjects , however. The others do not seek advice on politics, home care, investments, and other subjects. They look to him only for ideas about golf. In this subject matter, however, he is the acknowledged authority.


This section covers sociological models, which focus on the behavior of groups and individuals within groups. All individuals belong to numerous groups which influence their thinking and action; their families, churches, work groups, schools, and social groups (such as the golf foursome). Only isolates, such as hermits and Robinson Crusoes, are immune from group influence. Even Crusoe became subject to a group, when he was joined by Friday.

An important group is the culture. This is a large group that affects all activities that are repeated more or less consistently among a population. Over a period of time individuals learn and adopt the ideas, values, and patterns of behavior of their culture.

Culture instructs people on how they are supposed to behave. It spells out the duties, responsibilities, and privileges of society's membership. Also culture spells out specific acts society encourages or frowns upon. A "good father" in a particular society may be one who provides for the family and attends to certain household duties, but who does notdevelop a questionable track record at a local bar. Finally, culture provides a system of symbols and material products. Individuals become accustomed to associating certain products and meanings with certain needs.

Because of their common experiences, members of cultural groups develop somewhat similar forms of behavior. Further, there are subcultural differences within a broad population. Most Americans, for example, enjoy pork products. But many Jewish and Arabic Americans avoid them because of subcultural pressures. Other subcultures are teen-agers, African Americans, Mormons, Northerners, city dwellers, and senior citizens. Each has its own set of norms, expected behaviors, and symbols.

Failure to properly recognize cultural differences can lead to major marketing blunders. An American cosmetic producer, for instance, raised the ire of many citizens when it introduced "Cue" toothpaste into French-speaking countries. This is because in French "Cue" is an off-color word. Marketers must avoid such mistakes and adapt their strategies to the cultures and subcultures in which they operate.

A producer of skin blemish remover cream is studying the culture of Western Canada to provide clues as to how to market the product. This study may help in revealing what various products symbolize in Western Canada. This should be examined, as systems of symbols are very important to product purchase and vary from one region to another. The use of skin blemish remover cream, for instance, may symbolize adolescence and immaturity in some segments.

An analysis of culture will assist in understanding the system of symbolism that exists in a large group. Symbolism refers to what various objects mean to members of a group. The product itself and various parts of the product, such as the package and label, can convey considerable meaning to target customers.

A producer of outdoor camping equipment once introduced its product line into several Arabic countries. The company logo contained a symbol that appeared to numerous consumers to resemble the Star of David. This perception dealt a serious blow to the company, which found that its revenues were negligible.


Another way in which groups influence consumer behavior is through social stratification, which affects all societies. Some people live in the "right" neighborhoods, while others live on the "other side of town".

In some societies a person's birth may be the basis for a stratification system, as in the now-defunct caste system of India. However, stratification usually is less rigid and is termed" social class". Members of a social class tend to share certain behaviors. In the United States, social class tends to be based upon occupation, source of income (salary, investments, etc.), and housing type.

In the United States the traditional social class categories are:

1. Upper-upper--Those with inherited wealth and family backgrounds.

2. Lower-upper--The newly rich.

3. Upper-middle--Successful professionals and business executives.

4. Lower-middle--White, blue, and gray collar workers who earn a better than moderate income.

5. Upper-lower--Individuals with limited education who perform manual labor.

6. Lower-lower--Those with the least income and prestige.

Some marketers find that social class helps to explain many buying decisions. For instance, those in higher classes make most purchases of luxurious vacations, while those in the low to middle classes often take family car trips.

We should recognize that within each social class are "privilege groups" These are made up of individuals who have more income and wealth than others in the class. Privilege group members purchase many luxury goods. Likewise, there are "dis-privileged" groups. An example is ministers who may have high prestige but earn much less income than others in their social class. These individuals budget carefully, in order to make ends meet.

A seller of luxury fishing boats desires to sell its products to consumers who desire prestige and pride in owning "the finest". It should target lower-upper consumers, as these are the status market, the group that is willing to pay substantial amounts of money , just to build prestige and status in the eyes of others.

Marketers of expensive items that are sold on a prestige or "snob appeal" basis usually find that the Lower-upper class is a prime target. A Realtor who sells million dollar homes has found this to be the case. Members of the Lower-upper class seek prestige and feel that they can attain this by purchasing expensive and conspicuous items. Members of the Upper-upper class already have prestige and feel no need to attain more. They often purchase more traditional goods and services than do the Lower-upper. And most members of the Upper-middle (except perhaps for the privileged) do not have sufficient incomes to purchase the most expensive homes.


Another important group for those who are interested in consumer behavior is the reference group. In general, people adjust their behavior to meet the formal and informal standards of groups to which they belong or aspire to belong. These groups are called "reference groups" because individuals refer to them in setting standards of proper conduct.

Generally, a reference group is a collection of people that influences the behavior or attitudes of others. However, a reference group can also be a single individual like a rock star or a famous person at school. Many types of reference groups exist:

· Primary groups are those with few enough members to allow intimate face-to-face communications. Examples are families, friendship groups, and golfing partners.

· Secondary groups are those where interpersonal face-to-face interactions are not possible because too many members exist. Examples are religious organizations and trade unions.

· Formal groups have an established organization, such as the employer, the church, and the Elk's club.

· Informal groups are voluntary associations of persons with similar interests. Examples are car pools and bridge clubs.

Since these groups have a strong influence on the behavior of their members, it is in the self interest of marketers to find out who the group leaders are and to direct their communications at these leaders. Some golfing equipment producers, for instance, have found that golf pros tend to be group leaders. These producers direct much of their advertising and personal selling effort at the pros.

The family is a very important reference group. Its influence varies, as these groups go through what is called the family life cycle:

1. Bachelor stage--young single people away from parents' home.

2. Newly Marrieds--young, no children.

3. Full Nest I--youngest child under 6 years.

4. Full Nest II--young marrieds, youngest child over 6 years.

5. Full Nest III--older marrieds, dependent children.

6. Empty Nest I--older marrieds, no dependent children, household head in labor force.

7. Empty Nest II--older married, no dependent children, retired.

8. Solitary Survivor I--spouse deceased, still in labor force.

9. Solitary Survivor II--spouse deceased, retired.

Both needs and desires, on the one hand, and incomes on the other, tend to change with the passage of each stage. This means that the purchases of family members will change as they move from one stage to another.

Decision making authority within the family varies widely. Research has revealed four family decision making molds:

· Autonomic--equal number of different decisions made by each partner.

· Syncratic--most decisions made jointly.

· Husband dominance--the husband dominates most decisions.

· Wife dominance--the wife dominates most decisions.

In the U.S. there is a trend toward increasing numbers of syncratic and autonomic families. This may be due to higher levels of education and increases in income on the part of women.

Firms that rent items to households often find that the best target market for them consists of the bachelor stage. Many members of this group lack the income needed to purchase items. Also, they frequently change apartments and areas of the country, needing items only for a short period of time. Bachelors rent products such as furniture, sporting equipment, photographic equipment, and tools in high numbers. Renting is often appealing, as these individuals often live in apartments, rooms, and small homes, and have limited space to store goods. Renting them when they need them is often a necessity.


Sociologists have developed a model called "Diffusion of Innovations" that has proven to be very useful to marketers in understanding consumer behavior. All consumers do not automatically adopt new products, even if they are far superior to those they replace. It may take months or even years before a new offering can penetrate a market.

There are five adopter categories. The first is "innovators" (2.5 percent of the population). They tend to be venturesome, worldly, and are on the fringe of the social system. Often they tend to be relatively young. Innovators are mobile, traveling considerably and changing jobs, residences, and other arrangements frequently. These individuals are "social guinea pigs", demonstrating the practicality, workability, or desirability of an innovation to others.

Early adopters make up 13.5% of the population. They are the next group to adopt the new idea or product. Often they are among the better educated and more financially successful members of society. They tend to be young and are frequently considered to be opinion leaders.

The early majority are the next 34 percent to adopt the idea or product. Their primary function is to sanction the use of an innovation. They may be eager to embrace new ideas but are often unsure of themselves and wait for sufficient social approval and for the early adopters to try out the innovation.

The late majority is the next 24 percent to finally adopt after 50 percent of the others have already done so. They tend to resist change but are tied to the society and adopt when an innovation becomes inevitable. Often they succumb to social pressures to accept a new idea, reluctantly changing past patterns.

Laggards are the final 16 percent to adopt. They cling to past behaviors, norms, and values. Like innovators they are deviants in some respects but at the opposite end of the social spectrum. In general, laggards are older members of society.

When an innovation becomes operable, people pass through a series of mental stages before they adopt a new innovation:

1. Awareness--the person becomes cognizant of the existence of a

new idea, but not fully informed about it.

2. Interest--the person develops the motivation to seek information about the innovation.

3. Evaluation--This is the decision stage, where the person determines whether or not he or she should try it.

4. Trial--the person tries the innovation but does notmake any lasting commitment to use it again.

5. Adoption--the person decides to make regular use of the innovation.

The stage that most consumers are in helps the marketer design the marketing mix for a new offering. For example, if the bulk of the target market is in Stage 2 , management could offer free samples of the new product as a means of inducing consumers to try it. On the other hand, if the bulk of the target is only in Stage 1 , management might feature an extensive informational advertising program to provide information about the innovation.

When a company is contemplating bringing out a new offering, an important question is "Who should be the target consumer?" The diffusion of innovations model suggests that these should be the innovators.

If a tea producer hopes to reach innovators through advertising, sales promotion, or some other means, management must identify who the innovators are. This can be difficult, because innovators for one product may not be innovators for others. The best generalization is that innovators for many products are mobile-- changing jobs and residences frequently and engaging in considerable travel. This would suggest that many would belong to the various newcomers clubs that exist in every city. Preparing advertisements to be included in the promotional packages of these clubs could be useful in reaching innovators.



Industrial Buyer Purchasing:


Try to imagine the major ways in which the purchasing behavior of business and nonprofit organizations differ from the purchasing behavior of consumers.


No chief decision maker can feel pleased about a ,100 million plus business write off. This decision was especially bitter for the chairman of a major company that had to abandon the U.S. market for digital telephone switching equipment. The firm was unable to transform the system that it sold in Europe to meet U.S. specifications.

Digital equipment is in heavy demand in the U.S. because it allows telephone companies to offer cash generating services such as call forwarding, call waiting, and the equivalent of a private telephone system for business customers.

The company failed because of bad timing. Its strategy was to establish a leadership system in Europe and then bring the product to the U.S. But this happened too late. Other companies moved in to saturate the market. The loss meant more than the ,100 plus business write-off. It put the company in a vulnerable position against hard-charging competitors in the rest of the world.


Far too many people envision marketing as solely relating to consumer products. These products, however, represent only a portion of the total picture. Industrial goods are the other major component.

Industrial buyers seek ways of attaining their objectives by producing goods and services and selling them to others. In turn, they buy goods and services to enable them to operate.

The major categories of industrial buyers include:

· Agricultural producers (farming, forestry, and fishing).

· Service companies (such as travel agencies and CPA firms).

· Construction firms.

· Extractive firms (mining, quarrying, and drilling).

· Financial institutions (banks, insurance, and real estate).

· Manufacturing firms

· Not-for-profit institutions (churches and charities).

· Public utilities.

· Transportation firms.

As a group, industrial buyers have behavioral characteristics different from purchasers of consumer goods and marketers should be aware of these differences when designing their strategies.

Fortunately for marketing decision makers, federal and state governments and trade associations collect substantial detailed data relating to industrial buyers. These organizations publish and make available to managers much of this information. They report on the number and type of establishments, their sales volume, number of employees, cost structures, and other important variables. Most often, the reported data are broken down into Standard Industrial Classification (SIC) codes, which categorize producers by the types of products they manufacture.

Breakdowns of sales and other data by SIC categories are useful to industrial marketers in locating market opportunities. The codes utilize a four-digit number, where the first two digits identify a particular industry, such as machinery or apparel. The code 75_ _ refers to repair shops, for instance. The last two digits signify subdivisions of the industry. 753_, for instance refers to all automobile repair shops. Further, 7534 identifies tire re-treading and repair and 7535 means paint shops.

Another characteristic of industrial buyers is that they are more highly concentrated in geographic locations than are consumers. To illustrate, roughly 50 percent of the 1.8 million manufacturing and service firms in the U.S. are located in eight eastern and Midwestern states plus California.

Within individual industries, concentration is even greater in terms of both geography and size. Most of the rubber industry, for example, is located in Ohio. Many steel plants are situated near Pittsburgh. As for size concentration, nearly half of all value added by manufacturing is accounted for by the largest 200 companies.

Concentration of the market has two important implications for marketers. First, a single potential buyer is usually more important to an industrial marketer's success than is a single consumer to a marketer of consumer goods. This is because sales to a producer are generally much larger in dollar volume than sales to a single consumer. This being the case, marketers often segment markets on the basis of individual potential customers and adopt a very flexible approach to each.

Second, because of industrial buyer concentration, mass promotion campaigns are often unnecessary. Because of concentration, personal selling is generally much more efficient. Individual sales representatives can call on specific buyers and spend considerable time with them, in order to satisfy their specific needs.

Concentration in the industrial goods market leads many firms that sell to this sector to rely heavily on personal selling, rather than advertising. A seller of maintenance supplies to the steel industry could rely heavily on advertising, but much of this would be wasted, as it would reach firms that are not in the steel industry. The marketer is much more likely to succeed by maintaining a sales force that has been trained to serve steel company buyers by discovering their unique needs and making a major effort to satisfying them. In fact, industrial marketers spend more than ten times more dollars on personal selling than they do on advertising.


One of the key factors distinguishing industrial buyers is their informed and skillful buying. When consumers buy a faulty product, say a toaster that burns toast, they are likely to become upset, but the consequences are not often monumental. On the other hand, if an industrial buyer makes a multimillion dollar mistake it could mean major losses and even bankruptcy.

Many factors such as favorable terms of sale, freight charges, dependable rapid delivery, and price are all critical to an industrial buyer's success. A price only a few cents per ton lower on steel, for example, could result in added profits of a million dollars or more to a large buyer of steel, such as an automobile producer.

Accordingly, industrial buyers devote a great deal of time and effort to purchasing. Most are aware that they must remain current on all information on items which might fill their needs. In fact, many are actively involved in informing potential suppliers about their existing needs as well as those anticipated in the future. Further, many industrial buyers employ purchasing specialists whose jobs entail aggressively seeking information about products, services, and suppliers.

The types of products industrial buyers purchase include:

1. Installations--long-lived expensive manufactured products such as buildings and major equipment.

2. Accessory items--capital items used to complement installations. These include small power tools.

3. Supplies--items used for maintenance, repair, and to facilitate operations. Examples are electricity and pencils.

4. Services--such as legal advice and consulting.

5. Raw materials--such as coal and wheat.

6. Components--items that receive processing before delivery. Examples are tires on new automobiles and pig iron to be processed into steel.

Purchasing personnel for industrial goods firms are likely to be highly involved in informing potential suppliers about their needs. The purchasing personnel for a manufacturer of office machinery illustrate this point. They realize that they are highly dependent on suppliers for their success. If suppliers cannot adequately satisfy their needs the purchasing process may be very ineffective and they may lose their jobs. Accordingly, they work very closely with suppliers in taking steps to insure that the latter develop and deliver products that will satisfy their unique needs.


The process of industrial exchange can be complicated. It is based on an interwoven web of exchanges in a chain that begins with a set of resources and ends with the production and sale of some final consumer good or service. Further, each exchange in the chain depends on all others in the web.

Consider the manufacture of a book. Somewhere, perhaps in Ontario, Canada, a mining company obtained iron ore and sold it to a steel producer, which marketed the steel to machinery manufacturers who, in turn made printing presses and equipment for lumbering. A saw mill, possibly in Maine, logged a tree with this equipment in order to produce paper. A printer commissioned by the publisher purchased both paper and press. Finally, bookstores bought copies and sold them to consumers. This example shows only a few links in the chain leading to the production and sale of the book. Each link in the chain contributes a small but important part of some final product and each exchange involves strategic marketing decision making.

The demand for the output of a steel mill is derived from the demand for consumer goods. If consumers purchase more automobiles, pickup trucks, paper clips, and other objects made from steel or by machinery and equipment made from steel, the demand for steel mill output will ultimately increase.


There is a fundamental difference between consumer and industrial buyer behavior for goods and services. First, consumer demand is direct because consumer goods and services provide personal need satisfaction. On the other hand, industrial buyer demand is indirect. Industrial buyers do not purchase products to obtain satisfaction from using them. Instead they use purchased items to produce goods and services for their customers and thereby earn profits.

Demand for industrial items is predicated upon what the customers of producers (and eventually consumers) seek for need satisfaction. Industrial buyer demand is consequently derived from the demand for consumer goods. If demand for books diminishes, for example, so would demand for trees, printing presses, and all other products in that exchange chain.

The derived property also means that the total demand for a type of industrial product tends to be inelastic. This means that price changes bring about smaller increases in quantity demanded than would be the case than if demand were elastic.

The value of each link in the chain of exchange depends on consumer demand for the end product. Since each link contributes only a fraction of the value of a total final offering, the impact of a change in price at one link is diminished by the overall effect of the other links. A price increase or decrease in any of the elements of a consumer good brings about a far smaller result at the end of the chain.

The discussion on price elasticity refers to total industry demand for an industrial product. An individual company's demand, on the other hand, can be very elastic. This is because many items that competing producers sell are physically similar, sometimes identical. A pine tree harvested in Washington, for example, is physically the same as one taken in Wisconsin. Coal, iron ore, steel, wheat, and even most machinery are similar between competitors. This means that price differences can have a large impact on the demand for a single supplier's goods, despite the total industry's relatively inelastic total demand.

Because of the chain of exchanges, industry demand for industrial goods tends to be inelastic. This means that price increases will not reduce demand substantially and price decreases will not significantly raise demand. Purchasers of steel products use many other goods in addition to steel. Hence, steel price changes will affect their total costs but only to a degree. If these cost changes are passed on to consumers, they will not be substantial and will not materially affect the demand for consumer goods.



Selling Industrial Offerings:


Think about how the process of selling industrial goods would differ from selling most consumer items. Then pursue this section to refine your analysis.


The purchasing department for the machinery and equipment segment of a potato chip manufacturer is the envy of the industry. This department is a model of well-coordinated operations. Individuals in production make purchase requisitions when they see the need for new machinery and equipment. The requisitions, if and when they are honored by production management and the finance department, are forwarded to purchasing. This department has a well-trained staff that is familiar with the needs of production and with the quality of a number of suppliers with which it has done business in the past.

Purchasing personnel seek out suppliers with a track record of high quality and service at a reasonable price. They negotiate at length in order to attain the best terms of sale. Finally, they arrange for rapid and reliable delivery of the needed items. This department is regarded by management as one of the best in the company.


Most firms of any size employ buying specialists called purchasing agents, or sometimes buyers or merchandise managers. These are the company's acquisition experts.

The nature and scope of a purchasing agent's responsibilities vary from one company to another and depend on factors such as the size of the company, the variety of items purchased, and the technical complexity of the products. In small companies the manager or some other individual may handle purchasing on a part-time basis.

Professional purchasing agents are very well informed. They are responsible for aggressively seeking pertinent information about both new and existing products and services. Because purchasing agents are avid information seekers, industrial marketers generally place their promotion emphasis on top-quality personal selling, as opposed to mass advertising. This does notmean that advertising and other promotion methods are not important. Often these methods are the most efficient at rapidly informing purchasing agents of new products or improved features of old products.

Industrial purchasing tends to be highly systematic. The approach that purchasing agents take is both purposeful and methodical. One of their tools is a reference library of well-stocked reference materials containing information on goods and services and on suppliers. They have catalogs, specification books, price lists, notes on past experiences, and many other detailed documents on file. Many buyers also maintain Dun & Bradstreet or other financial ratings of companies with which they might do business.

Like consumers, industrial buyers do not comprehensively evaluate every possible supplier on each purchase occasion. Instead they develop loyalties to certain suppliers, also termed vendors, especially for frequently purchased items. Consequently, industrial buyers generally maintain "approved supplier lists" from which they select specific vendors for particular purchases. Firms included on these lists are there because of favorable past evaluations.

Marketers should direct their efforts toward getting on the list, if they hope to do well in the long run. Similarly, continued aggressive marketing is warranted even if the firm is on the list. Efforts should be made to continue to please the buyer and to remain on the list.

Most professional buyers continually seek improved procedures in their buying endeavors. Hence, they should remain fully aware of new developments in the field. Reading "The Journal of Purchasing and Materials Management" is a good start, since it explores new techniques and buying models. Also the National Association of Purchasing Managers is active in informing its members about new buying techniques.

Generally, industrial marketers find that personal selling must bear the brunt of the promotion burden. The experience of a marketer of machinery that is sold to fire extinguisher manufacturers illustrates this point.

Customers of the firm want considerable in-depth information about equipment before they will buy it. This is understandable. The equipment is expensive and it is one of the most significant determinant of the quality of company products and the pace that they can be produced. Further, there are major price variations in the equipment, from one vendor to another.

Buyers in this industry want to engage in considerable discussions with sales representatives and managers before they purchase equipment. They want demonstrations, explanations, and answers to pertinent questions. Advertising, personal selling, and sales promotion cannot do this. They still have a role to play--that of reinforcing the efforts of the sales force--however.


Industrial buyers do not devote equal amounts of attention to each purchase. Instead, different situations demand different amounts of time and effort.

There are three major classes of buying situations. First, some purchases represent new tasks, in that buyers lack experience with a product or service they have not purchased before. These situations are the most complex. Of all the classes," new tasks" require the greatest amount of information search, evaluation, deliberation, and advice from others. As a result, they offer the greatest opportunity for a marketer to obtain new accounts. Buyers are open to advice from sales representatives in these situations. A representative can make a mark by helping to reduce uncertainty through providing needed information about how the firm's offerings can help solve the customer's problems.

A toy store buyer is about to purchase electronic games, which is a new task for the buyer. Companies selling to this store should use sales reps to provide advice to the buyer. The buyer will probably perceive considerable risk in this new task. He or she will require further information on the products, how to sell them, how their quality varies, and related matters. Members of the sales force can supply needed information and reduce perceived risk.


The opposite of new task is the situation termed a "straight re-buy", where an organization conducts buying automatically by computer or by exclusive use of an approved supplier list. The only decisions to be made are how much and what kind of items to buy. Realistically, there is little chance of obtaining new accounts in these situations. Experienced sales representatives learn the art of detecting these low-potential customers and finding more promising prospects.

Finally, there is a broad group of situations between the two extremes, termed " modified re-buy", where buyers are willing to consider new information, new sources of supply, and slightly different products or services. Those on approved supplier lists are most likely to obtain eventual orders, but there is some degree of opportunity for astute marketers capable of zeroing in on unsatisfied needs.

Most straight-re-buy situations periodically slip into modified- re-buy ones. This gives buyers the opportunity of reconsidering their acquisitions at some desired regularity. Marketers need to be alert to these opportunities and be ready to respond quickly. Further, existing suppliers also need to be ready to respond, in order to avoid the loss of customers. Marketers should develop potential alternative strategies ahead of time in anticipation of altered buyer needs, so that they are ready to respond rapidly and effectively. Frequent contacts with customers are useful as a means of detecting when buying situations may change.

New task buying situations are much more common at the retail level than they are in manufacturing and wholesaling. This is because retailers can easily change the composition of the products that they market. This can be done rather easily, simply by changing buying and some promotion plans. In the case of wholesaling and especially manufacturing, changing buying plans can be very expensive.

A bicycle retailer that plans to sell skis may be making a smart move. Bicycles sell well mainly during the spring and summer, leaving flat sales for the fall and winter. Skis should take up some of the slack and provide revenues during these off months. This will place store buyers in a new task buying situation, however. Bicycles and skis are quite different and have different marketing needs.


Value analysis is a procedure utilized by some buyers to improve their purchasing. It attempts to reduce costs by carefully analyzing components of items to see if they can be standardized, redesigned, or made by less expensive means. The approach requires that purchasing agents become knowledgeable in areas such as production, physical distribution, and engineering. By understanding the technical aspects of their purchases, they are often able to more efficiently specify their company's needs.

There are five steps involved in value analysis:

1. Determine if a standard item can be used instead of some specially ordered one. For example, can standard sized nuts and bolts be used rather than custom ones, as per engineering's specifications?.

2. Determine if a product can be slightly redesigned to include standardized parts. To illustrate, can the product be reduced in weight to enable using standard shipping containers rather than specially built ones?.

3. Determine if the number of parts can be reduced by combining two or more into one. For example, can a door handle be combined with a lock?

4. Determine if a less expensive substitute material can be used. To illustrate, is it possible to replace a brass part with one made of aluminum or plastic?

5. Ask suppliers if parts can be made for less by tooling or production changes and/or by ordering larger quantities. For example, ask supplier A if it would buy a larger machine and cut its price if a greater share of the business were directed its way.

Many purchasing agents utilize value analysis. Industrial marketers can use value analysis as an effective means of guiding their efforts. By carefully assessing buyers' purchases through an examination of their particular value analysis methodology, a firm can more effectively shape its offerings around satisfying potential customer needs. This aids the marketer in developing a tailor-made marketing program for particular buyers and potential buyers.

Basically value analysis is an effort to reduce costs by analyzing components of products to determine if they can be standardized, redesigned, or made by less expensive means. A refrigerator producer might make an effort to find out if a less expensive substitute material can be used in the refrigerators. It might be possible, for example, to substitute plastic or aluminum for steel on door handles or in some of the internal components.

The manufacturer should be aware, however, that a replacement of less expensive substitute material may lower the quality of the product and alienate consumers. This being the case, the firm should conduct technical and marketing research to make sure that the change would not bring about a lesser quality product and consumer alienation.



Joint Decision Making and Approaches to Exchange:



Answer this question: "Who makes the decisions in industrial products firms to purchase particular items?"


A university recently made a decision to purchase a particular brand of personal computers for faculty, administrators, and staff personnel. The decision was not easy, however, as many individuals had a role in the decision.

The purchasing agent had the responsibility for formally making the order. However, he did not make the decision as to what brand to buy. Rather, he relied upon inputs from a number of parties.

The purchasing agent formed a committee, made up of staff from the computer center, faculty, secretaries, and administrators. These individuals were responsible for making a recommendation. In turn, the members of the committee contacted their constituents to determine their preferences. The faculty member on the committee, for instance, disseminated a questionnaire among faculty ranks to provide insights as to what brands they liked most.

The committee's decision was not easy. All members were not in accord and it was very difficult to reach consensus on the best brand and model. After months of negotiating, the committee finally was able to reach agreement and proceeded to make their recommendation to the purchasing agent.


Purchasing agents are generally responsible for placing orders, but they are seldom solely responsible for making buying decisions, especially major ones. Instead, they make joint decisions with others.

The degree of joint decision making involved with a specific purchase is the result of both specific product and company factors. A heavy emphasis on joint decision making is likely when time pressure is not great, there is a high degree of risk, the product is a new task purchase and it is a major item such as an installation. Similarly, if the company emphasizes task force decision making, is a small organization, and if it decentralizes authority, there is likely to be a high degree of joint influence.

The joint decision makers are often called "the buying center", which is the group of those individuals who are involved in the purchasing process. The makeup of the buying center often varies from one purchase decision to another. The members can be categorized as follows:

1. Users--those members of the buying organization who use the purchased products and services.

2. Buyers--those with formal responsibility and authority for contracting with suppliers.

3.Influencers--those who influence the decision process directly or indirectly by providing information and criteria for evaluating alternative buying actions.

4. Deciders--those with authority to choose among alternative buying actions.

5. Gatekeepers--those who control the flow of information into the buying center.

Often individual members of the buying center are involved in two or more roles. The buyer for a department store, for instance, may take on all of the roles or may specialize in numbers two, three, and five. By the same token, more than one member may be involved in a single role, as when a buying committee has the responsibility for carrying out the duties involved in role four.

The marketer of industrial goods is faced with the responsibility of determining who plays a part in the various roles outlined above. This is not an easy task. One means of accomplishing it is to ask sales representatives to become involved in the buying company to the degree that they can discover who the occupants of the center are. Another method is to conduct marketing research designed to identify the occupants and their roles.

In a buying center made up of individuals who are charged with the responsibility for choosing a brand of forklift trucks, the users would be the truck operators. Their influence can be very strong. Management of the warehouse using the trucks should realize that company performance is highly dependent on the truck operators. If they dislike the equipment which they are to operate or experience difficulty in using it, warehouse performance is likely to slip. Thus, most firms carefully consider the perceptions of these individuals in making a decision.


In many cases there is conflict among the members of the buying center. Conflict may take place at any point in the industrial consumer behavior process. Members of the buying center may disagree as to whether or not a purchase is necessary. Other points of disagreement are the product characteristics sought, the potential suppliers that should be considered, and the merits of each supplier.

There are various ways of resolving conflict. These include problem solving, persuasion, bargaining, and politicking.

Problem solving takes place when the members of the buying center have differences of opinion regarding the merits of the suppliers and their brands. Conflicts of this nature tend to produce an active search for future information, consideration of information already on hand, and a search for suppliers not previously considered.

In this case, the marketer is well-advised to determine the source of the problem and to provide information that would resolve it in his favor. Sales representatives are useful in this regard. A sales representative, for instance, could talk with members of the center and determine the nature of the conflict. Following this, the sales representative could provide evidence of the superior performance of his or her company.

A sales representative works for a manufacturer of children's clothing. The manufacturer is attempting to convince a department store to stock the clothing, but some members of the buying center favor the manufacturer and others another producer. The sales rep should talk with buying center members, determine the nature of the conflict, and provide evidence of the quality of the company's clothing. This is a case of problem solving, where members of the buying center differ on the merits of alternative suppliers and their products. Sales representatives should act as problem identifiers in searching for reasons why conflict occurs. Then they should attempt to show how their products can resolve the problem or problems.


A second means of handling conflict is through persuasion. Here the members of the buying group agree on overall buying goals but differ on what criteria to use in evaluating suppliers. It may be, for instance, that an important goal of the buying center is to keep costs at a low level. The purchasing agent may argue that this means buying only those products that have a low purchase price. On the other hand, the head engineer may feel that this goal requires purchasing products that are ideally-suited for the production line, thereby keeping labor and wastage costs at a minimum.

Where the conditions above prevail, the members of the buying center tend to overcome conflict by discussing points of disagreement, rather than by seeking information. Thus, the purchasing agent may try to persuade the head engineer that initial purchase costs are much greater than production costs and that they should be used as a criterion.

Industrial sales representatives may be effective in influencing the persuasion process in a way that favors their companies. If, for instance, supplier X's product is low in initial price, a company sales representative might side with the purchasing agent in attempting to convince the head engineer that this criterion is more important than others.

Bargaining is another method of overcoming conflict. It is to be expected when conflict takes the form of fundamental differences in buying goals. An example is where the purchasing agent wants to keep costs low by purchasing inexpensive equipment and the head engineer wants to purchase high-quality equipment so that the company might produce products that are superior in quality to those of rivals. Under these circumstances, the parties are likely to resort to bargaining. This involves giving in on one issue in exchange for gaining on another.

In a bargaining situation, the purchasing agent may be willing to forego buying from the lowest price "quoter". He may insist, however, that the extremely high price suppliers be dropped from consideration.

A common outcome of this situation is for the other members of the buying group to let one have his or her way. They make this concession in exchange for a favor or agreement that others will have their way in future purchasing situations. A good stance for the marketer is to urge those that favor her position to grant minor concessions for others.

Politicking takes place when the members of the buying center disagree as to the style of decision making. They do not agree as to the means of solving the buying problem.

When politicking occurs, personalities may enter the scene. Thus, the purchasing agent may feel that the vendors should be carefully evaluated in an objective manner, while the head engineer may feel that the contract should go to Company Y because the sales representative is a good friend. The marketer, under these circumstances, should point out the importance of the buying function and the need for making effective purchasing decisions.

When the members of the buying center are involved in bargaining, it is a good idea for the sales representative to urge those who favor his position to grand minor concessions to others. A computer sales representative who is involved in this situation can visit with the member of the buying center who agree with him and find out what the objections of the other important members of the buying center are. Then he can assist in coming up with ideas as to what minor concessions could be made. In this way, he can serve as a valuable advisor.


There are four approaches to exchange--methods for evaluating suppliers and entering into exchange:

1. Inspection--which involves thoroughly examining each item being considered. Buyers often use this process for non-standardized items such as livestock, machinery, buildings, and airplanes.

2. Sampling--which is the inspection of a portion of a total order. Buyers may use sampling when a large number of items are involved, some of which may have perished in transit, such as farm produce.

3. Description--involves simply ordering items on the basis of specifications, grades, or brands. It is based on trust when quality is not likely to vary and when the supplier is known to be reputable.

4. Negotiated contracts--these are usually entered when exact specifications have not been drawn up by the buyer. To accommodate design changes, buyers award contracts where suppliers work on some negotiated profit margin.

Marketers should make themselves aware of both prevailing exchange practices and existing buyer expectations in developing strategies for particular buyers. Marketing success is often based on developing and furthering the trust relationships required to simplify the target's buying and make it as trouble-free as possible.

The description exchange approach involves ordering items on the basis of specifications, grades , or brands. It is based on trust when quality is not likely to vary and when the supplier is known to be reputable.

A manufacturer of plumbing fixtures is likely to use description. Most of the fixtures are basically commodities with standard specifications. Inspection or sampling is not necessary unless the producer is totally new to buyers or has a questionable reputation. Negotiated contracts are not needed because the buyers' specifications normally are already determined. Description is often preferred by both buyers and vendors because it is neither very costly nor very time consuming.



Governmental Buying:


Think about how governmental agencies purchase goods and services. In what ways might these agencies behave differently than industrial goods purchasers in profit seeking companies?


At $3,900 for a full-page ad and with a total circulation of only 5,000 copies, the "National Journal" is probably the most expensive magazine advertising buy in the world. Its purchase price is no bargain either, at $546 per year for the weekly publication.

On the other hand, the "National Journal" is no "National Enquirer". Boasting a subscription unparalleled among other publications, it includes senators and congress members and 100 paid copies are delivered to the White House. The balance of the readership is made up of corporate executives, media people, and advertising agency executives. The mean reading time is currently 68 minutes-- practically unheard of, considering the decision making power of the audience.

Advertisers in the journal are trying to reach decision makers in Washington. They realize that powerful governmental officials are devoted readers of the journal. This being the case, if a company desires to sell to the federal government, this is a very desirable medium. Its advertisers include some of the largest companies in the United States and abroad.


The level of governmental spending is huge. Federal, state, and local agency purchases lumped together account for nearly a fourth of the Gross Domestic Product of the United States. Two thirds of this amount is spent by the federal government, making it the single most largest purchaser of goods and services in the world.

Besides missiles, tanks, and naval vessels, the federal government purchases products as diverse as food, clothing, education, pencils, and even illicit drugs for research purposes. The major categories of expenditure are defense, education, and social welfare.

Many marketing managers pay considerable attention to governmental needs. Just one contract for a very small portion of what the government buys can mean the difference between success and failure for even a large company.

Because the risks are so great and the opportunities so substantial, many companies, both large and small, are recognizing the importance of employing the marketing concept to direct their orientation to obtaining governmental business. Opportunities are substantial but competition is difficult in this market.

Generally, governmental demand for goods and services is derived; however it is derived not from consumers but indirectly from voters through their elected representatives. If voters want a new dam, new facilities for the homeless, or new university buildings, these are likely to be forthcoming.

Further, total governmental demand is very inelastic. Mainly, this stems from the way money is appropriated for expenditures. Governmental budgeting procedures are different from those employed in private business. Administrative action determines the budgeted amounts. The various spending agencies consider all items, including capital expenditures, to be expenses during the year incurred, rather than as investments (as in private business).

Similarly, since government is a not-for-profit organization, authorities appropriate money with the intention that it will be spent. Administrators are often penalized for spending less than their budgets because future budgets are often based on previous expenditures. Administrators, then, are motivated to spend all of their budgets. Total demand, therefore, tend to be very inelastic.

The budgeting process does notmean that government is unconcerned about price. In fact, price may be the government's primary criterion in the selection of a particular supplier. This is essentially the case when agencies employ competitive bidding.

Federal government (and many state and local government) agencies are characterized by inelastic demand. An important reason is that future budgets are based on past expenditures. If the agency bases its expenditures on price it may seriously under spend or overspend its budget. Hence, the agencies generally strive to spend amounts that are equal to or perhaps slightly more or less than the budgeted amounts. This insures that they will not suffer future budget setbacks or reprimands by superiors.


The federal government's buying organization and procedures look overwhelmingly complex to the uninitiated, but they are actually quite uncomplicated. Essentially all buying is divided into two major sectors, civilian and military.

The General Services Administration (GSA) plays a dominant role in the civilian sector by serving as a purchasing agent for standard items, such as supplies and stationary. Perhaps more important, the GSA develops purchasing procedures for the rest of the civilian sector to follow.

The Defense Logistics Agency (DLA) is the military equivalent of the GSA. Further, it attempts to identify and develop standardized equipment, such as weapons, that all military branches can use. There is a large turnover of personnel within these buying groups, complicating the marketing process and necessitating continuous advertising and personal selling to educate buyers on the merits of a particular company's products and services.

To be sure, Washington, D.C. is the haven of federal government buying, but it also takes place throughout the country, in cities as large as New York and in towns as small as Arco, Idaho. Practically every government office and post throughout the world buys many local products and services such as food and fuel. This means that small local firms can also effectively penetrate part of the market.


Companies desiring to sell to the civilian sector of the government should contact the General Services Administration. This was the initial step undertaken by a company that wanted to sell walk-in freezers to several civilian agencies. The company discovered that the GSA provided a wealth of information on the governmental agencies that might be able to use the freezers, what types of products they needed, procedures to be followed in making sales, and specific individuals to contact. The GSA imparted useful information to company personnel through conversations with several GSA employees and also brochures and pamphlets.


Marketing opportunities are not restricted to federal agencies: each state and local government also engages in buying activity. Education and welfare activities account for a large proportion of the total dollars spent. Also important are expenditures for projects such as roads, parks, trash removal, and hospitals. State and local units sometimes supplement their funds with federal money, as when they employ Federal Highway Trust Fund money to construct roads. Revenue sharing programs also provide substantial assistance to many cities and localities.

In many respects, state and local buying resembles buying by the federal government. There are variations from one state to another, however. Some states and local units have agencies such as the GSA and the DLA that purchase many goods and services for other agencies and establish procedures for other agencies to follow in their buying decisions. In other state and local jurisdictions, buying is entirely decentralized and is the prerogative of individual departments who have authority over specific functions, such as education. Given these variations, it is a good idea for marketers to carefully assess the conditions and procedures for buying in each individual situation.


A large manufacturing company is looking for opportunities in state government budgets. An especially attractive field is education. States spend large amounts on primary, secondary, vocational, and higher education. For many it is the highest expenditure category. Further, the expenditures for education are growing faster than most others.


Individual states generally decentralize buying responsibility. That is, individual school boards, road commissions, hospital boards, water and sewer boards, and similar units make the bulk of all procurement decisions. Thus, managers of even small firms in less-populated cities and towns have an opportunity to compete for a piece of the action.

Government buyers sometimes make their acquisitions through negotiated contracts when a particular supplier's products are uniquely desirable. The normal approach, however is through description and competitive bidding. Generally, the lowest bidder receives the contract, unless the low bidder is not considered "responsible or responsive to the terms of the solicitation". This means that buyers may consider a company's reputation, financial solvency, and past experience.

To a large degree, governmental buyers operate much like the buyers of industrial goods in profit-seeking companies. As in the case of industrial buying, marketers have substantial opportunity to shape their strategies around the target customer's needs. In fact an astute marketer frequently helps in identifying the government agency's needs.

Most states and municipalities decentralize buying authority. A company that wants to sell hospital supplies to a hospital should contact the hospital board or its appointees (employees of the hospital). These individuals are directly responsible for acquisitions that the hospital needs for its ongoing operations. Different people may make up the buying center for different items (such as capital items versus expense items). The marketer is well-advised to engage in fact finding to discover who is in the buying center for a particular purchase.


















Chapter 4


Marketing Research and Information Systems

Section (4.1) Collecting Marketing Information

Section (4.2) Marketing Information Systems

Section (4.3) Developing a MIS

Section (4.4) Marketing Research

Section (4.5) Initial Steps

Section (4.6) Determine Needed Information

Section (4.7) Data Collection Instrument

Section (4.8) Data Acquisition and Analysis




Collecting Marketing Information:


Try to answer the question: "What kinds of information do marketing personnel need, in order to carry out their jobs effectively?"


The 1980's marked the rapid expansion of the fast food business, with overall industry sales growing at an annual compound rate of 10 percent during the period. Many companies prospered. Growth was not universal within the industry, however. Several companies, even some large ones, lost considerable ground during the period.

A major characteristic separating the winners and the losers was the former's dedication to the diligent use of carefully gathered and analyzed market information. For example, one large corporation learned through research that it could greatly expand profits by adding breakfast entries. Another finding was that locating stores near where people gathered, such as in shopping malls, hospitals, and school cafeterias, could significantly increase total business as opposed to locating just near where people live. The company also began to improve the effectiveness of its advertising and other promotion campaigns based upon research findings.

In contrast, the managers of many of the companies that lost ground continued to make their decisions on the basis of intuition. Their performance suffered as a result. Simply put, they were not in touch with their markets.


Management can adopt one of three styles of using information when making decisions: relying primarily on intuition, on informally collected data, or on information collected on a systematic and objective way.

The experience of a regional fast food franchise illustrates the results of relying on blind intuition. Through insight and without any market testing, management introduced the "heroburger"--a rectangular sandwich instead of the customary oval-shaped one. Management was so convinced of its salability that all other sandwiches were pulled from the menu. The chairman of the company later lamented: We shot ourselves out of the water with that one!"

This is not to imply that all intuition is wrong or bad. In fact, some marketers who have depended upon this method have been very successful. Their companies have become major corporations. But these are in the minority. For every great success story there are ten or twenty examples of miserable failure. And many of the successes have been based more upon pure chance--management was lucky. But it is a major mistake to place too much faith in luck--it is a two edged coin.

Informally collected information can also be used, as when a butcher asks regular customers how they enjoyed their last roast. While it is a step in the right direction because it at least asks customers what they think, such informal data can also lead to poor decisions because of the inherent personal bias involved. Who qualifies as a regular customer" Are these people representative of the market at large? Did the butcher ask the questions objectively, without bias? These are important questions because answers to them will greatly affect the value of the information gained.

A marketing manager for a dry cat food manufacturer has decided, based on his judgment, that the firm should move into the canned cat food market. This decision may be in error because of personal bias. Most people have a bias for or against a particular decision. It may be based on attitudes and beliefs and not upon fact. In turn, such decisions often are in error. Perhaps this manager has a feeling that cats will like the canned food better or that cat owners will prefer buying it, based upon his own opinions. But the cats and the cat owners may not agree with this judgment.


Management may pursue a systematic and objective style of getting data, like that practiced by some of the leading fast food franchisors. This style is much more likely than the other two to result in a solid decision because it is founded on obtaining needed, accurate, and unbiased information about the firm's environment. While intuition and judgment will always be valuable, decisions based on systematically and objectively collected information significantly increase a company's chances for success.

A systematic style of gathering information means that a specific set of procedures are employed to make sure that all steps are performed as planned. Nothing is left to chance. The people who gather the data are told how they should do the work and they must adhere to these instructions and not substitute their own judgment on how to do it. When the butcher talks to his customers this is not systematic--much of it is random.

An objective method of gathering data is unbiased. Here the intent is to discover that which is true, regardless of the personal preferences of management or the researcher. Subjectivity is not allowed to creep in. The efforts of the butcher are probably not objective. He probably visited with good customers more than he did with others, for example.

A producer of breath fresheners should collect information systematically and objectively, in deciding whether or not to introduce a new product. In this context "systematically" means to follow a logical prearranged series of steps, rather than proceeding haphazardly. Company personnel should decide exactly what information they need for the decision and then make a careful plan for acquiring the information in a timely manner. "Objectively" means in a non-biased manner. The information gathered should not be tainted by the personal feelings or desires of the marketing personnel. Instead it should be scientifically verifiable.


There are four major reasons why marketers systematically collect information. First, many firms are geographically separated from the bulk of their markets. A producer of plumbing fixtures, for example, is located in Wisconsin but relies for sales on customers around the globe. Collecting information about these distant markets is essential so that management can make intelligent decisions about what is needed in far-away places.

Second, important information is seldom obvious. Why do some people buy detergents from in-home sales representatives, for example, while others buy competitive items in supermarkets? Accurate answers to important behavioral questions may be essential in deciding effective strategy, yet the answers may be difficult for management to provide without conducting research.

Executive isolation is a third reason for collecting market information. Highly-paid, well-educated top managers have needs, activities, and desires far removed from all but a few market segments. Relying on collected market information enables them to make effective decisions relating to all target markets.

Finally, accurate and carefully researched information is needed because of the high costs of making a mistake. A plant expansion might cost ,250 million or more or a large-scale advertising budget might exceed ,200 million per year. Management cannot afford to risk making a wrong decision on the basis of mere hunches or guesses.

The ten major types of marketing research studies are (in decreasing order of usage):

1. Forecasting sales.

2. Measuring the sales potential of markets.

3. Analysis of the market share of the company.

4. Analysis of the characteristics of markets.

5. Breakdowns of sales by geographic area and type of product and type of customer.

6. Competitive product studies.

7. Pricing studies.

8. Distribution channels research.

9. Packaging research.

10.Plant and warehouse location studies.

A marketer of fruit drinks should collect marketing information because the company is geographically separated from its market, important information is seldom obvious, executive isolation is likely, and the costs of making a mistake can be substantial.

If the company conducts marketing research to justify a decision that has already been made--such as not dropping a particular flavor--this can be a serious mistake. Marketing information is conducted to provide systematic and objective inputs for decision making. It should not be used merely to support personal feelings and beliefs. When this is the case, marketing research can lose its objectivity and become a mere public relations tool.


An important question is "How much information should be collected?" The amount of information can vary from nothing to a vast amount of detail. Too little information results in needless risk, but attempting to collect too much information involves excessive costs. Therefore, it is prudent for management to make a tradeoff between the cost of collecting and analyzing additional information and the estimated cost of making a wrong decision is the information is not collected.

This problem can be resolved by subtracting the costs associated with research from the projected sales that would result using research and comparing this with projected sales that would result if research were not used. The result is an estimate of the value of the research. If the value is substantial, or is even negative, management may decide to forego research.

This method does require making some forecasts of costs and of sales. Forecasts, of course, are subject to error, so the calculations may also contain error. But estimates such as these represent management's best estimation of the value of the research.

In determining the value of research (and as a corollary if it should be conducted) management should forecast the difference in sales of situations where the research is conducted and where it is not conducted. All of the costs of doing the research should be subtracted from this figure. The costs of doing the research include direct costs of the research, costs of reduced sales because of delays while the research is being conducted, possible sales losses because rivals may monitor the research and capitalize by increasing their own sales, and the possible costs of making errors in the research.

A producer of frozen sandwiches is considering the introduction of a new sandwich. It is estimated that sales emanating from the new offering with research will be $28 million and without research will be $20 million. The costs associated with the research are:

· Direct research costs-- $1million.

· Costs of a delayed decision-- $2million.

· Costs of tipping off rivals-- $2 million.

· Costs of marketing research error-- $million.

The value of the research is:

$28 million minus [$20 million + $1million + $2million + $2million + $1million] = $2 million.




Marketing Information Systems:



Think about what kinds of systems marketers could use to arrange for acquiring and using information effectively.


A producer of large and small electric appliances utilizes what is called a "World Wide Marketing Screen". At its heart is a central computer that key managers can access with desktop terminals located in their offices. The memory contains millions of information pieces, such as the names of over 40,000 potential business customers worldwide, all planned construction projects worldwide that amount to $1 million or more, and 20 year economic forecasts of 160 countries. At the touch of a button, executives can acquire product sales forecasts, define market targets, and even plan future sales efforts. Some of this information is shared with retailer-customers.


Most progressive companies have a formal system of collecting and reporting market information. The major feature of this arrangement, termed a "Marketing Information System" (MIS) is that the firm systematically collects and reports data in such a way that they are of major value in assisting decision making.

The marketing information system operates continuously. This is in contrast to marketing research, which management conducts on a project- to-project basis, as the need arises. The MIS is always functioning in an attempt to acquire information from all sources, both inside and outside the company. The MIS obtains timely and relevant inputs from the various sources, processes these into usable form, and transmits the resulting information to the marketing executives who need the information. Normally, the MIS is heavily dependent on computerized data processing facilities.

Marketing information systems should not be confused with management information systems. Both are called MIS's. The management information system collects, processes, and disseminates data for the whole company--human resource management, operations management, top management, marketing, and finance, for instance. The marketing information system is part of the management information system.

The MIS is an information acquiring, processing, and transmitting system. For a producer of sandwich bags, the system will acquire up-to-date useful information about such things as what consumers use the bags for, who uses the bags, how often they are purchased, and problems with the product. The system will acquire numerous bits of information and will arrange these into frequency distributions, means, percentages, medians, etc., so that their meaning can be readily understood. Finally, the system will arrange for providing the information to the executives who need it, on a timely basis.

The MIS will furnish the data needed for decision making. It will not make decisions or formulate strategy, however. That is the job of management.


The elements of a MIS are as follows

Inputs-----------Marketing Information System-----Outputs to Managers · Environment

· Data Base

· Internal

· Data Reduction Unit

Information is collected from the marketing environment (consumers, suppliers, competitors, and other parties and from sources within the company (as from accounting personnel). The sources of information can be many and varied. In fact, the company may come across useful inputs in newspaper and magazine articles, from chance comments by rival company executives at meetings and parties, and from company sales representatives who hear news from their customers.

The MIS collects, processes, and stores the information and disseminates it to those marketing executives who could improve their decisions through information. The idea is that the right information should get to the appropriate managers in a timely fashion. Dated information may be of little or no value to marketing management. It is much more useful to point out to executives that sales are beginning to decline than to say that they have declined.

The MIS contains a data base. Here information is received, processed, edited, and stored. The data base can have a wealth of detailed information on consumers, competitors, channel members, and other parties. When the need arises, the data-reduction unit transforms the information in such a manner that it is relevant for particular marketing decision makers.

The output of the MIS is timely and relevant information that marketing executives need. In turn, this information is employed by executives as an aid to decision making.

The data reduction unit transforms information in such a manner that it is relevant for particular marketing decision makers. For a manufacturer of body shampoo the unit would provide information such as what consumers use the product, how often they use it, how often they buy it, and prices consumers are willing to pay. It is in this unit that meaningful information is prepared. There is no point in providing management with reams of computer output in infinite detail. What management needs are summaries of the data, not the raw output.


The MIS gathers data from all sources, including marketing research. Any source which might be a depository of inputs for management to use can be drawn upon by the system. MIS personnel are specialists in gathering and channeling inputs that operating executives lack the time and expertise to acquire. An effective MIS unit helps ensure an aware management is informed of important developments that might have an impact on the well-being of the company.

Sometimes useful information is available from a variety of sources. A competitor may run a help-wanted advertisement for salespeople in New England, signaling that it plans to expand there. Magazine interviews of competitor executives may tip off some of their plans. Chance remarks by competitors, suppliers, intermediaries, and others at social events may turn out to be revealing of important developments.

Some companies have employees on their payrolls whose job it is to seek out information that busy managers do not have time to solicit. These employees read articles in the trade and in the consumer press, monitor the internet, interview company and outside personnel who may possess insights useful to managers, and look for information in other sources. Their work can be invaluable for a successful MIS.

A producer of industrial belts and hoses is setting up a MIS. Management is undecided as to where it should get information inputs into the system. The inputs should include accounting records, marketing research, information gained from sales representatives, press releases of competitors, magazine articles, information, from suppliers, and many more. In fact, any source of data, so long as it is reliable, may be used. A distinguishing feature of the MIS is its acquisition of data from many varied sources.


In some firms, management is overwhelmed with reports, memos, E Mail, computer printouts, and other communiqués. Many of these reports are quickly dated or become irrelevant. An effective MIS unit helps overcome such problems and discovers exactly what information is needed by each manager and when it is needed. Then the unit takes steps to insure that this information is provided as required on a "need-to- know" basis.

Some of the information inputs to marketing managers are relatively simple. A sales manager, for instance, may want to know monthly sales compared to quota for each territory in the company. This manager does notneed long computer printouts containing information in such detail that it is of little or no practical value. Most managers are very busy and the MIS should be designed so that its reports are no more difficult to comprehend than is necessary.

Advertising executives need different information. They can use marketing research feedback on the effectiveness of particular advertising campaigns and individual advertisements--quantitative information. Also they can use qualitative information on consumer life styles, values, and trends, in order to prepare creative advertisements that have meaning to target customers.

A cereal producer that is considering using MIS personnel to acquire information probably would do this because marketing managers do not have the time and expertise required. Most marketing managers are already highly involved in planning, organizing, and control activities. This is especially the case in a volatile industry such as cereal products. Further, acquiring information is a specialized activity--one that requires considerable expertise. Many marketing managers do not have training or experience in this arena. They are likely to make major mistakes. This is a job for specialists.




Developing a MIS:



Think about how you would set up a MIS in a company. Then go into this section for insights on how this might be accomplished.


A producer of hard liquor has installed a very modern MIS that enables key managers to retrieve figures on current and past sales, along with inventory levels for all brands and package sizes for each of 400 distributors. Computer terminals allow the information to be retrieved at a moment's notice.

Before installing the system, MIS personnel asked managers what information they needed, in order to carry out their responsibilities effectively. The managers replied that they critically needed figures on sales and inventory, broken down at the distributor level. This would allow them to adjust their strategies in accordance with developments in the market and by competitors. To date, this information has been very useful and the managers are satisfied with the results.


The starting point of MIS development is determining what types of information management needs. The primary criterion to use in this regard is its usefulness for decision making. Usually, the goal of collecting information for a MIS is to obtain it from existing sources and integrate it in a central location so that it can be readily reported and accessed by management as needed. Most companies ask marketing managers what information they will need in this central location, when they are forming the MIS.

As a point of clarification, data may be classified into two types: primary and secondary. Primary data are originated for a particular study as when a magazine collects statistics on sales generated by a new sales brochure. Secondary data already exist and were collected for some other purpose. An example is U.S. census data.

The specific information needs of managers vary from company to company. There are two sources of information inputs--internal and external. The first arises from within the company and consists of such sources as sales records, warranty cards, past research , shipping records, and other company accounting records. If the firm has not already set up adequate records to help in decision making, they should be established. It may be recommended, for example that sales data be broken down by product class, customer type, or geographic area.

An MIS differs from an accounting system in that it also includes the integration of information originating outside of the firm. There are two major sources of such external secondary data: government publications and private publications and reports. Federal, state, and local government documents are especially useful sources of relevant MIS data.

If a facial tissue manufacturer is in the process of setting up a MIS, the prime consideration in deciding what information to include is usefulness in decision making. If information fails this test, it should not be collected.

The manufacturer is setting up the system specifically for one purpose--to improve decision making. Information on sales of company and competitors' products, share of market, advertising expenditures, and consumer brand loyalty are all likely to be useful. It is this kind of inputs that MIS personnel seek.


Integrating both internally and externally generated information into one source represents a big step forward in providing management with needed decision making information. An MIS is designed to collect information from selected sources. One means of collection is through environmental screening. This is continuous monitoring of the environment through multiple sources, such as sales reports, trade journals, and published governmental statistics. Another source includes past marketing research projects the firm has initiated from time to time to yield specific primary data.

Environmental screening can be a very useful function to the firm. The environment is an important element to consider in devising and in revising marketing strategy. Screeners assess what is happening in the economic, technical, social, cultural, and competitive environments. This information must be fed into the MIS data processor in a timely fashion, so that it might be of the greatest value to management.

Most seasoned managers agree that the environment is subject to more rapid change today than it was in the past. And this trend seems to be accelerating. This would make environmental screening an even more important function in the future.

The marketing manager of a fast foods chain has heard of the benefits of environmental screening. This process involves continuous monitoring of the environment. Screening is continuous--not intermittent like marketing research. Often, particular personnel are assigned the screening duties. They might read articles in the trade press, collect information obtained from sales representatives, ask company service personnel for complaints they have heard from customers, and pursue many other potential sources of inputs from the environment.


When developing an MIS data base, the firm should avoid aggregating data (reducing detailed data to summary measures). Facts should be stored in as much detail as possible. Aggregation lessens management's ability to later search for causes and relationships. Detailed facts are needed to answer such questions as "Have profits eroded because sales have declined?" For which products? Which territories? Which kinds of customers? What time of year? Which day of the week?" Aggregation only serves to conceal underlying influences. And if the data have been aggregated for purposes of current decision making, this may make them unusable for future planning.

Soaring computer technology has greatly advanced the development of the MIS. Advanced generation mainframes, sophisticated PC's, desktop terminals, and user-friendly software have enabled companies to maintain, analyze, and report more information than they could even dream about in the past. And the proliferation of this technology will spur future MIS development.

Small companies should consider using an MIS, especially since PC's can now do work once reserved to mainframes. Smaller companies normally must be more selective about the kinds and volume of information included. Still they are capable of doing what only the larger companies with larger systems did only a few years ago.

If a hard-candy manufacturer employs a MIS with aggregated data, management may experience difficulty in later searching for causes and relationships. It is very possible that company management will, at some time in the future, think of new ways to combine and compare the data. If it has been aggregated, however, this may be impossible because the new variables to be studied may differ from those used when the data was aggregated. This lack of flexibility signals the need for management to keep the data in its raw form.


The final step in developing a MIS consists of determining the ways to report information to key decision makers. There are three types of information a MIS reports to managers: control information, planning information, and information needed for marketing research.

Control information permits continuous monitoring of marketing activities. It allows managers to spot trends, symptoms of problems, and even market opportunities before it becomes too late to take needed action.

For instance, a supplier of many parts to the auto industry uses a system where management can use desktop computer terminals to gain access to many important pieces of information, such as sales of any part, current inventory levels, orders to suppliers, current sales forecasts for any part, and other similar information. The system enables management to anticipate potential problems before they arise and take timely corrective action.

Planning information is useful for the effective development of marketing strategy. The information includes characteristics of target markets, market positions of the company's as well as competitor products, emerging environmental trends, and other inputs useful in sound strategy formulation.

An MIS also provides information to serve as a springboard of knowledge for marketing researchers. This is especially important during the initial phases of the research process.

The specific ways a MIS reports information to management varies from company to company, depending on needs and the system's capabilities. Most systems include some combination of both regularly printed reports and various means of handling special information requests.

Companies use information on sales representatives expenses for control. A division of a company that produces mouthwash would want to monitor the expenses of sales representatives to make sure that they are in control. If the expenses are too great, steps must be made to curtail them, if economically possible. If the expenses are too small, this may indicate that sales representatives are not calling on enough customers or entertaining clients enough. Either way, management can take corrective action before the problem gets out of proportion.




Marketing Research:


Try to conceive of the ways that the MIS differs from marketing research. Then go into this section to discover just what marketing research consists of.


A producer of frozen french fries for institutions (schools, hospitals, and the like) conducted a research project to determine what kinds of french fries college students preferred. They varied the composition, degree of crispness, color, and other variables and had college students taste test the various combinations. The research showed that students preferred serrated (Z shaped) fries over straight ones and that shape was very important in appealing to students. The company followed up on the recommendations of the study and was able to penetrate the college market very effectively.


While a well-conceived MIS can provide an invaluable data base for decision making, the data collected is not always sufficient to solve particular decision problems and additional data collection is required. A chemical company, for instance, learned from research that many consumers objected to the smell of ammonia contained in the popular glass-cleaning products. Following this opportunity, the company developed and introduced a vinegar- based glass cleaner.

The MIS is an ongoing system. It operates on a full time basis, gathering, processing, storing, and disseminating information. The idea is that of a continuous flow. Conversely, marketing research is intermittent. If problems with the sales force develop, researchers may be called in to seek solutions. Once the project is completed, the research stops. Later the company will begin other research projects. Each one is oriented toward a specific detailed need of one or more decision makers.

In between major projects, marketing researchers may be called upon to analyze routine data. They may do environmental screening work, analyze secondary data in search of trends, and look for areas where useful marketing research could be conducted. These in-between tasks are normally dropped for the time being when a marketing research study is needed.

A glass producer has a MIS but still conducts marketing research. It is necessary to do research because the MIS does notcollect information that is sufficiently specific. The MIS collects a variety of information that may be useful to a number of executives, whether they are responsible for pricing, product development, channels of distribution, transportation, advertising, sales, or other functions. From time to time it will be necessary to make decisions that require very specific information, however, such as how customers feel about a particular company product. In this case, the needed information may not be forthcoming from the MIS


Whenever information is collected and analyzed for a particular decision problem, the process is termed "marketing research", which is part of a MIS.

Marketing research consists of planning for, obtaining, analyzing, and interpreting all the facts necessary to make an intelligent decision concerning a particular problem. It involves systematically obtaining and analyzing information about a market, such as what buyers want, need, think, and feel.

While the involvement in this function varies from one company to another, practically all firms of any size do some marketing research. Typically, management budgets around one percent of sales for this activity, and about 60 percent of all companies have formal marketing research departments.

Other companies rely on consultants, advertising agencies, and independent research agencies to conduct research for them. Even those companies with formal research departments spend, on average, about half their budgets on contracted work.

If a producer of chocolate chip cookies uses marketing research, it obtains, analyzes, and interprets facts necessary to make an intelligent information about a particular problem. The company uses research to help solve problems in product planning, pricing, promotion, and distribution. The firm should conduct research only when a problem surfaces.


Some problems are obvious, as when company advertising efforts annoy target customers. Others are less obvious, as when sales representatives are not making presentations in the ways in which they were trained. Still other problems consist of lost opportunities. If the company fails to take advantage of opportunities, it is suffering losses that are really no different than obvious problems. Failure to grasp opportunities is one of the hallmarks of an unsuccessful company.

By itself, simply spending money on research is no guarantee of useful results. Some studies merely verify the obvious; others are performed haphazardly. Sometimes they are undertaken by personnel who lack expertise. There are individuals who feel that anyone can do marketing research--all it requires is to write up a questionnaire, administer it to a sample of respondents, and calculate the results. This is a very naive position.

If a company desires to do research, but its personnel lack the training and background to do the work, it is a good idea to retain a consulting firm, advertising agency, or research company. These firms have individuals with the needed expertise to produce quality results. Before retaining an outside party, it is advisable to obtain references from other marketers who have employed them in the past. Anyone can claim to be a consultant, and some of those who self-designate themselves in this way are not qualified to assist most marketers.

Whether the research is done internally or contracted from outside sources, it is management's responsibly to be in a position to assess a research project's usefulness and to judge whether or not it represents a quality piece of work. This is accomplished by understanding the nature of objectivity and the scientific method.

If a dish washing liquid manufacturer assumes that specialized skills are not needed in marketing research, this is a major mistake. It is unwise to assign responsibility for this function to those who have not been trained in the field and lack experience. Skilled specialists are needed by the company to frame objectives, isolate problems, design research projects, analyze the results of the projects, and interpret what has been analyzed. These tasks are likely to be mishandled by the uninitiated.


Quality research yields results that are both valid and reliable. Validity refers to the extent to which a study measures that which is intended. Reliability, in contrast, refers to its repeatability; whether or not the results are from random fluctuations or if, in fact, they are consistent with the underlying phenomena being measured.

If a study is conducted at one time, but is not acted upon until later, it may lack validity, because it no longer matches market conditions at the time when management takes action. It may lack reliability if the responses from the members of the sample do not remain stable, even over a short time period.

The best way to assure valid and reliable results is to follow the scientific method, which is a systematic and objective procedure. The scientific method involves a sequence of activities which, when combined, produces what is called the marketing research process: initial observation, hypotheses formulation, determining needed information, developing a data collection plan, data acquisition, analysis, and interpretation.

If the producers of an acid blocker ask consumers for their image of the product but this image varies considerably from one minute to the next, the research lacks reliability. A reliable measure is stable--it remains the same with the passage of time and is repeatable. On the other hand, an unreliable measure changes with changes in the consumer's mood, the weather, etc.




Initial Steps:



Think about how you would go about beginning a marketing research project. Then pursue this section for guidance in this area.


An automobile company desired to market a car that had an image of being very modern, upscale, and fashionable. The firm left a large group of stylists with the problem of determining what the car should look like to portray the intended image and personality. The stylists devoted many man hours to this project, producing a design that was expected to be state-of-the-art. They did not utilize research to learn if the design actually created the desired personality in the eyes of consumers. This product introduction was a major failure, one that cost the company substantial profits and market share.


Marketing research's first step is initial observation, where researchers learn the fundamentals relating to a particular decision problem. This enables them to set a realistic direction for the entire research effort. The activities of awareness, fact finding, and problem definition are parts of this step.

Awareness is gaining a basic understanding of the characteristics of the decision environment. This is essential before attempting to tackle a research project. It depends considerably on the company's particular situation. If the company plans research to learn why many customers do not repeat their purchases of a particular brand of detergents, the researchers should first become familiar with the nature of detergents, the target market's makeup, the competitive setting, the consumer decision making process, and related factors. Inexperienced researchers sometimes try to cut corners and collect data before they first understand the situation and what management expects from the research.

Researchers can gain awareness in a number of ways. They may read company advertisements, reports, and past research studies. They may visit with knowledgeable persons, including sales representatives, advertising personnel, and physical distribution managers. They may talk with target customers and others who know target customers well. They may visit retail stores and visualize company displays and packages. A variety of information sources can be very useful.

If marketing research personnel for an antibacterial liquid hand soap manufacturer read a report on why consumers buy liquid hand soap, this is part of the awareness stage of marketing research. Here, the researchers want to acquire a feel for the area in which they are about to do research. They desire a basic familiarity with that which they are about to study. This will be of value throughout all of the steps in the research, as the personnel attempt to produce results that will be of genuine value to line managers in decision making.


Fact finding is another phase of initial observation. Here analysts construct a list of facts to later consider as symptoms of underlying causes. The symptoms may be that sales are falling, that there is a low awareness of the product among consumers, or the morale of the sales force is poor. Some research projects uncover literally hundreds of symptoms.

While fact finding, researchers are like auditors who investigate company documents such as warranty files, sales records, and accounts receivable to gain useful insights. Fact finding can also include talking with company sales reps, executives, distributors, customers, and examining research reports. No attempt should be made to explain the facts during this stage, only to uncover them--both the "good ones" and the "bad ones".

Problem definition is the next phase. Before collecting any primary data, the researchers should carefully define the problem. Exploratory research--small scale studies that examine various directions and different probable solutions and implications--is sometimes desirable.

Generally, exploratory research is designed to uncover problems--but not their solutions. For example, many factors relating to sales representatives (personality characteristics, salary structures, and education) might be looked at to learn if they relate to performance. Here the intent is to narrow the direction of future research.

There is a difference between a decision problem and a research problem. The former is one that managers must resolve, such as "How can we increase camera sales". A research problem, on the other hand, specifies precisely what information the research should provide. It is both specific and limited in scope.

For a company that markets energy bars and drinks for runners, an example of exploratory research is analyzing "Why is customer loyalty for our drinks weaker than for rival drinks?" This is research conducted to find the real problem. It is not research to determine if a solution to a problem is potentially effective or not, but rather to define the problem. Other research, conducted later, can be used to solve the problem.


Another early phase in marketing research is formulating hypotheses. Sometimes formally identifying a problem is sufficient to enable management to make an intelligent decision; the solution to the problem is obvious. But, in many cases the best course of action is not clear and further research is needed. Hypothesis testing is required.

Hypotheses are hypothetical and unproven ideas to be confirmed or rejected. Examples of hypotheses are:

· "Appeals to convenience in mail brochures for antacid tablets will create more consumer interest than will low cost appeals."

· "Sales of a water softener are down because rivals' salespersons in several territories are becoming more aggressive."

Hypotheses need not come from top executives. Sales representatives, advertising personnel, product managers, and others are all fruitful sources. A hypothesis is merely a well educated explanation for some condition or event.

A marketing researcher for a paperboard company does notneed to develop hypotheses for a research study. This is because the only information management needs is to identify a problem. Sometimes management does notknow what the problem confronting the firm is. Could it be that the sales force is not closing enough sales? Is the advertising not generating target customer interest? Are prices too high? Research into such issues does notrequire hypotheses. Rather, it requires fact finding which indicates where the marketing unit is not realizing its objectives and goals.


In generating hypotheses, researchers confer with marketing personnel and others, such as accountants, intermediaries, and advertising agency personnel. In addition, they consult research reports and company records. Basically, they are looking for creative ideas and not answers to problems. The answers will come when they test the hypotheses.

Sometimes marketing research does notinclude hypothesis testing. Instead the analyst sets up research objectives. These are statements of the information that management needs. A possible objective for a producer of antacid tablets would be "To provide the information necessary to indicate if the convenience or the low cost appeal is superior in generating target customer interest. A less complicated objective is "To determine the most profitable target customers for our company."

In generating hypotheses about why market share for a gum producer is declining, it is a good idea to consult marketing personnel, advertising agency personnel, intermediaries, and other knowledgeable parties. These individuals have experience with this and other products that can translate into very practical hypotheses. Judgment built up over years of marketing products can be invaluable in producing hypotheses. In contrast, marketing researchers sometimes lack this practical experience and their hypotheses may not be as relevant.




Determining needed information:


Think about how marketing researchers can decide what kind of information they require. Then pursue this section to expand your insights into this area.


It is necessary to consider what kind of information to collect. To illustrate, a dog food producer did an extensive market study, testing demand, the package size, the design, and the advertising program. Then the firm launched the product with a major campaign, acquired the proper intermediaries, and received very large initial sales. Several months later sales plunged. An expert was called in, who took the product to a dog pound, where he found that the dogs would not touch it. The firm had done a major marketing study but had not acquired information as to whether the dogs liked the product.


An important step in marketing research is to determine the types of information needed to test the hypotheses and/or achieve the research objectives. The researchers may decide that data from a secondary source, new data, or some combination of both is needed.

Marketing research projects produce primary data--the information analysts collect for the specific purposes of a particular study. But researchers also use data originating in secondary sources, such as census or trade association publications. Some impatient researchers and managers believe that they must rush out and gather new data through some kind of survey whenever management needs new information. But it is foolish to try to reinvent the wheel. Researchers should always begin by checking to see if the appropriate data can be found in the company MIS or in other secondary sources.

Frequently the data available in secondary sources do not provide all the information needed for a particular research project. Researchers must then resort to collecting original data, called primary data.

Secondary sources may be dated. The last U.S. Census, for example, was taken in 1990. Even though some of the data has been updated through forecasts, it is not possible to obtain current figures for many variables. Also, secondary data may be classified in ways that do not suit the researcher. The Bureau of the Census, for example, does notuse the same income categories that many marketing researchers do. This can make comparisons of different data sets different.

Some secondary sources are biased, as in the case of trade association publications which attempt to place the industry in a favorable light. Even United Nations statistics are subject to error because this organization depends upon individual countries to provide population and income figures and some countries falsify the data to make their countries appear to be more prosperous than they really are.

Practically all primary data collection efforts in marketing research gather information from representative samples of existing or potential customers which researchers use to make inferences about all customers.

A marketing researcher that markets sunglasses collects primary data when he conducts a consumer survey and asks consumers what they like and dislike about various sunglass tints. Primary research takes place when data are acquired to solve a particular marketing problem. In this case, the researcher does notuse data that were collected by others, but directly engages in data collection. This helps insure that the data will be exactly what is needed. In the case of secondary data, the units of measurement or classifications used in reporting the data may be wrong for the current study's purposes.


In the case of primary data collection, samples are taken from populations. A population refers to all persons or objects about which a research team would like information; they may be customers, trucks, warehouses, retail stores, or any other group. For example, if a marketing researcher for a political candidate wishes to predict voting behavior during an upcoming election, the population probably includes only registered voters in the election district.

Defining the relevant population in marketing research is not always simple. Is the relevant population for a presweetened cereal adults or children or both? Another problem is that some individuals naively assume that people listed in directories such as telephone books and city directories make up an entire population. Such directories often exclude many potential prospects.

Two major categories of sampling designs are available: probability and non-probability samples. In the case of the former, each population member has a known nonzero chance of being sampled. Random selection determines whether or not a particular population member is included-- researcher biases do not influence whether or not a certain subject is chosen. Probability samples are the only type that permit drawing statistical inferences.

Non-probability samples allow personal judgments of researchers to determine which members of the population will be included. As a result, biases may enter into the selection and render the results non-representative of the population. If there is little variation in subject responses, however, non-probability samples can yield results that are representative of the population. Normally non-probability samples are taken in order to economize on time and cost. An example is a convenience sample, where subjects are selected on the basis of convenience to the researcher, as when members of a college class are chosen.

A number of equations are available for determining the proper sample size. The main point is that researchers can extract much information with a high degree of precision from relatively small samples.

If a brewer wants to conduct a probability sample of the population of a city it can interview an arbitrarily chosen home in every city block, using detailed maps of the city. Interviewing every consumer who enters a shopping center would not work, since many consumers will not enter the shopping center on the days the study is done. Telephone interviews will miss unlisted numbers, not at homes, and those without telephones. City directories do not include all residents of the city.


There are three means used to collect primary data:

1. Observation,

2. Surveys, and

3. Experiments.

Sometimes researchers can best collect needed data simply by observing and recording the actual behavior of consumers. Traffic counters count the number of vehicles traveling on a street or road. An analysis of license plate numbers outside a retail store or mall can reveal the identity of the shoppers. Observers can record consumer reaction to in-store displays, monitor traffic direction in stores, and determine consumer difficulties in following product directions.

Observation is advantageous in that it can be inexpensive, it is objective, and subject cooperation need not be sought. However it can be time consuming. Further it is difficult to infer motivations, perceptions, and other psychological variables. Just because a consumer examines a product in a store does notmean that she is interested in buying it. She may be curious and wonder "Who would ever buy such a thing."

Surveys are one of the more widely used methods for obtaining opinions and attitudes. Surveys provide information to define market targets, develop strategy, plan promotional mixes around media exposure habits, and develop distribution channels to satisfy target customer needs.

The major types of surveys are personal interviews, telephone interviews, and mail interviews. Direct mail is the most common type, since it permits economical surveying of widely dispersed subjects from one central point. Personal and telephone interviews, in contrast, permit far greater persuasion in gaining subjects' cooperation, flexibility in answering their questions, and in learning unanticipated information.

A problem with all kinds of surveys is non-response. Many consumers do not fill out and return mail questionnaires. This can be partially overcome by using personal addresses, stamps rather than metered mail, and a small monetary reward (such as a dollar bill) given to the respondent. Personal and telephone interviews may also run into resistance. If the respondent is informed that his or her replies will be held in strict confidence and that the study is a worthy one, response is likely to be better.

A furniture store manager wants to survey consumers in the community surrounding the store to determine the store image. He plans to use personal, rather than mail interviews. An advantages of using personal interviews is that they can yield unanticipated information. Often interview respondents will make comments or inferences that can be of interest to the company. Some may state that they are having certain problems with the product under study, for instance. Others may relate that the product is not widely-enough stocked--they cannot find it in retail stores. Mail surveys cannot uncover this kind of information.


Focus groups are a special kind of survey. An interviewer questions members of a group that are assembled together (normally 10-15 subjects). Respondents are allowed to spontaneously discuss the topic under consideration (such as merits of a product) and to reveal their feelings. This allows for group interactions. The interviewer serves mainly as a means for getting the group to talk and to stay on track on the subject.

Experiments test a group of representative subjects on a dependent variable (such as favorable attitudes toward a brand). Then the same subjects are exposed to a treatment (such as reading an advertisement featuring that brand). After the treatment, the subjects are tested again. The assumption is that any difference between the pretreatment and post-treatment scores is due to the treatment, provided that the researchers have controlled extraneous variables. Often experimenters compare the performance of subjects in test groups to that of control groups who have not experienced the treatment.

Experiments are more useful than observation and surveys in tracing cause and effect. However, they can be expensive and time consuming. Test markets, where products are sold and the results measured are examples. These can take years to complete and are very costly, both in terms of direct costs and in delaying the product from being introduced to the total market.

An ice cream bar company desiring to determine consumer reaction to a price decrease should conduct an experiment where prices are lowered in some stores but not in others. This will be useful in measuring the degree to which the price reduction (treatment) brings about sales changes (dependent variable). By not reducing prices in some stores, the researchers will have a control group with which to compare the results of the experimental group (consumers shopping in stores where price is decreased). If the researcher measures sales changes in the two groups of stores and compares these measures, the impact of the price decrease can be gauged.



Data Collection Instrument:


Think about what kind of questionnaire might be appropriate to give to marketing research subjects, in order to measure their attitudes or opinions.


A Western state conducts surveys of out-of-state visitors each year. The intent is to find out what the visitors want when they are tourists and how well the state fulfills their expectations. Questionnaires are left in hotel and motel rooms, recreation vehicle parks, tourist information booths, and other places where respondents can be reached. The questionnaires ask the visitors what places they visited in the state, what activities they pursued, what they purchased, and several other types of questions. The survey results have been very useful to the state department of tourism and to many tourist-oriented retailers and service firms in the state. The value of the research is signified by the fact that the state does a new survey every year.


An important stage in marketing research is to develop a data collection instrument. This might be a questionnaire, a diary of purchases for consumers to fill out, a record of visually observed shopper reactions to an in-store display, or whatever is appropriate for the study. Basically the nature of the instrument determines what information is collected and how it is to be measured. This stage is extremely critical, as numerous errors can result from poorly designed instruments.

The first task in building an instrument is to define what types of information are necessary to test the study's hypotheses or fulfill its objectives. Some studies attempt to analyze one variable at a time. These are termed "univariate" analyses. These studies are also called "descriptive" because they seek to describe the nature of a chosen variable such as its mean or frequency. Descriptive studies are helpful in gaining an understanding of the dimensions of some important variable. For instance, an appliance producer might track retail prices to see what actually is charged for some item such as a slow cooker. Having this information handy can help considerably in making future pricing decisions.

Most marketing research projects, however, involve "explanatory" studies, where analysts examine two or more variables. This is called "multivariate analysis". The intention is to evaluate the relationships between a primary variable of interest, such as sales, and secondary variables of interest, such as group memberships, income, and advertising levels. The former are called "dependent variables", whose values are presumed to be functions of the secondary variables of interest. The latter variables are independent because their values are presumed not to be a function of the dependent variables. Income, for example, is not a function of the purchase of a CD player, but the reverse may be true.

Dependent variables imply causality. That is, if one variable depends upon others, the latter must surely cause the values of the first. While only carefully controlled experiments prove causality, an analyst often has no other operational choice but to use judgment in assuming that casualty exists. Thus, if it is discovered that other related studies suggest causality or if logic supports this condition, it is often assured that the dependent/independent relationship holds true.

It is necessary that the researchers identify appropriate independent variables. They often consider elements of the marketing mix and economic, demographic, and life style variables in this regard. The specific variables about which they should collect information are identified on the basis of past research studies, experience, logic, and intuition.

If a yogurt producer has conducted research that shows that the color and consumer preference for frozen yogurt are closely related, further analysis is necessary to establish causality. One way to do this is to examine related studies of the company product. These may indicate that color is important and also the degree to which it has an impact on customer preference. Explanatory studies require some kind of backup, such as this, to truly establish causality.


Another task in building a data collection instrument is to formulate the questions to be asked. Here is where instrument development is more an art than a science. Beyond initial training, analysts need substantial experience and creativity to construct meaningful questions. Essentially there are two major parts of this task: determining the type of questions to use and establishing the question sequence.

The questions asked must relate directly to the variables about which information is sought. But beyond this, researchers must determine the type of question that is most likely to reveal useful information.

Open ended questions, such as "Why did you buy our brand?" do not limit the responses that respondents provide. They are good for opening questions. But they are difficult to tabulate because the responses are often un-patterned. The opposite of these are structured questions, which provide possible responses, such as "Which of the following brands do you prefer?" These can result in faster subject answers and facilitate tabulation. However, they restrict subject answers to predetermined categories and may suggest logical answers that may or may not be correct.

A producer of cooked popcorn in cans wants to find out what consumers think about its products. On a questionnaire it plans to ask a sample of consumers:

(1) Why do you buy our popcorn?

(2) What would lead you to buy more and

(3) Why is it better than other brands?

What is the disadvantage of this type of question?

The disadvantage is they are difficult to tabulate because the responses are often unstructured. That is, respondents elicit answers that may not be capable of being compared with the answers of other respondents. Thus, one consumer may indicate that he buys it because of low price. Another may say that she buys it because she heard about it from friends. Another may say that she saw it in a store. Only the first answer is a real motive. The other two indicate where the respondent found out about it. These answers cannot be compared.


Scales ask respondents to mark their feelings on a continuum, such as Sweet _ _ _ _ _ Sour. These allow subjects to precisely identify their responses. Also scales are very fast elicitors of answers. However, valid scales are difficult to construct and statement positions are subject to researcher bias. Further, because only certain statements are presented they may omit relevant dimensions.

It is important that opening questions gain the respondent's interest. Initial questions should be relatively easy to answer and should not cover potentially embarrassing topics. Each subsequent section then asks for information of declining subject interest.

Usually it is best to first ask general questions, then more detailed queries on a subject of interest. When asking about past behavior, it is useful for researchers to follow a chronological sequence, first asking about events taking place in the distant past and then moving toward more recent events. Specific questions should be worded as simply as possible so as to avoid confusion.

A common mistake is to ask too many questions. Relatively short questionnaires result in higher response rates, are simpler to analyze, and are more likely to yield accurate responses.

Above all, questions should not suggest appropriate answers. For example, answers to the question "Would you like to buy one of these items?" are influenced by preceding questions that describe product advantages or disadvantages. Questions referring to a particular product are usually placed at the end of the questionnaire to avoid this problem. Also many researchers use several forms of questionnaires, with the questions in each appearing in a different order. In this way they can control the effects of positioning.

A researcher for a company that makes cereal bars plans to survey its customers to find out how they would react if the firm included pecans in the bars. Structured (multiple choice) questions will be used. Included in the disadvantages of this type of question is that the questions restrict subject answers to predetermined categories. The subjects can only respond by using one or more of the answers which are on the questionnaire. But they may have an answer that is not on the questionnaire, and their response can be misleading.

One way to soften this disadvantage is to use an "other" category in the choices. The questionnaire formulator can leave space for the respondent to write in his or her choice, providing an opportunity to obtain the subjects' actual response to the question.


Another phase in building a data collection instrument consists of reproducing necessary forms and obtaining appropriate equipment. This task is relatively straightforward, but keep in mind that it is important to get forms printed and have traffic counters, movie cameras, or whatever equipment is necessary to collect data ahead of time.

Pre-testing is the final task involved in building a data collection instrument. Some neophyte researchers are prone to develop instruments and then rush directly into collecting data. The experience of a producer of elevators illustrates the problem with this approach.

To learn about attitudes towards the company it conducted a survey of area building maintenance managers. However, the questionnaire used marketing jargon--terms such as "promotional strategy", "differential advantage", and "product mix"--which were not understood by the maintenance people. Consequently, management was unable to use the results for decision making.

The researchers could have avoided this problem had they pre-tested the measuring instrument by administering it to a small group of subjects and then determining if any problems existed in interpreting the questions or in other areas. Further, pre-testing often indicates that the researchers can discard some of the independent variables originally thought to be important. After pre-testing, considerable streamlining is often possible.

Pretests should use subjects that are similar to members of the population. Some researchers pretest measuring instruments among their friends, family, colleagues, etc. But these individuals may not be representative of the sample that will be taken when the actual research study begins.

If a producer of frozen pizzas wants to test a measuring instrument to determine if teenagers like several new flavors that are being introduced, the best place to conduct the pretest is in a city recreational center. Large numbers of teenagers from diverse backgrounds frequent such centers. On the other hand, shopping malls, supermarkets, and convenience stores do not draw as many teenagers and those that they do attract tend to cluster in several income and social class groups. Hence they are not representative of the population of teens.




Data Acquisition and Analysis:



Try to answer this question--What are the best ways of acquiring information from subjects and of analyzing it so that it is useful in solving marketing problems?


A life insurance company decided to conduct a survey to determine the image of the company among recently-graduated college students. It hired six students to interview target customers during three summer months. The results were not satisfactory.

Two of the students decided that they would not work very hard that summer. They spent the bulk of it in their rooms, filling out fake interview questionnaires without actually interviewing target consumers. In this way, they could falsify a day's work in less than a half hour's work.

Unfortunately, it was only after several months that company managers stumbled upon the cheating and terminated the guilty parties. By this time, a large amount of the data which had been acquired was useless, and the company decided to terminate the entire project.


In one of the later phases of marketing research, data are acquired. This can be very time consuming. A cigarette company test marketed a new cigarette for eight months, for instance. Direct mail surveys typically take up to two months for responses to be returned.

The research instrument, the sample, and the information needs of management dictate the procedure to follow in this stage. Some firms use part-time help to collect the data because of cost economies. Students, homemakers , and retirees are relatively inexpensive to hire for this task, in most cases.

On the other hand, part-timers usually require considerable training and supervision to assure that procedures are followed accurately and consistently. For this reason, many companies hire good field research firms who maintain professional staffs of competent and fully-trained interviewers to collect data.

Nevertheless, problems still may emerge when companies contract out personal interview work to a specialty firm. Field personnel often receive their pay on a piecework basis, sometimes without close field supervision, and interviewers may cut corners; violate instructions in order to speed up the survey process; or even fabricate fictitious interviews and turn in counterfeit measuring instruments. Most reputable field research firms verify collected information by having auditors re-contact a sample of a survey's respondents (often ten per cent) to assure that they were in fact surveyed and that instructions were followed.

If a pickle marketer is doing a survey and wants to minimize or prevent counterfeit interviews, a good strategy is to pay interviewers by the hour instead of by piecework. If they receive money for the latter, they are motivated to turn in as many completed questionnaires and is feasible, because they receive direct compensation for this. So, there is motivation to cut corners or to fabricate fake interviews. Paying by the hour eliminates this incentive.


After acquiring the data, researchers analyze and interpret it. Analysis involves breaking data down into meaningful categories and studying differences and relationships between them. It includes selecting and applying some type of mathematical model to test a study's hypotheses. The objective is to uncover relevant variable parameters (such as means and medians) and associations between variables.

Raw data, standing alone, are not very meaningful to marketing managers. It would not be helpful to a health food store manager to know the annual volume of purchases by each of the store's many customers, for instance. But the mean annual purchase figure probably would be useful. The manager might want to compare the mean figure for various market segments, such as various income groups. This might indicate that the store is appealing primarily to middle income groups.

Another type of analysis that could be useful would be to determine the relationship between purchases in the store and age. Regression analysis is useful for this purpose. This method analyzes the relationship between two or more variables. It might indicate that, as consumers grow older, they tend to patronize the store more. This would be useful to the manager in developing a segmentation strategy. He could aim at older middle income groups.

Interpretation means making the results of research meaningful to managers. The latter do not want to be confronted with a vast sea of numbers. Rather, they want summary statements of what the data are, what they mean to the company, and what action prescriptions they suggest. A well-written research report sets forth clearly- articulated interpretations to managers. The written report should be followed by an oral presentation of the major findings.

A clothing wholesaler has collected data on purchases by retailers and wants to analyze it. This involves breaking data down into meaningful categories and studying differences and relationships between them. The wholesaler, for instance, might break down the sales data between large and small retailers. Then it could determine the mean value of purchases of these two classes and compare the two. This might reveal that small retailers, while their number is large, are not buying much, on average, compared to large retailers. This information might convince the retailer to concentrate its marketing effort on large retailers.


There are two major categories of mathematical models used in marketing. These are statistical models and management science.

Statistical models are used most often in marketing. Multivariate statistical analysis is used extensively with survey information in order to calculate how much of a dependent variable's fluctuation can be explained by fluctuations in the values of independent variables. The statistical procedures which are most often employed are called multiple regression analysis, discriminate analysis, cluster analysis, and factor analysis.

These multivariate methods are useful because they can show the relationships between groups of variables. A multivariate study might show, for instance, that the heaviest customers of a health food store are age 55-64, have incomes between $30,000 and $40,000, live in tract homes in suburbs, own personal computers, and are members of the lower middle social class. This example illustrates how multivariate methods can simultaneously study the operation of several variables (in this case age, income, housing, computer ownership, and social class). This kind of analysis is much more meaningful than only studying one or two variables at a time.

With the passage of time, marketing researchers are also increasingly called upon to solve problems of optimization. Determining optimal allocations of advertising dollars among various media, the best sales force territory assignments, and the most efficient shipping routes are examples of problems that cannot be solved using statistical procedures. Linear programming, integer programming, and a group of similar specialized techniques are used for such purposes.

A marketing researcher for a company that produces paints, stains, and adhesives is engaging in statistical analysis when she compares average sales of company products in hardware stores with average sales in discount stores. In this case, the researcher is taking measurements of two segments of the population (hardware and discount stores) and comparing them. If there are statistically significant differences between the two, the analyst will note this and report the differences to management. This may lead to new decisions by management, such as having sales representatives spend more time with discount store buyers than they did in the past.


After the analysis, it is the responsibility of the research team to interpret the data for management. This consists of informing management, usually in both oral and written reports, what the study uncovered and the meaning of the research to management. Included should be a discussion of both accepted and rejected hypotheses, assessment of their meaning, and a clear explanation of the assumptions of the analysis. The statement of assumptions is extremely important, and unfortunately it is sometimes forgotten by naive and technique-oriented researchers.

It should be kept in mind that the purpose of practical research is to assist management in decision making and nothing more. Esoteric research and interpretations are not needed.

A research project should not be forgotten upon completion; in the final stage, the analysts should specify follow-up procedures. Perhaps they should perform a future study to determine if conditions change over time or test some of the assumptions to learn if they were appropriate. Proper follow-up procedures anticipate changing conditions or incorrect conclusions that may have been drawn because of erroneous assumptions or other reasons. By performing follow-up studies, possible trouble spots may be uncovered before it is too late to take corrective action.

A company that produces pillows and comforters should include in its statement of interpretations an explanation of the assumptions of the analysis, a discussion of rejected and accepted hypotheses, and an assessment of the meaning of the hypotheses. In interpretation, the researchers are summing up the gist of the results of the study to management. They are informing management what the study uncovered and what this means to managerial decision making. The statement of interpretation is that part of the research report that usually most interests marketing managers because it provides them with action prescriptions.









Chapter 5

Product Management


Section (5.1) Important Product Concepts.

Section (5.2) Product Life Cycles.

Section (5.3) Strategies for Life Cycles.

Section (5.4) Product Portfolio Analysis.

Section (5.5) New Product Strategies.

Section (5.6) New Product Development Stages.

Section (5.7) Branding Decisions.

Section (5.8) Packaging Decisions.



Important Product Concepts:



Reflect on this question--"Just what is a product?" Then go into this section to explore this topic in depth.


A large newspaper, located on the west coast, recently decided to introduce a new magazine, to be inserted in the Sunday edition of the paper. It was felt that the existing home supplement magazine was outdated and of little interest to readers.

The company became involved in a major marketing research project to design a magazine that would be of major interest to the market. Among the topics which were studied were target audience lifestyles, values, and attitudes. The market segments which the research indicated that the magazine should target were "outer-directed achievers" and "inner-directed socially conscious". The final decision was to design the magazine to include features relevant to socially-conscious readers and also features with a human relations perspective.

All of this effort has led to a highly successful new publication that is being read by the target, according to follow-up research, and advertisers have taken note, with revenues increasing dramatically over the outdated old magazine.


Product management involves two steps. First managers must monitor existing product performance and change strategy when necessary. Second, management must make decisions relative to new product introduction.

Before exploring specific product decisions we will examine several concepts relating to products or services. These include attributes, levels of product abstractions, product lines, and the idea of an optimal product mix.

To marketers, a product is an entity that has certain attributes such as color, size, weight, quality, reliability, and taste. For instance, Tabasco pepper sauce is a red, easy-to-pour, concentrated hot sauce for seasoning foods. People evaluate products by deciding if acquiring the attributes of a given product will allow them to accomplish their intended life activities. They make a purchase when they believe that an item's attributes suit their needs better than the attributes of other products. People seeking a hot, spicy flavor are likely to buy a bottle of Tabasco sauce, for instance, if they feel that it creates a more desirable flavor than would competing products such as steak sauce. To marketers, therefore, the concept of a product is viewed in terms of the item's ability to fulfill customers' desires.

Buyers also view products at three levels of abstraction: a generic product, a specific product, and a total product. At the broadest level, a generic product is a type or class of item designed to satisfy some basic need, such as the refrigeration of food. The underlying intention of most purchasers is the satisfaction of one or a combination of basic needs. People do not buy refrigerators for their own sake--because they have sophisticated electrical devices or attractive hinges and handles--they buy them to preserve food.

A specific product is a subclass of a generic product. Specific products have distinguishable attributes that set them apart from other items within the same generic class. Because of differing attributes, however slight they may be, General Electric, Westinghouse, and Frigidaire refrigerators differ from each other.

The specific product attributes satisfy secondary needs. While people buy refrigerators to preserve food (a primary need), secondary needs such as color coordination, durability, and styling generally determine which specific product they will buy within a generic class. An important task of most marketers is to see to it that their company's products satisfy the secondary needs of the selected target.

Finally, buyers evaluate a total product. This includes all of the elements of a marketing mix, not just physical attributes. Instructions for use, retailer locations, advertising messages, and all the other marketing mix decisions shape a total product. By including discounters in its list of appliance distributors, for example, a manufacturer changed its total product offering.

For a manufacturer of a degreaser the primary need is to clean hands and other parts of the body. This is the major reason why people buy degreasers. If the need did not exist there would be no reason for any company to offer the product. All other needs (secondary) are of lesser importance than this one because they would still probably still buy a degreaser even if the secondary needs were not satisfied. No one would buy a degreaser, for instance, just because it had a smooth and creamy texture.


How many products should a firm offer for maximum profitability? There is no ready answer to this question. Some have a fairly modest set of offerings that are restricted to one or a few closely related industries, such as automobile and truck production. On the other hand, there are firms that produce a very wide variety of unrelated products spanning several industries. Some of these companies have developed most of their offerings, while others have acquired them through mergers and purchases of the assets of other firms.

Few companies rely solely on a single product. There are several reasons for this. The risks are too great to rely on one item, average overhead costs can be reduced by spreading the total over several products, and distributors and other customers often expect companies to handle several items. Large companies often rely on thousands of items. And while most smaller companies begin with a single product, they usually branch out rapidly into new items.

An industrial lubricant company makes only one product--machine oil. If it expanded its offerings it might benefit from spreading overhead costs over more products. Every company has overhead (fixed costs) that exist no matter how many products are produced. These can include rent of the office, warehouse, and plant facility; salaries of management; and property tax. If more products are sold, these overhead costs can be allocated to the new products as well as the old. This may make the old product (machine oil) less costly on a per-unit basis.


A "product line" is a group of closely related products that are offered for sale by a company. Product lines may be related because they are substitutes (replace each other), complements (related to each other such as riveting machines and rivets), sold to the same target market, distributed through the same channel, or are within the same price range. To illustrate, an electronics producer offers several models that vary in size, style, and color. All of them are part of the company's television set line.

A department store organization provides a good example of product lines. In such stores, individual departments exist to sell individual lines. In a typical store there are departments for men's, women's, and children's clothing, for instance. Each of these departments handles a single line.

A large electronics firm offers three related product lines. These are large computer systems, personal computers, and typewriters. Each of the three lines has a separate marketing organization, including its own sales force.

In contrast, a product mix is the complete set of products that a company offers for sale and involves one, two, or more product lines. The television set producer, for instance, sells TV's, radios, and other electronic product lines. A motel chain's product mix also includes institutional furniture manufactured by a company division and other products, in addition to its lodging line.

For a department store, women's wear is a product line. It consists of a group of items that are both substitutes (the store offers a range of blouses, for instance) and complements (the store offers both blouses and skirts). These items are sold to the same target market. As such, they logically group together and are usually sold within the same department within the store. Other departments, such as the store cafeteria, the credit office, and the lounge are service departments which support the various product lines.


Another useful idea is that of the optimal product mix, which is the one that best allows the company to reach its goals. Each item in the product mix makes some contribution toward a firm's goals. In turn , the firm's goals serve as yardsticks by which management can measure performance and the need for some new type of action, if necessary. Management makes product decisions to close the gaps between goals and achievement.

A contribution gap is the difference between a company's goals and its performance. If there is a gap, actions should be taken ahead of time if the business is to keep on its intended track. Of course, such a gap could result if management set goals too high, meaning that expectations should be revised downward. A contribution gap also occurs when the company needs new product strategies.

There are two fundamental product decision strategies for management to make. The first, Market expansion, involves fine-tuning the marketing mix for one or more existing products in an attempt to squeeze a greater contribution from the product mix toward company goals. The second strategy is to develop and market new products--change the product mix--to generate the additional contribution.

A producer of microwave ovens that is suffering from a contribution gap can take two steps to overcome the gap. One is to alter the marketing mix for the microwaves. This could be accomplished by changing advertising appeals, reducing prices, or improving the quality of the microwave ovens. Another possibility is to add new products or product lines, such as digital clocks. The major precaution for this latter strategy is to make sure that the new offerings have synergy with the existing products and with the company at large.









Product Life Cycles:



We realize that plants and animals go through life cycles. Try to imagine how products go through these same stages.


The personal computers offered by a large company have gone through a definitive cycle that resembles the patterns followed by humans as they pass from infancy to growth to maturity and finally to decline. The firm was formed by several computer technologists who developed a product that was very user friendly. The computers were rapidly sought after by consumers and for a time the company was very prosperous. Later competition set in and the firm experienced production and marketing problems which reversed the trend and sales leveled off and then dropped sharply. This company literally went through a life cycle with its product.


The sales and profitability of products typically change over time in an orderly manner, termed the "product life cycle". Many examples illustrate these cycles. Products as diverse as streetcars, trains, piston-powered commercial airplanes, manual typewriters, hand-crank telephones, and many others have experienced a fluctuation from rapid growth to decline. Business history books are full of examples of this cycle.

The time it takes for a life cycle to be completed differs from one product to another. Fad items such as clothing styles typically have very short life cycles, perhaps only months or weeks. At the other extreme, products like sheet steel and gasoline have lengthy cycles spanning decades. There is evidence that the average length of product life cycles is shortening over time. Management has the task of distinguishing between fads and true marketing trends, of course, as trends are more lasting and have general marketing planning implications.

Experts differ on what factors determine if a product is a fad or a genuine new fashion. Basically, most agree that fads do not really satisfy basic needs. Rather, they provide amusement, novelty, topics of conversation, means of being different from others, and other relatively insignificant rewards, as compared to longer lived products that satisfy more important needs, such as health and safety. Still, even the experts have trouble predicting how long a product life cycle will last.

The stages are introduction, growth, maturity, and decline. In the introduction stage a company introduces a new product to a market. This is a period usually marked by low sales and losses instead of profits, because introduction usually requires a heavy financial investment in marketing to create product awareness, and investments in other areas such as production and research and development. Some new products , such as industrial robots , diffuse very slowly into their potential markets, while other products virtually bypass this stage.

The second stage of the product life cycle is that of growth, which is marked by increasing profits and sales. Because rapid growth in sales and increasing profits signal the existence of opportunity to other firms, increasing competition from other items in the same generic class often evolves as the stage progresses. Rapidly expanding demand may be sufficient, however, to enable several competitors to maintain prices and earn good profits.

If a cosmetic manufacturer is introducing a new line of shampoos, management can expect heavy investments in research and development. It can be very expensive to make technical and marketing studies and to translate the results of these studies into salable products. This is especially true in the cosmetics and health and beauty industries, where competition is rigorous and new products must have very substantial advantages over rivals, in order to gain a foothold in the market.


A marked change occurs during maturity. At the start, sales increase but at a declining rate, eventually peaking and then declining a bit. Profits also begin to fall. This is the status of many basic industries today, including steel, asbestos and copper. They find themselves in a dangerous position because, if trends continue, they may suffer severe financial losses or even have to drop major product lines or go out of business if the decline is too severe.

Several factors account for the sales deceleration. For one, customer awareness of the product has generally reached a high level by this stage. For another, the product may be losing its appeal; perhaps new substitutes have emerged. Finally, competition tends to be greater than during any other stage of the product life cycle, reflected in some firms' heavy price cutting.

If a producer of coffee concentrate believes that its major brand has reached maturity, customer awareness of the product has usually reached a high stage. The brand has been around for a long time and most people realize that it exists. But, it has become so familiar that it does notexcite anyone--the steak has lost its sizzle. Many consumers become tired of old products and for sheer variety sake look at newcomers to the market.


The final life cycle stage is decline. It can occur rapidly, perhaps within weeks or months after the introduction, as in the case of fad items, or it might not set in for decades with products like asbestos insulation. Research shows that industrial goods tend to have a longer life cycle than do consumer goods. Life cycle theory proposes that all products eventually will enter into a decline stage.

Management should thoroughly investigate the prospects for a product before it is decided that it is in decline. Sometimes an offering will experience a temporary fall in sales that is due to competitive efforts, an unhealthy economy, rumors about the product, or other forces that are not permanent. The product may recover after these environmental changes have run their course. Management is well- advised to study the situation carefully before pronouncing the product as being in decline and becoming a candidate for abandonment.

A manufacturer of work clothes for blue collar workers is eyeing a new industry--women's dress clothing. In this case the product life cycle probably will be short. This is an industry where fashion is very important--and last year's fashion is usually passé. Many of the fashions turn out to be fads and last only a very short time. Others never do anything and move directly from introduction to decline. It is apparent that this is a very risky industry for the firm to enter. On the other hand, many companies earn very high returns on investment in this industry. If management is willing to gamble, this may be a good target. A conservative management probably will find the risks to be too great, however.


Certain conditions demark the decline stage. These can signal to management if a fall in sales represents a true decline or only a temporary effect.

The decline stage can be a very dismal one for the firm. More and more customers purchase less or stop buying the item as the stage progresses. Automobiles have replaced horse-drawn wagons and hand-held calculators have supplanted slide rules. Consumers still are aware of the product categories but they do not see where they satisfy significant needs. And some consumers may simply be bored with the offerings.

As sales begin to fall, the less profitable firms begin to abandon the market because they are forced out of business or they pursue other opportunities. Many remaining firms lower their prices to inhibit further losses. Also, they often cut promotion expenditures due to restrictive budgets and high levels of competition among target members.

The marketing manager for a baby food producer might argue that the main product line is in decline. An important symptom for this condition is that less profitable firms tend to abandon the market. Their costs are often high and reductions in revenue push per unit costs upward, driving profits down still further. They experience further losses as industry prices fall and put pressure on them to reduce their own prices. Declining revenues also frequently lead them to lower their promotion budgets, further decreasing demand for their products. They may be caught up in a downward swirl, where the only available action is to leave the industry.




Strategies for Life Cycles:



Try to answer this question "Would a firm use one strategy, no matter what stage of the product life cycle in which it might find itself?


A manufacturer of frozen Chinese foods introduced its new brand of sweet and sour pork ten years ago. At that time there was little competition and the product was very well prepared, allowing the company to charge premium prices. Demand for the brand was so strong that the company survived on only a moderate advertising budget.

The company management has wisely realized that times have changed and the old strategy is obsolete. The firm has lowered its prices and increased its advertising budget. This was appropriate, as several large competitors have entered the market and charge modest prices. Further, consumer demand has declined as tastes have shifted to Italian, Mexican, and French food. The firm has been successful, but only by astutely changing its strategy when the environment changed.


During the introduction stage of the product life cycle, the company can use several strategies; high-profile, preemptive penetration, selective penetration, and low profile. Managers who pursue a high- profile strategy introduce a product with a substantial promotion expenditure as well as a high price in order to recover as much cost and profit as is possible in a short time period. Marketers of new appliances, such as popcorn poppers with automatic buttering features have introduced products with a high profile policy.

This policy is most effective when a large portion of the market is unaware of the item, price is relatively unimportant to the target market, and the firm wants to develop high preference for its brand because extensive competition is expected in the future.

There are some good reasons for pursuing a high profile policy. Heavy promotion levels can inform target customers of an item's existence. A high price can both help to build an item's prestige and generate funds for the extensive promotion effort.

A preemptive penetration policy requires a heavy promotional expenditure accompanied with a low price. Managers adapting this strategy believe that target customers are largely unaware of their product's existence, price is relatively important to them, a large potential market exists with economies of scale possible from large sales volumes, and substantial competition is expected.

Low margins and high sales volumes tend to discourage competitors from entering a market, while scale economies are expected to help profitability. Tract housing developments and tour packages are two examples of products that managers frequently introduce through a preemptive penetration strategy.

Selective penetration consists of pricing a product relatively high while keeping promotional expenditures at a moderate level. Firms typically introduce prestige items like furs and high-fashion attire in this way. Selective penetration can be a good decision when numerous target customers are aware of an item, customers are willing to pay a high price, a relatively small potential market exists (substantial economies of scale are unlikely) and little future competition is expected.

A low profile strategy combines a small promotional budget with a low price. Marketers introduce many industrial goods, such as lubricants and cleaning and office supplies, through this strategy. It is most effective when many target customers are aware of a product, a large price-sensitive market exists, and a significant level of competition is expected.

In the growth stage of the product life cycle there are two fundamental and opposing strategies. First, management may opt to earn as much short run profit as possible by holding prices up and spending only moderate sums on marketing effort. A watch producer followed this strategy for its gold digital watches. Rather than investing in marketing to aim for future profits, the company assessed high prices (as much as ,2,500), utilized exclusive distribution, and engaged in only limited product development and promotion.

Other companies choose to reinvest profits into substantial marketing efforts in order to build a strong market position for future profitability. Companies electing to pursue this strategy emphasize some combination of large-capacity production facilities that will bring about greater scale economies, changes in quality, adding more intermediaries, and heavy promotion efforts to build brand preference.

A marketer of canned peanuts might choose a preemptive penetration strategy for introducing a new brand of unsalted peanuts. This strategy requires a heavy promotion expenditure accompanied with a low price. The large promotion expenditure is necessary because many target customers do not know about the existence of the product-- they have to be informed. The low price is necessary because target customers feel that price is important--they are price sensitive


There are three strategies that marketers can employ at the maturity stage of the product life cycle:

· Marketing mix modification,

· Product modification, and

· Brand extension.

Altering one or more of the elements of a product's marketing mix is called a marketing mix modification strategy. It may involve seeking new segments to pursue, stimulating greater use of company brands by current customers, or repositioning of the product.

Sometimes a firm can locate new segments of customers. Many companies initially market consumer items on the east and west coasts, because of the high population densities, adaptive cultures, and high incomes. As these segments mature, they then develop strategies to penetrate other less-populated states.

Modifying the marketing mix to stimulate greater usage by existing customers is another way of generating increased sales. Fast food chains use contests and coupons to promote increased consumption. Packaged food companies provide free recipes using the product to promote increased consumption.

Product modification is another technique that involves making slight style and feature improvements. The annual style changes in the auto and fashion industries are examples. By making last year's model seem dated, marketers induce customers into buying a new item.

Brand extension is another major strategy that can be helpful during maturity. It involves finding new uses for a product. Baking soda, for example, has been promoted as an odor inhibitor for refrigerators, cat litter boxes, and thermos bottles. Many software producers have moved from developing video games to educational programs for home computers. Successful brand extensions can enable marketers to break away from mature markets and into growth opportunities.

However, brand extension usually involves substantial marketing costs because it is similar to bringing out a new product and requires a high initial investment. Consequently, management should pursue it only if the extension actually produces substantial benefits to a significant market segment that was previously unsatisfied.

A furniture manufacturer that uses a product modification strategy may benefit in that target consumers may feel that they must have this year's model. Some will feel that the product has been improved and they want the best. Others will buy the new item for prestige reasons. Another reason for purchase is boredom with an old model. It is not necessary to make major changes in the product--minor modifications will do.


There are five strategies that are available during the decline stage of the product life cycle:

· Recycle,

· Status quo,

· Retrenchment,

· Milking, and

· Pruning.

A recycle strategy is one where a company makes a heavy promotional expenditure to revive a product that is in decline. In a sense, the company hopes to introduce the product again. In this stage fewer competitors are in operation than was the case during earlier stages. This means that competitor counteractive strategies are less likely.

Normally recycling is done when management feels optimistic about the future of the product and is convinced that it has a loyal following and satisfies needs effectively. This strategy can be more expensive than some of the other alternatives. Management should study the situation carefully to gain evidence that future revenues will be sufficient to cover the substantial promotional expenses.

A cosmetic manufacturer has a lipstick brand that is in decline and is considering a recycle strategy. This strategy may be effective because the demand for lipstick is affected by advertising expenditures. The major means of recycling is to use this promotion method to revive the product by creating new demand. The demand for some products, such as computer paper, hand soap, and garage shelves, is not influenced much by advertising. On the other hand, advertising can create images for personal attraction enhancement items such as lipstick and dress clothing.


Under a status quo strategy, the firm retains the same marketing mix that it employed during maturity. This is especially appealing to companies that once held significant consumer loyalty within specific market segments. As a market begins to decline, it often does so through a peeling away of the outer segments distant from its core. However, those firms with an established niche at the heart of the market may be able to maintain profitability by continuing their current strategies.

Retrenchment takes place when a firm withdraws from weak market segments to enable concentration on those segments where it has the greatest strength. It is based on the 80-20 principle; 80 percent of a company's sales are often derived from 20 percent of its customers. Similarly, 20 percent of a company's products often account for 80 percent of its sales.

Retrenchment makes cost reductions possible and allows concentration of marketing efforts in the most promising arenas. The firm can stimulate profitability and cash flow as a result. Once a company has successfully retrenched, it can again attempt to expand its operations once it has regained its financial strength.

A milking strategy is roughly analogous to salvaging a sinking ship--a firm cuts all costs to a bare minimum and continues to sell the product so long as its revenues cover all variable costs. This strategy makes sense when it appears certain that a product's death is close at hand.

Pruning is a strategy of abandoning a product. Unfortunately, many managers hold on to products which once were popular and perhaps contributed substantially to establishing the company's market position. However, outdated successes are not part of a marketer's realm. Therefore, once forecasts of opportunity no long justify continued efforts, the firm should drop a product so that it can devote efforts to more promising ventures.

A producer of light fixtures that has a product line in the decline stage might consider that a status quo strategy is appropriate if the line still has significant consumer loyalty within one or more specific market segments. With a status quo strategy the company will use the same marketing mix as it employed during maturity. This will continue to satisfy those segments made up of consumers who are loyal to the product line, even though it will not appeal to other segments. This may allow the company to take advantage of this loyalty factor.




Product Portfolio Analysis:



Think about how a company might decide what products should make up the product mix. Can you envision any useful guidelines for management?


A producer of metal castings for the machine tool industry has managed to develop its product mix in a way that optimizes the company's profit and cash flow performance. The company has one line that is mainly popular with large customers and has a high growth rate in sales and a high market share. But this line needs considerable cash to grow. This need is fulfilled by another line, mainly popular with moderate sized customers, that has a high market share but is not growing in sales. The second line provides the cash that is needed for the first. As a result, the product mix of the company is in equilibrium-- producing adequate sales, profits, and cash.


Many companies who offer a variety of goods and/or services have used a technique called "product portfolio analysis" to integrate strategies for an entire product mix. This procedure is based upon the principle that if management considers all product strategies in conjunction with one another, the company is more likely to benefit than if individual product decisions are made independently.

This approach is analogous to the investment portfolio strategies used by various individual investors and companies. They attempt to maintain some balance in their investments in order to reach diversified goals such as income and capital growth.

Investors realize that it can be a mistake to overdo any one category. If they invest heavily in bonds they will be placing their funds in a relatively safe place but may have little opportunity for growth and high incomes. If they focus only on common stock they could make great gains but they also could lose large amounts--the risk is great. Even with mutual funds--which invest in a variety of stocks--the risk can be substantial. Thus, intelligent investors develop their objectives and then attempt to construct a portfolio of targets for their money. They may end up with some combination of stocks, bonds, certificates of deposit, real estate, and other investments.

Marketers can use the same principles as do investors in producing a desirable portfolio. In so doing, they can set up a product mix that allows them to best reach their objectives.

A book publisher is considering the use of product portfolio analysis. This analysis is based upon the principle that the strategies for all products should be considered together. The idea is that weaknesses in one kind of product may be offset by strengths of others. If the decisions for each product are made independently, there is not an opportunity for synergy, where the entire product mix complements other components of the mix. This analysis, then, is aimed at optimizing the objectives of the entire company, rather than the objectives of each individual product.


A widely adopted form of portfolio analysis involves categorizing products along two dimensions: current or expected market growth rate and market share. Often market growth rate is stated relative to the change in gross domestic product, providing an index that is relative to all products and services. Another modification is to state market share as a percentage of the firm's largest competitor, a logical transformation because the strategies which are appropriate for a given market share could differ, depending upon the market share of the largest competitor.

Users of the product portfolio concept often arrange company operations into "strategic business units (SBU's). These are divisions that offer one or more products to a particular market and that resemble separate firms. The truck division of a large automobile producer, for example, is a strategic business unit.

With product portfolio analysis, the entire firm is viewed as a portfolio of SBU's or individual products. This requires that each SBU has a clear cut strategy and serves a well-defined segment of the market. In turn, management should develop the strategies of the SBU's in a manner that promotes overall company goals, resulting in balanced growth in various products' sales and earnings and in the overall asset mix.

Market share and market growth are, of course, interrelated. During times of substantial market growth, consumers and intermediaries are not locked into rigid purchase patterns and a firm can acquire additional market share at reasonable expense. Conversely, when the growth rate is low (as it is during later points in the product life cycle) the firm finds it more difficult to increase market share. Consumers and intermediaries have developed entrenched purchase patterns and competitors can be expected to react intensely when their market share is threatened.

If a diversified manufacturer is contemplating the breakdown of its product mix into SBU's, an attempt should be made to develop balance between these entities. Instead of having each SBU try to maximize its profits, all should work together to promote achievement of overall company goals. This means that the SBU's should function, in a coordinated fashion. One may supply cash for another or one may bring in more profits, thereby promoting the achievement of overall company goals.


Breaking down SBU's (or individual products) into four categories can provide numerous strategic prescriptions.

Those SBU's or individual products with high growth and high market share are called "stars". These units require substantial amounts of cash in order to maintain growth. Management can accomplish this through invading new markets, research and development, large promotion expenditures, and low prices. These , of course ,tend to drain cash resources.

Units with low growth and high market share are called "cash cows". Products in this category are profitable and tend to generate large amounts of cash. The firm can retain its market share without spending substantial resources. Hence, the best strategy is to take steps to ensure that the company maintains its high market share without taking extreme measures such as price cutting or developing many related new products. The firm can use funds generated from cash cows to support research, promotion, and product development activities for other SBU's.

High growth low market share products are called "problem children". As any parent will agree, this situation calls for substantial amounts of cash in order to maintain the growth pattern. The firm may consider strategies such as repositioning, product modification, or brand extension, or might decide that the costs of maintaining problem children are just too high and get out of the business.

Products with low growth and low market share are called "dogs". These can pose problems for the company. They often do not generate much in the way of cash or profits and opportunities for future growth are limited because the markets are not growing. Given this background, a milking or pruning strategy is probably appropriate.

A cosmetic manufacturer with a SBU that has been labeled as a star would benefit from invading new markets. The SBU has been successful in the past, as evidenced by its high market share. This indicates that the company has developed an effective marketing mix. A good strategy is to search for new markets (such as overseas) where this effective combination of ingredients will provide the company with further success. Milking and pruning would not be recommended, since these are mainly strategies for products that are not doing well in the marketplace. A repositioning strategy would entail excess risk and would amount to changing a successful marketing mix to an untried one.


As with any investment portfolio, a company should strive for a condition of balance among the various categories. If the product portfolio is characterized primarily by dogs and problem children, strong remedial action is required. Management should aim for a situation where there are some products producing profits and cash and others utilizing cash as a means of providing future growth. Hence, cash cows and stars are desirable targets.

In some cases there are opportunities for beneficially converting a product's status from one category to another. For instance, the firm can use funds from cash cows to develop problem children into stars so that when the problem children's growth rate slows, the next generation of cash cows will be replaced. Management should be on the alert for such strategic modifications.

Product portfolio analysis does notprovide usable answers to all strategic product questions. There are several problems with the approach, including the following:

1. Classifying SBU's into the different categories is imprecise. Standard procedures that lend themselves to all situations are unavailable, causing measurement problems.

2. Variables other than market share and market growth are also important to consider.

3. The focus is on internally generated and used cash. Management should also consider other sources of cash, including the financial markets.

4. The focus is on the short run. Long run considerations should also be evaluated.

While there are weaknesses, the major advantage of the approach is that it stresses achieving a balance among all of a company's products. In this sense, product portfolio analysis forces management to integrate its efforts.

A desirable strategy for a producer of infant's toys is to use funds from cash cows to develop problem children into stars. Problem children have low market share. This can be remedied by increasing promotion expenditures, reducing prices, product development, and other means. The best source of these funds is cash cows, because they tend to be cash generators. If the problem children can be converted into stars, the firm will have a source of profits for future periods.


New Product Strategies:



Think of the major strategies that companies might pursue in developing new products. Then go through this section for expansion of your ideas.


A diversified manufacturing concern suffered a seven year bout with anemic sales and even worse profits. Outsiders reported that the company "just does notseem to know what products to offer." The company was forced to write off almost ,100 million for closed and distressed sale business.

The firm's historical strength came from serving the railroad business but its entire railroad castings operation, once a contributor of 40 percent of the company's revenues, was sold after this industry nearly collapsed. The chosen replacement was electrical connector products.

No sooner had the company moved into this new product line than the market softened and competition grew tougher. The firm was also once a major auto parts supplier but it withdrew from that market--just before the auto industry enjoyed a spurt in sales.

Company management continues to look for a product line where it can prosper. However, management just does notseem to know what products to add and which to drop.


A big risk is taken when marketing a new product. There are two major hurdles to overcome. First, introducing a new product is usually quite expensive. Second, new products have an enormous failure rate. Despite the cost and risk, management may have no other choice but to introduce new products. Usually Market expansion alone cannot fill all contribution gaps in the long run.

There are four fundamental types of new product strategies. These are:

· Rounding out existing lines,

· Creating market related lines,

· Creating technologically related lines, and

· Creating unrelated lines.

Rounding out existing lines involves intensifying the depth of an existing product line. In this sense "depth" refers to the number of substitutes or variations a company offers within a line. When management rounds out existing lines, similar customers, marketing skills, and technology are involved: the firm stays on familiar ground.

A sporting goods store has considerable depth in its product line. This means that it has many substitutes or variations within a line. If a consumer wants to purchase a softball glove, there are many different variations in the store--various sizes, colors, and quality levels. A discount store does nothave as much depth. It may have only a few gloves available for customers. However the discount store offers many different items besides sporting goods in its product mix. It furnishes breadth, rather than depth, to its target customers.


After expanding a line, the firm may be better able to meet the needs of target customers. Each thrust into a significant new market segment can turn a line's stagnant market into one of growth opportunity.

Rounding out usually offers the greatest potential for synergy of the four new product strategies. This is because the company can take advantage of its current marketing strengths: image and awareness among customers, channels of distribution, and so on. Similarly, the strategy usually takes advantage of the company's current production expertise because the products are similar, keeping down the associated development costs.

Success in filling out a line depends largely on how divergent are the needs of various segments as well as what size they are. Companies seeking to attract the patronage of many segments adopt a full line strategy. On the other hand, smaller firms are often forced to adopt a limited line strategy and target one or several segments that industry leaders have bypassed. Some coffee service firms, for example, provide their own blends of coffee to offices located in major cities. While their coffees are typically unavailable to the general public, these firms seek their niches in segments bypassed by large competitors.

A soft drink marketer that is considering rounding out its fruit drinks line may benefit because of the many possible sources of synergy. The firm can take advantage of its image among consumers and its existing channels. However, rounding out lines keeps the company in its existing sphere of business. It will not diversify risk by moving into new kinds of ventures. Hence, the company still has all of its eggs in one basket. If that target turns out to be a bad choice, the firm may suffer catastrophic financial loss.


The breadth of a product mix refers to the number of lines a company offers. To illustrate, general hospitals typically have six or more lines of service, including maternity , surgery, extended care, cardiac treatment, outpatient care, and emergency treatment.

The second new product alternative is the creation of new lines to fill a contribution gap. By so doing, a company is able to expand its potential opportunity by channeling a portion of its efforts into new types of products and new markets. There are three possible expansion strategies that a firm can take: market related lines, technologically related lines, and unrelated lines.

A new line is market related when the target customers or required marketing activities are very similar to those of existing customers or activities. A market related line is often a substitute for other items in a company's product mix.

Next to rounding out an existing line, adding a market related line is the most likely new product strategy to result in positive synergy, since it enables the organization to capitalize on its marketing expertise. After gaining experience in dealing with certain types of consumers, channel members, and promotional efforts, a company management team is better able to exert its expertise in related areas. Further, if the new line fails, it may not damage the reputation of the older lines because of their separate identities.

Another means of achieving favorable synergy is to expand into technologically related lines. As a result of engaging in ongoing technical activities, managers and operatives develop expertise in certain fields of production, research and development, financial planning, and organization skills. This knowledge may provide the necessary differential advantage for expanding into technically related fields.

While expanding into technologically related lines can be synergistic, many production oriented managers neglect one important element: assessing market opportunity. A company may have a production related competitive advantage only because the potential market for an offering is so small that other firms are not willing to enter.

Management should consider any new product strategy only if it offers sufficient profit opportunity to warrant incurring the inherent risks and the company has both the marketing and production skills required for successful introduction.

A third possible strategy for broadening a product mix is to expand into unrelated lines. These are neither market nor technologically related to a firm's existing lines.

Some companies regularly pursue unrelated lines; some job-shop manufacturers go after virtually any type of business they can get. Other companies expand into unrelated lines when competition becomes too fierce or demand declines in established industries.

Adding an unrelated product line is the strategy least likely to succeed because a company can neither capitalize on its marketing ability nor its technological experience. Management should consider this strategy only as a last resort. In most instances, it makes far better sense to engage first in Market expansion, then move on to some related line, and then start another round of Market expansion.

An office supply wholesaler that is considering expanding into the personal computer line because it is market related would find that it was dealing with the same type of customers. In this case, the customers would be office supply retailers, industrial buyers, and nonprofit organizations. The wholesaler has experience in dealing with these organizations. The members of its sales force already are acquainted with most of the buyers. Company managers know what motivates target customers and how to develop customer loyalty. These are invaluable assets.


Any type of expansion through new product introduction can do more damage than good, even if the offerings are, by themselves, very successful. If a new product contributes less to the company's objectives than those it displaces and if it caters to essentially the same target, the result may be cannibalization. In turn, cannibalization takes place when more profitable items do not sell in sufficient volume because consumers purchase a new but less profitable product.

Successful new product strategy is often a function of obtaining conquest sales--those taken away from competitors' products. But this is not always the case. Instead , the company can trade up customers to an item yielding a greater contribution. Trading up involves developing additional products that are slightly more desirable to buyers (and also more profitable to the company) and then convincing consumers that they should purchase the more profitable ones.

Management must exercise caution when attempting to trade up consumers. If the company exerts too much pressure to trade up or if low priced items are unusually shoddy or purposefully made unavailable, the practice is termed "bait and switch", which is illegal under federal law.

If a department store exerts excessive pressure on consumers to buy more expensive products, this is illegal under federal law. Once consumers have entered the store in search of bargains which they have read about in advertisements, sales clerks might ridicule the low priced model and tell consumers that they would be foolish not to buy a higher priced one. Or, they might indicate that they are out of stock in the case of the less expensive item when, in fact, they never had an adequate stock. These bait-and-switch techniques have been ruled to be illegal in a number of court cases.




New Product Development Stages:



Try to imagine the various steps which companies must take in order to develop new products. Then go through this section for insights into this process.


A large producer of aircraft once decided that it should attempt to build streetcars for various municipalities and transportation authorities. The firm made the decision to go into this line without any very structured analysis. Rather, the decision was based primarily on intuition and management subjective judgment. Four years after the company secured a contract from a large city transportation authority it had delivered only 32 of the 175 cars ordered and only 16 of the 32 ran. This illustrates a pattern--every time an American aerospace company has gotten into surface transportation, the result has been a financial disaster. It is apparent that technological solutions and markets in surface transportation are far different.


This section covers the steps involved in the new product development process. These steps are:

1. New idea generation.

2. Screening.

3. Business analysis.

4. Development.

5. Testing

6. Commercialization.

New idea generation means coming up with new product ideas. There are many sources including monitoring technological breakthroughs, brainstorming, customer suggestions, sales personnel suggestions, and even spying on competitors. Some executives visit foreign countries, see what products are selling well there, and then attempt to duplicate them in the U.S.

In the idea generation stage the objective should be to produce a large number of new ideas, but not to test them. Management can screen out poor ideas at a later time. Generally, the larger the number of new ideas, the greater the likelihood of finding a good one.

After the idea generation stage comes screening. It involves separating new product ideas into those worthy of further consideration and those warranting immediate rejection. The concept of synergy is useful in making such distinctions; those ideas that do not fit in with the firm's strengths and experiences from both market and internal capability perspectives are logical candidates for rejection.

Some managers use checklists for screening. These embody a listing of various desired product attributes and a scale for assessing each product idea on each attribute.

The third stage ,business analysis, involves estimating the future revenues, costs, and required investment of the new idea. This phase, then, utilizes financial data in great quantity.

An important part of the financial data needed is the forecast of future sales for the new idea. Corporate forecasters and other financial analysts are used to estimate this variable. On the other hand, accountants and engineers estimate expected costs. The forecasts of sales and costs enable management to predict upcoming profits. They can estimate return on investment by comparing the profit forecasts with the estimates of invested capital.

A restaurant chain that is in the new idea generation stage to come up with new ideas for items to place on the menu should strive to generate a large number of new ideas. Management could solicit ideas from customers through suggestion systems and monitoring of informal suggestions. It could ask employees for their suggestions. Another possibility is brainstorming , where a group of personnel get together as a group and try to elicit as many suggestions as possible. The company might review what competitors are doing with their menus. Also, management could review trends in society, such as the trend to consume healthy and low caloric foods.


Development is the next phase of new product generation. This is possibly the most critical step because it usually requires substantial investment. Further, this is where management learns whether or not it can turn an idea into a technical reality. Development involves concept testing and prototype development.

Concept testing assesses potential buyer reactions to an idea. It usually involves working with a panel of customers who are representative of an intended target. It begins by verbally (or in writing) describing a product concept. For example:

"This is a card which resembles a credit card. While golfing, you can carry it in your pocket. At the end of each hole, you would insert it in the card reader and record your score. At the end of the course, your total score would be recorded. This would compare your score with the par score and with the average score and would update your handicap."

Panel members are then asked questions about the overall concept and its attributes, such as:

1. Are the potential uses for this card understandable? What are they?

2. Does the card have favorable features? What are they?

3. Would you be interested in buying this card? Why or why not?

4. What improvements or additional attributes do you think are necessary?

In concept testing, then, management gets a reading of how a representative group of consumers see the idea of the new product. They are not actually exposed to a physical product, however.

Once concept testing has been completed, the next step is to build a prototype. This is one or a few units of an actual product, created to be used and tested. In many cases, a prototype is a skeletal product, not a working model, showing the essential distinguishing characteristics of the new offering. In the appliance industry for instance, companies produce tools and dies to build a prototype. They hand-make many assemblies and, since they have not yet acquired production experience, unit production costs may be very high.

A frequent danger in developing a prototype is that engineers and other technicians may attempt to incorporate their own personal preferences in a product. However, management must insist that consumer preferences, not the preferences of technicians, be adhered to in the absence of contradictory marketing research.


A home appliance company that is searching for new product ideas would conduct concept testing by asking a group of target consumers to react to the idea of the new product. The idea would be explained to the members of the panel and their reactions sought. At this stage, the objective is to get members of the panel to evaluate the idea of the product. They are requested to imagine that it exists and to form up impressions of how they would react to it. Concept testing, then, is normally much less expensive than is prototype development. However, it is not as realistic as it does notuse an actual product--only an idea.


Testing is the next stage of new product development. Here the company assesses the actual prototype along with its planned package and brand. Management may use several types of testing.

Durability tests, such as driving new cars on test tracks may be employed. These help assure that the product meets acceptable performance standards. Safety tests are also important, such as those revealing whether product use and packaging can result in personal injury. For foods and drugs, extensive testing is required by the Food and Drug Administration. The tests must assess, to the satisfaction of the FDA, that the products perform as claimed and that they do not have undesirable side effects.

A cereal producer is testing a new offering. The components to be tested include the brand, the package, and the prototype. The tests are comprehensive. They should test the major elements that will determine the fate of the product. The brand, package, and prototype all have a major bearing on sales levels and should be tested. On the other hand, the advertising budget does nothave an immediate effect on buyer welfare; it is an internal company management tool. This being the case, it does nothave to be tested.


The marketability of the items might also be tested. This may involve test marketing, where the product is placed in test markets (cities or areas that are typical of the total market) and sales records kept to determine the salability of the item. Sometimes groups of consumers are asked to take the product home, use it, and then give their reaction to it. Another possibility is to ask groups of employees to use the product and then evaluate it.

Whenever testing is used, management must be cautious about revealing its hand to competitors. A large baker, for example, market tested soft-on-the-inside, crunchy-on-the-outside cookies. Before the tests were completed, two competitors had beaten the company to market with their own brands.

The last step in new product development is commercialization. If all of the previous stages show positive results in terms of enabling a firm to close its contribution gap, the commercialization stage begins. At this stage, the company actually introduces the new item to the market. Accordingly, product introduction should be timed to coincide with the period when a contribution gap is expected to materialize.

If a large food processor wants to engage in the testing phase of new product development for a new coffee offering, this phase could include test marketing the new coffee in several large cities. This test would actually assess how well the new item would sell. This is, after all, a major objective of the company, so a sales test would be of major importance. Even if all of the previous new product development steps produced positive results, if the product will not sell it should not be introduced. Care must be taken, however, to the effect that the test cities are typical of the United States at large. Many consumers in Seattle, for instance, are gourmet coffee drinkers, so this city might not be typical of the country at large.



Branding Decisions:



Think about this: Is it important to have a brand name for a new product? Then review this section for insights into this field.


A producer of baby foods has found that its brand name has considerable value. For decades the company has manufactured and marketed a wide line of baby foods. This brand is widely distributed and has enjoyed national advertising support. When birth rates declined in the United States the company decided to introduce food for infants, carrying the same brand name as the baby food. The introduction has been a success. The image of the baby food has carried over to the infant food offering, in the eyes of consumers.


Appropriately naming products can be critical to their success. Brand names can be valuable property. They are so valuable that some unethical managers produce counterfeit products. The process of naming and otherwise designating products is termed "branding".

Technically, there are several major aspects of a brand:

1. A "brand" is a name, term, symbol, design, or some combination of them intended to identify the goods and services of one seller and to distinguish them from those of competitors.

2. A "brand name" refers to words, or that part of a brand that can be spoken.

3. A "brand mark" is that part of a brand that can be recognized, but cannot be verbalized. Examples include distinctive package shapes and symbols.

4. A "trademark" is a brand or part of a brand that is given legal protection, granting the holder exclusive rights to use the brand name or mark. The first user of a mark or name may register it with the U.S. patent office for 20 years with renewable rights.

A producer of cough medicine has an interest in getting a brand mark for its child's cough medicine offering. The brand mark will cover distinctive package shapes and symbols. It will cover everything that cannot be verbalized. This includes the company logo or signature (a distinctive mark that identifies the company), the shape of bottle and package, distinctive formats, and in some cases even distinctive colors. Some marks are much better recognized than the brand name, especially among preschool children.


A fundamental decision is whether or not a company should brand an item. In general, branding helps in establishing a total product's distinctive identity. Firms cannot effectively differentiate their products unless potential buyers are able to distinguish between items within a generic product class.

Because of brands, buyers are able to discriminate among the products of different companies, enabling them to select the particular item offering the greatest promise of satisfying their unique needs. Repeat purchases and brand loyalty can only happen if a company brands the goods and services that it sells.

Branding, however, is not always desirable for the firm. If it cannot maintain quality, for instance, a brand may signal to buyers that a particular item should be avoided in the future. Also it may be difficult to identify a product--such as fish sold in pet stores. Further, consumers may not be highly involved with some products, such as rubber bands and paper clips, and may not really care which item they buy.

If a producer of hair care products brands its items the major advantage of this policy is that it allows consumers to identify company products and differentiate them from rivals' offerings. The brand name acts as a signal of quality and satisfaction to consumers. They realize that a brand stands for certain product or service attributes and that they will benefit from attributes that they liked in the past. This enables the company to convince consumers that they should buy the same item repeatedly, producing brand loyalty. Without branding, this would be impossible.


Once a manager decides that branding is desirable, the next decision is to select the most appropriate strategy. The firm may offer a generic brand, an individual brand, or a family brand.

Generic brands do not have a brand name. The package merely identifies the product and the marketer. Many consumers have found that they can buy generic packaged and canned groceries, paper products, and even cigarettes at lower prices than if they bought branded items. Generic brands, of course, directly compete against branded offerings.

Individual brands are unique names given to individual items. (An example is General Mill's Bacos). They do not carry the company overall brand name (such as Del Monte). In the case of individual brands the company does nottie its image to the success or failure of a single item--one failure carrying the brand name will not disparage the image of the entire product mix. Also, a company can introduce a lower-prestige item without harming the image of existing successful products.

There are two major individual brand strategies. The first is to use a completely separate brand for each distinct offering. Lorillard is one of many companies that use such a scheme, termed a "multibrand strategy" (e.g., Virginia Slims, Old Gold, and Kent). This makes sense when the firm is appealing to completely different segments with different items. Also, offering separate brands can help a company capture a greater share of a market.

However, offering separate brands can present some major difficulties. This arrangement may require large separate promotion budgets, since promotion efforts are independent and not combined, and a new brand name does notbenefit from the "halo effect" (acquiring an identity from a familiar name).

The second individual brand strategy is for management to link a new product's identification with the company's name, even if it still employs individual brands. Kodak disc cameras and Kodachrome film are illustrative. This strategy makes sense when a company has an established and favorable reputation in a generic product area. The firm thus is able to take advantage of the positive halo effect but can still retain enough separate identity to appeal to individualized market segments.

A family brand exists when more than one of a firm's products have the same name. Examples are Fisher-Price toys and Wish Bone salad dressing. There are two fundamental advantages to a family brand strategy. First, it aims directly at capitalizing on the halo effect, which often helps in promoting initial sales for the new product. Second, the costs associated with introducing a new product are generally lower than for individual brands. The firm need not spend sizable funds for creating brand recognition with this strategy.

There are two general types of family brand strategies. The first is to use a "blanket brand"--a common name for all of a company's offerings. General Electric, for instance, applies the G.E. brand name to every one of its products, from multimillion dollar turbine generators to 39 cent light bulbs. A blanket brand can be very functional due to the halo effect, but each item carrying the brand should be of comparable quality, as inferior goods may impair the reputation of other offerings.

The second strategy is to use a different brand for each line of products, in order to maintain a separate identity. Swift, for instance produces both packaged meats for human consumption (Premium brand) and a line of fertilizers (Vigoro). Naturally, a separate identity is desirable for each line.

The naming of brands is an important function, not to be taken lightly. Marketing research firms use elaborate procedures to test proposed names. Some specialize in this process. Basically, good brand names:

1. Suggest the desired image--such as Frigidaire refrigerators.

2. Are easily recognized with simple pronunciation and memorability -- such as Karo syrup.

3. Are relatively short and inoffensive--such as Ford.

4. Are legally protectable--The Lanham Act (1946) states that a firm cannot protect a name that is the generic word for a type of product, such as "aspirin".

If a company that makes recreational boats uses a completely separate brand for a new offering this will help in appealing to a completely different segment of the market. For example, if the firm wants to produce an upscale line and appeal to those with higher incomes, the new brand will enable the firm to differentiate the new from old brands. Management can take steps to build a prestige image for the innovation and not worry that the image of existing products will inhibit this effort. Many consumers will not even connect the two lines in their minds, since they have different brand names.


An important question is: "Who will own the brand?" In a sense, producers have the ultimate authority as to whether or not a specific product is to be branded. This is because they have the final say as to whether or not they will manufacture the product. However, this position is quite misleading. In fact, both manufacturers and intermediaries engage in branding.

Manufacturer brands are those owned by the producer of the goods. Historically, manufacturers have dominated branding. Today many producers continue to produce practically all of their output under their own names.

Manufacturer brands offer various advantages. For producers, they allow the opportunity to closely control all aspects of the marketing effort, including advertising, packaging, and transportation. Also, producers can pull offerings through non-agressive and ineffective dealers by building final consumer demand with promotion. Manufacturer brands can also offer advantages to intermediaries. If the producer has heavily promoted an item, demand may be established and lower inventories may be possible.

Over time, more intermediaries are engaged in building their own brands, called "distributor" or "private" brands. Practically all retail chains now brand at least some of their products, and many wholesalers also carry their own brands.

There are some advantages to distributor brands, mainly that managing the brand is placed nearer final consumers, meaning that needed changes caused by market trends and pressures can be more readily implemented. There are fewer channel layers to go through.

However, branding by distributors can cause conflict within channel systems. Manufacturers lose an element of control over their destinies in the process. Manufacturers frequently have more at stake in the success of a given item since intermediaries can readily handle some other product if one fails. Manufacturers cannot so easily convert their facilities.

If a garden tools manufacturer prefers to use manufacturer, rather than distributor brands, a major advantage of this strategy is that they allow manufacturers to closely control all aspects of the marketing effort. They can determine product attributes and variety, the promotion mix, prices and terms of sale, what physical distribution facilities to employ, and many other marketing activities. If an intermediary owns the brand, its managers will demand a greater voice in marketing decisions. For example, they may require lower prices and more liberal warranties. These requirements may not be compatible with the strategies of the producer.



Packaging Decisions:



Answer this question: "What functions do packages accomplish for marketers?" Then go into this section in search of answers.


Packages are a major determinant of what consumers buy. Numerous blind tests have shown that consumers cannot distinguish between their favorite soft drink and one that they refuse to drink (when the identities of the drinks are concealed). To a large degree,then, consumers are not buying products--they are buying packages. If their favorite drink was in a different can or bottle, they probably would not like it.


Developing a good physical product and brand name are necessary steps in generating a strong product mix, but these do not constitute the whole of product decision making. Marketers must also pay close attention to packaging. Packaging costs for food and beverages average about one-third of the value of the goods they protect. Also the package may be one of the best selling tools possessed by the company.

Packages can perform a number of functions. Packaging is more than just the container. It is a system in which the product is the focal point. In other words, a package can help cultivate a product's worth to buyers.

There are a number of specialized packaging companies that aid producers. These specialists are of value when the product needs a new package for a test market. Also, specialists can package seasonal products, eliminating the necessity for manufacturers to contend with idle packaging equipment during the off-season. Finally, if a new product is successful, the specialists can aid the marketer in jumping into the national market with new packages before rivals do.

Cost considerations are important in packaging decisions. Generally, the greater the extent to which the firm attempts to provide for more functions, the larger the total packaging costs. Additional costs constitute waste unless they are associated with a necessary function.

If a producer of hose couplings for industrial buyers uses specialized packaging companies it may employ them to package seasonal products. Many producers, such as food processors, agricultural cooperatives, and gift marketers have large packaging needs during certain times of the year, when demand for their products is substantial. At other times, demand drops off or even stops and there is no need for the extra packaging help. The use of the specialists assists producers, in that they do not have idle packaging personnel and equipment during slack times.


There are eight functions that packages perform:

      1. Protection.

      2. Containment.

      3. Sanitation.

      4. Communication.

      5. Unitization.

      6. Pilferage prevention.

      7. Apportioning and dispensing.

      8. Utility for reuse.

Probably the most fundamental function of packaging is to protect the product from the point of its manufacture to the point of use. A product can become damaged while in transit, storage, or sitting on a consumer's shelf while waiting to be used. Protective packages are a major feature of potato chips, keeping the contents fresh and unbroken until they are consumed.

Damaged products cost manufacturers, intermediaries, and consumers millions every year. At least some of this can be reduced through careful packaging. Shrink wrapping items to a cardboard or other type of solid base can protect the product and still allow consumers to view the contents of the package. Packages are available that can keep insects out of foods, prevent breakage of the product if it is dropped, and keep moisture and dust away from the product. Innovations in the packaging industry are continually being made to protect the product.

A doll manufacturer is designing a package for its newest market entree. The most fundamental function of the package should be protection from the point of its manufacture to the point of its use. Dolls are in special need of protection because children like to play with them and other toys in retail stores. Many children are unsupervised and misuse the dolls. In the process, they can quickly become shopworn merchandise and unsalable or salable only at a discount.


Containment is another function. Packages serve to hold products. Imagine trying to handle a month's supply of toothpaste without a tube. Without packages, marketers could not distribute and handle many items, such as liquids, loose solids, and corrosive and gaseous products.

Packages provide various sanitary functions, including spoilage reduction and reducing nutrient loss. Further, disposable packages can sometimes offer better sanitary protection than containers that need washing before reuse.

Packages enable marketers to communicate information about contents, handling requirements and use to prospective final customers as well as to channel members. Further, properly designed packages can serve as a means of promotion, capturing customers' attention and interest as they pass an item on a retailer's shelf.

A major packaging function for a toy manufacturer is to promote the product on retailers' shelves. This is particularly important for impulse items like toys, where the decision to buy is made in the store. Attractive packages gain attention and interest and can induce a desire to make a purchase. Many consumer purchases are made on impulse, so using packaging as a promotion tool makes sense. The package will have to appeal to both parents and children. Further, it may have an important protection function, as many children damage toys while they are in retail stores.




Unitization is another important packaging function. Packages permit marketers to combine a number of individual packages into collections that represent an efficient entity for buyers. For example, manufacturers wrap candy bars individually, then place 24 bars in a box, then transmit 12 boxes into a shipping carton, and further unitize cartons on a pallet for shipment.

Pilferage (on the part of customers and employees) from retail stores exceeds ,10 million per day. Packaging can help to reduce such theft. For example, a blister-pack fitted over a product with an oversized cardboard backing makes items like razor blades or cassettes difficult to steal.

Packages enable buyers to apportion and dispense items to facilitate need satisfaction. For example, safety caps prevent children from consuming certain dangerous over-the-counter prescription drugs, and instant coffee is available in easy-to-reclose jars.

Utility for reuse is an important function for some offerings. Producers design some packages to provide buyer utility (reuse). Decorator glasses, plastic margarine tubs, and designer perfume dispensers all can increase a product's total worth by making the packages themselves useful to buyers.

Each of the eight packaging functions that we have covered in this section are not equally important for all products. Some products, such as tent stakes, need little protection, while others, such as personal computer diskettes, are very delicate. Some firms utilize aseptic packaging, which removes all contamination through sterilization and allows fruit juices and other drinks to be stored without refrigeration.

Unitization is an important function for soft drinks sold to the mass market. Producers place units in 6 packs, 12 packs, 18 packs, and cases for sale to consumers. Experience has shown that consumers will buy more soft drinks when the bottles or cans are unitized than they will if they are sold individually. Buying more ultimately results in drinking more, so this practice works to the advantage of the bottlers. In some countries where personal incomes are very low, individual bottles or cans are sold because many consumers do not have sufficient funds to purchase a unitized amount.






Chapter 6

Marketing Channels & Physical Distribution


Section (6.1) Channel Structures.

Section (6.2) Why Should a Producer Use Intermediaries.

Section (6.3) Determining Needed Marketing Activities.

Section (6.4) Distribution Intensity.

Section (6.5) Specific Channel Configuration Decisions.

Section (6.6) Channel Leadership.

Section (6.7) The Physical Distribution System.

Section (6.8) Components of a Physical Distribution System.



Channel Structures:



Based on what you have learned so far, give your own definition of a channel of distribution. Then go through this section to enlarge your understanding of this entity.


Many of the large producers of home exercise equipment in the United States sell their products through retail stores. One of the few exceptions advertises in magazines and television and delivers the product by mail. This gives the firm several advantages. One is a low distribution cost, since the firm does nothave to reimburse wholesalers or retailers. Another is differential advantage by selling in a unique fashion that enables the firm to stand out from its rivals. These strategies have allowed the company to capture a large market share.


Management makes two types of distribution decisions. First, it establishes inter-organizational arrangements--termed "channels of distribution", which are networks of organizations that arrange for changes of title to goods as they move from manufacturers to final customers. Second, management seeks a means of physically distributing items to customers. This section focuses on the first of the two decision areas.

Because producers and final customers are separated from each other due to specialization, the gap between them necessitates the development of delivery systems to permit exchange. This delivery is not only in terms of physically moving items, but also in the sense of all economic transactional flows.

Consider a producer of antacids for stomach pain. The company is located in Indiana, but sells its products around the world. Accordingly, management must cultivate several arrangements to facilitate transaction flows, including becoming aware of consumer needs, arranging for distribution around the world, making potential customers aware of the product's availability and performance, transferring ownership to buyers, and obtaining funds for supplying the product.

In other words, managers undertake activities to develop the needed flows to bring together buyers and sellers in the marketplace. The activities may be grouped into nine key marketing functions that need to be performed.

1. Buying.

2. Selling.

3. Financing

4. Standardizing and grading.

5. Transporting.

6. Risk-bearing.

7. Pricing.

8. Storing.

9. Obtaining market information.

A producer of kitchen cabinets that is in need of activities to develop the needed flows to get together with consumers is in need of selling, transporting, and storing activities. The manufacturer must sell goods in order to transmit title and permit physical possession by consumers. Further, the firm must take steps to transport the cabinets to consumers, perhaps through other companies. Also, the producer must store goods in some fashion, so that they are available when consumers want them. All of these activities help promote exchange.


Simply put, channels of distribution are the sets of institutions and agencies that are used to make a product or service available to customers. The set of institutions used for a particular product is called a channel system, which is responsible for collectively performing all of the needed functions to bring buyers and sellers together.

Some producers attempt to perform for themselves all or most of the needed channel functions, resulting in rather simple channel configurations: direct from the producer to final customers. They rely on their own marketing personnel to do most of the work.

In contrast, most producers rely upon other businesses that are functional specialists to perform many of the needed marketing tasks. Retailers, wholesalers, and transportation companies are the three major types of specialists that producers call upon to help in performing major distribution functions. They are called intermediaries because they represent intermediate steps linking producers and final customers. The first two, retailers and wholesalers, are selling intermediaries--they directly engage in making sales. Transportation companies are shipping intermediaries. Their shipping expertise and transportation services can be important in facilitating sales.

While the institutions involved in a channel system are important, what is even more important are the functions that they perform. Thus a channel system can be thought of as both the institutions and the work that they do. A new channel system results, then, when there is a change in either the institutions or their functions.

A new channel system results when a shoe manufacturer changes the work that its retailers do. Hence, the manufacturer may have the retailer suddenly handle advertising, customer service, or storage. In this case, the retailer is now carrying out functions that the manufacturer was once responsible for. The burden of work has shifted to the retailer. Retailers, of course, expect to be compensated for these added duties, so the retailer compensation system will have to be altered to reflect this.


Some channels are lengthy, involving several different types of intermediary specialists. This is especially the case when marketing in certain foreign countries, such as Japan. A manufacturer may sell to a national wholesaler, who sells to a regional wholesaler, who sells to a local wholesaler, who sells to a retailer, who sells to consumers. Other channels are short, with producers selling directly to target customers. Some channels are difficult to change, over time, while others are capable of responding rapidly to emerging environmental conditions.

The six most important channel attributes are:

1. Length--the specific number of channel levels employed. Each different type of selling intermediary adds another level to a channel. In Japan, for example, channels tend to be long.

2. Width--the number of channel participants used at each level. If a manufacturer sells through many retailers in Japan, for instance, the channel is wide.

3. Tasks--specific sets of functions to be performed by each channel member--such as delivery and storage.

4. Adaptability--the ability of a channel to change according to the environment.

5. Specific participants--the type, number, and specific set of members that are part of a channel.

6. Conflict--the degree of competition among members of a channel and between competing channels. Included is the resolution of intra channel conflict by a member assuming leadership control over the channel.

A manufacturer of canned fruits and vegetables has an adaptable channel. This means that it has the ability to change according to the environment. For most producers, the target customer and its needs, competitors, government activities, technologies, and other environmental elements are subject to change. An adaptable channel is capable of adjusting to this change. The producer might find it necessary to add or to eliminate specific channel members or to change their functions in some way. Management might add new kinds of wholesalers if existing ones are not selling aggressively enough, for instance.


The simplest--a two level channel (also called "direct distribution") is where a manufacturer sells directly to final customers, as in a factory outlet store. A three level channel includes one selling intermediary, either a retailer selling to consumers or a wholesaler selling to industrial buyers.

Four level channels include two selling intermediaries. In consumer markets, this usually amounts to a wholesaler and a retailer, as when a food processor sells flour to a wholesaler who, in turn, resells it to retailers. With industrial markets, the two intermediaries might be two different wholesalers. Sometimes five or more levels are included, but this is uncommon.

If a manufacturer of dress shoes for men and women uses direct distribution, it has a two level channel. Here the producer sells directly to final customers. Some shoe companies employ sales representatives who call directly on consumers in homes, places of work, and other locations. These companies believe that they can control marketing activities more closely and distribute products at a lower cost than if they used wholesalers and retailers. Since they are not using intermediaries, however, they must undertake all of the marketing functions needed to reach the marketing objectives.




Why Should a Producer Use Intermediaries?:



Try to answer the question: "Why should producers use intermediaries?" Then go through this section in search of answers.


The agricultural marketing division of a large chemical producer decided that its 20 year old channel of distribution had served the company well in the past, but had outlived its usefulness. The company had been working with two completely different sales forces that distributed three different product lines. Due to the confusion, the situation had become unworkable, with excessive costs and lost sales in over-the-counter feed additives and animal health products.

A twelve-person task force led the company's six month study of alternatives. The task force developed a list of performance characteristics of the old distribution system and developed a list of objectives for selecting channel systems. It compared the objectives with a list of channel alternatives, and arrived at a choice of a preferred channel. It was one where the company would sell directly through veterinarians and through wholesalers who cover other markets. This new system turned out to both produce more sales and lower distribution costs.


Producers give up some control over their destinies by aligning themselves with intermediaries, who naturally expect to be compensated for their efforts. Since producers could market directly if they chose to, why do many opt for affiliating themselves with intermediaries?

The answer lies in the fact that intermediaries can substantially enhance a channel's overall performance. They might add to a channel's efficiency (ability to do the work at lower cost), its effectiveness (ability to do the work well) or both. Then too, many producers lack the capital that it would require to go direct. One of the large automobile producers, for example, uses about 8,000 independent dealers worldwide. The total investment for the firm to accomplish distribution directly would run more than ,100 billion--enough to break its treasury despite its being one of the top ten manufacturers. The firm has better alternatives for spending its money--just being competitive with new cars demands enormous investment--than tying it up in bricks and mortar for showrooms.

A marketer of tools for do-it-yourself consumers would probably be able to distribute its products efficiently if it used wholesalers rather than selling directly to retailers. Wholesalers are specialists in carrying out many channel responsibilities, such as selling, warehousing, and delivery. They have large and efficient sales forces, warehouses, and fleets of trucks that can operate at low costs. Often manufacturers cannot duplicate this low cost operation. Also, since wholesalers serve multiple producers, they are often big enough to enjoy economies of scale--further adding to efficiency. One of the big costs of this efficiency, however, is less control over marketing activities at the retail level.


Another reason to affiliate with intermediaries is that they facilitate the buying process for many customers by building assortments, or bundles of items in one location that customers believe are related. Grocery shoppers, to illustrate, prefer to buy soup, meat, canned goods, vegetables, and household items in one location, rather than from the soup store, the lettuce store, and so on.

Industrial buyers feel about the same way that consumers do. A supermarket produce buyer, for instance, would rather buy from one salesperson who represents one company, rather than having to work with the cabbage salesperson, the carrot salesperson, the apples salesperson, etc. The latter situation would be very time consuming, costly, and frustrating.

One of the major points of differential advantage that an intermediary can have is to stock a wide line. Retailers and industrial customers, then, have the opportunity to choose from an assortment of items. If one does notfit their needs, it is probable that the intermediary has one that does. This facilitates the buying process for these companies.

A hardware wholesaler facilitates the buying function for retailers by providing convenience for them. Hardware retailers are specialists in handling the needs of the retailers that they serve. They have developed expertise in handling the buying function for retailers in ways that fit into the established routines of the retailers. The retail buyers have dealt with wholesalers in the past and know that the operating procedures of the two parties are compatible. Generally, this facilitates the entire exchange process, necessitating few adjustments by retailers to the selling policies of those who call upon them.


One of the major costs of doing business is that of the transactional contact. This takes place when members of the channels of distribution make arrangements for exchanges with each other. The contacts can take place through various media, including personal calls by sales representatives, telephone calls, electronic communications through computers, fax transmission, the mail, and the like. All of these involve time and expense, on the part of both buyer and seller. If the number of contacts can be reduced, marketing becomes more efficient.

Transaction costs can be very substantial. Consider the cost of sales representatives. These individuals must be recruited, selected, trained, and supervised. All of these processes can be very expensive. When the sales representative is calling on a customer, he or she must be paid and all of the associated expenses, such as travel, accommodations, and entertainment covered. Salespeople make telephone calls and faxes, send letters, and use laptop computers and associated equipment. All of this comes at a high cost.

Even less expensive transactional methods can be expensive. Letters and faxes require the time of executives--using part of their salaries for this task. Secretaries' salaries and postage and fax fees can run high.

There are flows of paperwork that add to transactions costs. Bills must be mailed, invoices sent, bills of lading forwarded, and insurance arranged for. Arrangements must be made with transportation carriers (or with the marketer's traffic department if it does its own transportation). If the customer is in a foreign country there are numerous paperwork requirements from both the home and the host country.

For a producer of telephone components, a transactional contact takes place when a sales representative calls on a customer. Here, arrangements for exchange are made by the producer and the customer. These contacts are costly (the salary and expenses of the sales representative) and time consuming. The producer will be able to cut costs if it is able to reduce the number and the duration of these contacts.


Intermediaries can substantially reduce the total number of transactional contacts and related costs between producers and final customers. With direct distribution, five different producers would have to establish separate contacts with five customers. The total number of contacts would be 5 X 5 = 25.

If a retailer sells the products of the five producers to five consumers, there would be only ten contacts (five from the producers to the retailer and five from the retailer to consumers). For an entire economy, such as in the U.S., with hundreds of millions of consumers and hundreds of thousands of producers, the contact efficiencies are astronomical when intermediaries are brought into the picture.

Many critics of marketing point to the profits of intermediaries as being exorbitant, but they fail to grasp the idea that intermediaries can actually reduce costs and prices. By specializing, they can often perform the same functions for different producers at a lower total cost and they significantly cut the number of transactional contacts required between producers and users. It is true that intermediaries charge a markup for their services, but it is also true that they can clearly cut costs.

In a small island economy there are 9 producers and 9 consumers and all producers sell directly. In this case there are 9 X 9 = 81 contacts. If a retailer is added there will be 9 + 9 = 18 contacts. Hence, 63 (81 minus 18)contacts will be eliminated by adding one retailer. It is assumed, in this case, that every retailer serves every consumer and every producer serves every consumer.




Determining Needed Marketing Activities:



Try to imagine what factors (such as type of customer and type of product) determine the channel of distribution that a company will find to be optimal.


A southwestern producer of packaged sandwiches uses a direct channel. The firm produces the sandwiches, wraps them, and then delivers them directly to convenience stores, gasoline stations, and supermarkets where they are sold to consumers. When the company was founded, management investigated using food wholesalers to distribute the sandwiches to retailers. The investigation revealed that this would place these products on retailers' shelves two days later than would direct distribution. This being the case, the company installed that pattern and has been successfully utilizing it since.


Just what constitutes an optimal channel system depends upon the particular environment confronting the firm. The best set of channel attributes for steel is quite different than that for ice cream, for instance. But an optimal channel's characteristics may also vary among firms within the same industry. Different target markets, different objectives, and a host of other factors can bring management to place varied emphasis on particular marketing functions. In turn, these factors affect the desirability of including certain intermediaries in a channel.

There are five major categories of factors to consider when attempting to determine the marketing activities that a channel should accomplish:

1. Target customer characteristics.

2. Product characteristics.

3. Intermediary characteristics.

4. Environmental characteristics

5. Company characteristics.

Probably the single most important class of characteristics influencing a channel system's design are those relating to target customers. When there are numerous customers, each purchasing small quantities on a frequent basis, producers tend to develop rather lengthy channel systems that are also quite broad--that is, with many intermediaries at each level. This is especially true when customers are widely- dispersed geographically.

In contrast, producers tend to develop short and narrow channels when there are only a few geographically concentrated target customers, especially when large purchase quantities are involved. These conditions favor direct distribution. Large steel mills, for instance, market directly to companies in the metal-working industry because of their geographical concentration and large potential orders.

Product characteristics also play a major role in the design of a channel system. In general, the greater the value of an item, the shorter should be the channel for two reasons. First expensive products usually require a heavy personal selling effort (as in the case of large computer systems). Short channels have greater flexibility when it comes to meeting individual customer needs such as specially arranged deliveries, financing, and instructions for use.

Second, short channels can reduce an entire system's total inventory and related carrying costs. If numerous retailers and wholesalers stored fur coats, for instance, inventory carrying costs would mushroom dramatically.

A product's bulk and weight are also important. Large items cost more to store, ship, and handle; the greater these costs as compared to an item's unit value, the greater is the need to emphasize efficient handling and transportation. Thus, bulky and heavy items with low unit values tend to have longer channels.

Perishable items deteriorate over time; from decay (aging food) or from style deterioration (many types of fashion clothing). Highly perishable items usually require shorter channels so as to speed delivery to market. Milk typically has a shorter channel than canned vegetables. Similarly, fragile items typically have short channels.

Further, if items are custom-made to buyer specifications, a short channel is usually necessary. In contrast, highly standardized offerings such of jars of peanut butter can be efficiently handled by functional specialists, so longer channels tend to be used. The degree of required servicing, such as adjustments and installation, is also a consideration. Products that require extensive servicing typically move through short channels, as is the case with central air conditioners.

Personal computers tend to have a short channel of distribution. Target customers make large dollar purchases on an infrequent basis. The product is of high unit value and marketers who use short channels are able to prevent very high inventory cost by avoiding extensive use of intermediaries. The products are also heavy and bulky. Further the products require considerable customer service, which manufacturers prefer to do themselves, rather than delegating this responsibility to intermediaries. The result is that direct distribution is common.


Intermediary characteristics affect channel design. It is evident that intermediaries vary in their ability and desire to perform various marketing functions, such as storing, advertising, and personal selling. Producers should take these differences into account when designing inter-organizational arrangements.

For example, large retailers such as major department stores can provide extensive exposure for a product because of their ability to draw heavy shopping traffic. On the other hand, smaller specialty stores might offer greater sales potentials. While small units typically attract fewer shoppers than department stores, their customers often are more focused. A sporting goods store might not attract a large total number of shoppers each day, but those that do enter are predisposed toward buying sporting goods. Further, the relative promotion emphasis that a particular product receives is likely to be greater in a small store than in a large one.

A producer of high quality, expensive, prestigious television sets is likely to be satisfied with the services of department stores. These units attract high income consumers who want very high quality goods and services and are willing to pay a high price to get them. These consumers want considerable service--such as delivery and easy credit. They want extensive service while in the store and after they have made the purchase. Further, some desire the prestige of buying in an upscale department store.


Various characteristics of the environment also have an impact on a channel's design. Rapid economic expansion might require the selection of intermediary members that would otherwise be unacceptable; or a recession could mean that management would need to terminate some channel members.

Managers should consider competitors' systems when designing a channel. Producers seeking to penetrate closely related markets may develop channel systems that display their products next to competitive brands. Different brands of cosmetics, for instance, often sit side-by-side in cosmetics sections of department stores.

Various company characteristics play an important role in influencing channel system development. Large, financially strong producers are sometimes able to obtain scale efficiencies as specialists because of their size. Accordingly, they often perform many needed channel functions for themselves. Some computer manufacturers, for instance, use well-trained and motivated sales forces to sell personal computers to retailers.

Smaller companies, in contrast, usually rely upon intermediaries to gain efficiency. Most personal computer software companies rely on wholesalers to feed their products to retailers and cannot hope to provide these stores with the same level of support as the larger firms can.

Channel design decisions should also reflect a company's past experience. Some firms have a history of using wholesalers to distribute their products. Trying to reach retailers directly would place these firms at a disadvantage, since they lack experience in such matters. In a similar vein, marketing policies can influence the type of channel needed. A policy of "a maximum three day delivery deadline for 90 percent of our customers" requires certain types of intermediaries to permit implementation.

A vegetable and fruit produce grower uses wholesalers to distribute its products to retailers. One reason for this could be that the grower used to employ wholesalers. The firm has experience in dealing with these intermediaries. It could be that the grower dropped the wholesalers when sales revenues arose to levels that permitted economies of scale. This may no longer be the case, however, and the grower may need the assistance of wholesalers again. It may be difficult to gain their aggressive sales support, however, as they are aware that the grower may drop the wholesalers from the channel again.


Channel design is also influenced by the completeness of a producer's product mix in relation to the target market's desired bundle of items. Consider the case of an insurance company that writes only life insurance. If it chooses a target that has very few needs for other types of insurance, then a simple channel configuration may be appropriate. A direct distribution channel might be appropriate if it targets graduating college students, for example, since most of these prospects do not yet have needs for home, annuity, and other forms of insurance.

In contrast, consider the same life insurance carrier trying to penetrate a target of families that also have home, retirement, and many other types of insurance needs. Since it only handles life insurance, its product mix only presents a small portion of a complete insurance package to these buyers. Consequently, a more complex channel is warranted.

By working through independent agents who handle all other types of insurance from different carriers, the life insurance specialist can arrange to become part of an overall package of insurance coverage that represents a complete bundle of products to the target.

Other kinds of intermediaries provide benefits through the same process. The wholesaler or retailer carries a wide product line, obtained from multiple producers. When the intermediary sales representative calls on a customer, he or she is able to satisfy the need for different products and serve the customer in a way that provides much better service than if only one or a few items were carried.

A producer of business forms for small business is more likely to use direct distribution when the company is large. Large companies have the funds, sales forces, warehouses, truck fleets, and other resources needed to perform all or most of the needed marketing functions. They do not need to rely on intermediaries to do these functions and, because they are large, they may be able to undertake the functions more efficiently and more effectively than most intermediaries could. Small producers, in contrast, have few resources and, as a corollary, must rely on intermediaries.




Distribution Intensity:



Try to decide how you would determine the number of intermediaries to use at each level in the channel. Then pursue this section for more information on the subject.


A company had, for many years, a mission of selling plastic laminated sheets for use in construction. One use was in the making of doors. In earlier years the company operated its own door manufacturing plant that used the plastic sheets on the door exteriors. Company personnel handled all distribution and promotion activities; this did not work very well, resulting in poor sales performance.

Later the firm switched to using wholesalers to handle its doors, but again this arrangement did not work well because the company's mission was to sell the plastic sheets, not doors. Later the company developed 25 independent door manufacturers as "approved sources", which helped expand sales of the plastic sheets. Still later, firm had expanded the concept of "approved sources" to cabinet makers, building supply outlets, and home improvement centers, turning the company into a very profitable operation. Relying on intermediaries turned the firm around.


Distribution intensity, the width of a channel, is a cornerstone of distribution strategy. Several degrees of intensity are possible. While intensity is a continuum, it helps to think of three discrete alternatives: intensive, selective, and exclusive.

Intensive distribution is the strategy of making an item available at all locations where customers expect to find it. It is especially appropriate for consumer convenience items such as gum and candy bars, and for certain producer supplies such as common lubricants, floor-cleaning products, and other commodity items that face heavy direct competition. Intensive distribution is common for low-priced items.

Many buyers of such products accept substitutes if their favorite brand is unavailable. Hence, intensive distribution is important whenever a convenient location is a critical factor to buyers and when a high level of competition exists between brands. If consumers cannot find convenience items in their favorite shopping location they will simply buy a competitor's product. Because numerous locations are required, intensive distribution always necessitates the use of many intermediaries. All intermediaries where target customers shop should be included. All retailers for a paint brush manufacturer, for instance, might mean all paint, hardware, and discount stores.

Intensive distribution can be expensive to the manufacturer. It is necessary to set up a distribution channel that includes many intermediaries and to manage this large channel. This requires more time and effort than if the producer dealt with only a few intermediaries. Further, the marketer may experience difficulty in inducing intermediaries to promote a product more aggressively than competing products.

In the consumer goods field, marketers of convenience goods frequently seek intensive distribution. Producers of soft drinks, cigarettes, and detergents are examples. Consumers want these products in convenient locations. They are not willing to exert a great deal of effort to obtain them.

In the industrial-goods field, numerous marketers of operating supplies seek intensive distribution. The producers of lubricating oil and pencils fall into this category. Each manufacturer of these items knows that the market is made up of consumers from a variety of industries. This being the case, the producer seeks a large number of industrial distributors.

Intensive distribution may be necessary for a marketer of gum because many buyers of convenience goods accept substitutes if their favorite brand is unavailable. These consumers are not willing to exert much effort to obtain their favorite brand. They expect the producer to make it widely-available and may change brands if they experience difficulty finding the item. Of course, what is a convenience product to one consumer may be a specialty product to another. There probably are some consumers who will go to considerable effort to find their favorite brand of gum. But this number probably is not very large.


In the case of selective distribution, the producer uses only a limited number of intermediaries in each geographic area. Rather than selling through very large numbers of wholesalers and retailers, the company attempts to target those that appear to be the most promising.

Selective distribution requires being a bit more discriminating about which companies are to be included in the channel. Shopping goods are typical products for selective distribution. Customers are usually willing to search longer and travel more than for convenience items so that they can compare competing brands. Thus, convenient locations are less important than for convenience items and fewer intermediaries become necessary.

In the industrial goods category, selective distribution is found in accessories and parts and processed materials. In all these cases, producers are highly interested in obtaining substantial competition from intermediaries.

While fewer intermediaries are needed, the objective of selective distribution is not based upon numbers. Customers do not buy items because they are offered in fewer places. Instead, the goal is high-quality performance from wholesalers and retailers. Because few channel members exist, less intra-channel competition is involved and the producer can expect more from intermediaries.

Further, selective distribution enables the producer to exclude marginal dealers such as those with low sales, bad credit ratings, and small orders. Therefore, when customers are willing to seek out a product beyond the nearest convenient location and when a moderate marketing effort by intermediaries is required, selective distribution is likely to be appropriate.

This policy enables the marketer to avoid using intermediaries who are unprofitable because they:

1. Place extremely small orders.

2. Request excessive levels and types of services.

3. Fail to pay their bills promptly.

4. Return an excessive number of goods to the manufacturer.

5. Do not aggressively promote the manufacturer's offerings.

By carefully examining the records of past relationships with intermediaries, the manufacturer can identify those that have caused excessive costs in the past. Often a large reduction in expense can result from eliminating the costly accounts from a channel.

A shoe manufacturer might choose selective distribution because the manufacturer can expect more from intermediaries than is the case for intensive distribution. If only a few intermediaries stock the product, they realize that any efforts expended to improve the sales of the item in question will benefit them substantially. Thus, they are likely to give the product favorable display and substantial advertising and other promotion. There is little incentive to do this under intensive distribution, because efforts extended to promote the product will assist competitors.


The most restrictive strategy regarding a channel's breadth is exclusive distribution. With it, selected channel members receive an agreement, granting them sole rights to sell a product line in a certain territory. Producers of consumer specialty items and of parts and equipment sold to producers frequently employ exclusive distribution. They have no need for extensive networks of channel members to sell their products, as the function can be handled well by just a few.

Management can restrict the channel to low cost wholesalers and retailers who are willing to stock large inventories, perform services such as installation and repair, promote the product rigorously, and follow the price suggestions of the manufacturer.

A producer of rifles and handguns employs an exclusive distribution strategy. The product is a specialty good in the minds of many firearm buyers. They will go to considerable trouble to seek out retailers that stock this particular brand and if the item they want is not in stock will wait for the retailer to order it and have it in stock at a later time.

A problem with exclusive distribution is that the manufacturer must determine which intermediaries are to be given exclusive status. This is a difficult and potentially hazardous task. If management is not effective in judging intermediaries, good outlets may be excluded and poor outlets included in the channel. Further, those intermediaries who are not profitable at present may improve their operations and become desirable accounts in the future when the manufacturer, however, is tied to the exclusive distribution agreements with other intermediaries.

In short, this policy makes the producer dependent upon particular intermediaries for distributing the product. If they are not effective, the entire marketing effort may fail.

A manufacturer of expensive television sets that are in high demand by upscale consumers uses exclusive distribution. A probable reason is that consumers will go to considerable effort to acquire the sets. There is no need to stock this product in numerous retail stores, since consumers will seek it out, regardless of where it is located. A major benefit is that the transaction costs to the manufacturer are less than if the company used extensive or selective distribution, since fewer retailers are involved in the channel.


The advantage of exclusive distribution to producers is that they can expect chosen channel members to effectively perform many of the needed marketing functions. For example, successfully selling top-quality skis and boots typically requires salespeople who are both skiing and equipment experts and sources of consumer advice. Retailers who have exclusive distribution are more willing to hire experts at premium salaries to help customers satisfy their unique needs.

To intermediaries, exclusive distribution means that they have less direct competition. There may be others who handle the same line in nearby regions; however, the territories are usually large enough to avoid substantial direct competition. If the producer has not carefully designed the territories, however, direct competition can result and this can be very damaging to retailer morale.

New or small producers may not have a choice over the intensity strategy they employ. Established intermediaries may demand exclusive distribution before they will carry a product. By obtaining exclusive rights, they can reap a greater share of the benefits of helping to establish a successful product. This may bring about vigorous intermediary efforts for a producer, but it may also result in lost control. Therefore, management must exercise extreme care in assuring that distributors are capable of both serving the identified target and helping the producer to attain its objectives in the long run.

A producer of expensive watches might employ exclusive distribution because channel members will effectively perform many of the needed marketing functions. The producer might sell the watches only in selected upscale department stores and gift shops, where each store has an exclusive in its territory. The company would avoid selling through outlets such as discounters and mass market jewelers. There would be an incentive for channel members to give the watches prominent display, to bring them to the attention of customers, to give them advertising support, and to cooperate with the producer in carrying out the producer's mission, objectives, and goals.




Specific Channel Configuration Decisions:



Try to answer this question: "How could a producer motivate and control intermediaries so that they perform in a manner that supports the goals of the producer?"


It can be very difficult for a manufacturer to motivate intermediaries to act in its behalf. This is especially the case because some retailers have become so large that they demand that the producer conform to their plans, rather than vice versa.

Several large discount chains control a major portion of the retail market. They are so large that many producers realize that they must have at least one of these chains in their channels, in order to survive. The chains have taken advantage of this. They have required lower prices, more favorable terms of sale, favorable delivery, and other concessions, as a prerequisite for carrying the products. Some even charge "slotting fees"--funds given to the retailer in exchange for carrying the product.


Once producers have decided upon an overall strategy, it remains necessary for them to make specific channel attribute decisions. The overriding set of criteria to use as guidelines consist of the marketing activities that must be performed to permit effective market penetration. Two major alternatives exist: ownership or contractual arrangement.

The first question to be addressed is whether the firm should farm out marketing tasks to intermediaries or carry them out itself. When a company desires to perform tasks for itself that are not normally thought to be carried out on its level in a channel( e.g., a producer also serving as a wholesaler to retailers), the process is termed "vertical integration" or a "vertical marketing system." In other words, vertical integration involves expanding a firm's activities to other channel levels.

Forward vertical integration means that operations are expanded toward target customers. For instance, a sewing machine producer integrated its operations forward by opening company-owned retail sewing centers. This method's chief advantages are that the firm can maintain control of marketing activities and capture a greater profit margin.

Integration of a channel can also extend away from target customers, toward the source of supply. Termed backward vertical integration, the strategy may involve a producer who manufactures rather than buys parts and supplies. Another form is where a retailer performs wholesaling or manufacturing activities. Backward vertical integration can offer the advantages of assuring a steady supply, quality and profit control, and the potential to retain a large portion of an item's profit margin.

Integration is not an "all-or-nothing" proposition. A fully integrated firm is one that extends all the way from raw materials to ultimate buyers. Many service firms are fully integrated, but those involved with manufactured products seldom are because of investment requirements and other more favorable opportunity alternatives. Once a company establishes how far it wishes to vertically integrate, if at all, it must then address the question of establishing contractual arrangements with other firms.

If a software producer is thinking about going into the retail business, a major advantage is the firm can control marketing activities at the retail level. The producer can be assured that its prices are appropriate for the target consumer, that the products are properly promoted, and that optimal inventory levels are maintained. It can aggressively promote its own software to target consumers, something that it cannot do if it depends on independent retailers. Further, it can train retail managers and other employees so that they are well informed about company software and its major advantages.


Contractual arrangements are the agreements between independent firms at different levels of a channel. These arrangements may be formal and relatively permanent, as in the case of franchise organizations, or they might be less formal and permanent, as when a supermarket decides to buy dairy products from a dairy.

Three types of decisions are relevant in entering into these arrangements: adaptability requirements; appropriate motivation and control mechanisms; and the number, type, and identity of other firms needed.

Adaptability is an important consideration. Before establishing a channel, management is wise to consider the long-range prospects that could require future changes. Technological developments, changes in a product's life cycle, economic and legal developments, and competition, can cause a channel to be dated.

A personal computer manufacturer, for instance, found it necessary to drop wholesalers and to sell its personal computers direct to retailers via it own 350 person sales force as a means of more fully coordinating efforts with retailers. Thus, before attempting to establish formal and relatively permanent contractual arrangements with other firms, successful managers first attempt to estimate future conditions.

A producer of toys should choose channels that are flexible--capable of change when conditions dictate. This is the case because the toy industry is subject to considerable change over time. Consumer (both parent and child) preferences change radically from one time period to another. Last year's favorite item may be completely passé this year. Technology affects the industry, as in the case of computer games and new kinds of lifelike dolls and other products. Competition varies considerably, as market share of both domestic and foreign companies wax and wane without much advance notice. Prices vary accordingly. Hence, the volatility of this industry should dictate to management that the channels should be flexible.


Management should also consider appropriate motivation and control mechanisms. All efforts of a channel's members should interact in harmony for a marketing program to attain its maximum impact. In fact, some experts argue that intermediaries and producers are well-advised to see themselves as partners by coordinating their efforts for their mutual benefit.

However, while a carefully coordinated effort is a desirable goal, a harmonious relationship is not automatic. All channels, especially those involving contractual arrangements, contain some degree of conflict that strains relationships and can weaken performance.

Conflict is inherent in channels because of nonparallel goals among channel members. For instance, a recreational vehicle producer chose to install a new engine in its RV's to get better fuel mileage. This alienated many dealers because their mechanics were not trained to work on these motors. An automobile producer decided to raise its prices to improve future cash flow, despite company sales being down at the time. In turn, dealers were concerned about their own cash flow problems as inventories climbed. These types of decisions strain channel relations.

Conflict also stems from competition within the channel itself. Intermediaries are often competitors with each other, putting stress on the entire system. If one service station cuts the price of its gasoline, for instance, it may raise the ire of other nearby dealers. Similarly, large intermediaries often seek to gain favorable prices or delivery schedules, which upsets smaller firms. For instance, a manufacturer found that many full-retail-price druggists removed its brand of toothpaste from their shelves because large discounters began to cut prices.

Finally, Intermediaries are usually a part of multiple channel systems. Department stores, for instance, offer several brands of furniture. Naturally conflict may develop in their relationships with a given manufacturer since they attempt to balance their efforts on the lines they carry and even attempt to play one against the other in striking better deals.

A moderate degree of conflict can actually increase a channel's effectiveness by helping to reduce apathy. But too much is counterproductive. To strike a balance, management should work on developing an equitable system of motivating and controlling an integrated channel effort, including appropriate marketing plans, intermediary training sessions, margins and allowances, quotas, delivery schedules, and other moves designed to motivate members and spell out the activities for which they are responsible. This should be done before the system is formed, so that all parties know what is expected of them and what may be done in the event of non-compliance.

Finally, management needs to make specific decisions about the number and type of other firms to include in a channel, including the number of trade areas to cover, the number of representatives in each trade area, the channel level best able to service each area, and the specific firms to include. Economic factors, along with needed marketing activities, are the primary criteria for guiding such decisions.

A major potential source of conflict between an automobile producer and its dealers is nonparallel goals among channel members. Producers in this industry are motivated to sell large numbers of cars. They prefer for dealers to stock large inventories, in order to enhance sales. Dealers, on the other hand, prefer to keep inventories to a minimum, because of their high costs. Many manufacturers prefer low prices, as a means of moving their product line. On the other hand, many dealers resist price decreases, since it reduces their margins. These and other differing goals cause considerable conflict in this industry.


Ultimately, management must decide which particular firms to include in a channel and what their tasks are to be. Ideally, they should select channel members whose strengths most closely match task requirements. This involves considering inventory policies, advertising ability, personal selling efforts, return and allowance policies, pricing practices, and the entire array of marketing activities.

For example, certain retailers have prestige images, such as the shops along Rodeo Drive in Los Angeles. If the producer selects a prestige oriented target consumer, it should include such retailers.

The selection process can be the most difficult part of channel decision making, as the most desirable intermediaries may already be committed to competitors' products. For example, a new appliance manufacturer would have extreme difficulty in getting prime retailers to handle its products because other established producers have already secured the best ones. Accordingly, management may find it necessary to accept less-than-ideal channel members.

A producer of high-quality furniture is seeking retail dealers. The optimum type of retailer probably would be furniture stores that cater to upper income consumers. Department store employees typically do not have the depth of training to do a good job of selling quality furniture. This is also true of discount stores, with the added disadvantage that their target customers are not compatible with quality furniture. Further, their image is not compatible. Appliance stores carry lines that are not congruent with quality furniture and their strategy is dominated by price dealing. Furniture stores that appeal to upscale consumers employ carefully-selected and well- trained employees that are very closely attuned to customer service. These stores offer many services needed by the furniture producer and they have a prestige image.




Channel Leadership:



Provide an answer to the question: "Should producers always be the leaders of a channel?" Then go into this section in search of answers.


An automobile producer made some marketing decisions that surprised and even dismayed some of its dealers. The firm's sales were off, yet it raised its prices by more than three percent. Most of the firm's dealers were baffled, especially since company auto sales were down by six percent from a year before. In the face of this, dealers had inventories that were 30 percent above normal.

The dealers expected the company to launch new sales incentives eventually, but probably not until inventories dropped. Then, they predicted that the firm would roll out case rebates. In the meantime, many dealers were suffering from the double crunch of large inventories and reduced sales.

Many producers would experience reduced dealer performance under such conditions. However, this producer has built up a high degree of motivation and a cooperative arrangement with dealers. Many were optimistic that the company was doing the right thing, despite the unfavorable signs. Some dealers indicated that they had accumulated large inventories to take care of the expected large surge in sales later in the year. In addition, the producer offered rebates and low-interest financing on some slow-selling models to help alleviate its inventory problems.


To this point it has been assumed that producers are the developers and prime coordinators of the channel. In a sense, producers have the ultimate decision making power because they can always decide whether they wish to produce an item or not. But short of this extreme, producers are not always the principal channel decision makers.

In each channel system there is one firm that assumes a leadership position in determining who is to perform which functions. This firm is the channel's leader or "captain"--the principal decision maker within a channel system. A product's manufacturer often fills this role, but sometimes it is an intermediary.

A producer is always the leader in a direct channel since no intermediaries are involved. The leader of a lengthier channel might instead be a wholesaler or retailer. Usually, the strongest member of a channel system emerges as its leader.

Producers tend to be the leaders when large-scale expenditures are required in the marketing, production, or technological development of a product line. Examples include industries such as soft drinks, patent medicines, and automobiles. The major factors leading to a producer channel control is that a large expenditure is required for marketing, production, or both; the items are targeted for mass markets in multiple geographic areas; and the products are likely to be highly differentiable from others within their generic product classes.

In general, intermediaries do not have the single product capabilities, sufficient capital, or sufficiently large markets to develop products requiring large scale efforts. Developing a new TV set, for instance, might cost a producer in excess of $50 million. Larger markets than those served by intermediaries are typically necessary for such an investment to be financially feasible. Since producers can distribute through numerous intermediaries, large investments become more feasible.

In some cases, producers are the leaders because they have developed a reputation in the industry, over a period of time, and the public has come to accept their brands as traditional market leaders. These brands have accumulated considerable consumer loyalty and goodwill. It would take very large expenditures on promotion for intermediaries to break the grip on the market enjoyed by these brands. Accordingly, the producer is the leader of the channel.

Producer control of a channel for cereal is likely when the product is highly differentiable from other cereals. This makes it difficult for intermediaries to develop their own brands, because the product has a strong and established image that is hard to overcome.

Producer control is also likely if a large expenditure is required for marketing the cereal, as many intermediaries do not have the resources for such expenditures. If the cereal is targeted for mass markets in multiple geographic areas, producer control is likely, since producers serve such markets, whereas most intermediaries focus on smaller and geographically concentrated markets.


An intermediary is likely to be a channel's leader when one of three factors exist. First, strong intermediaries may have to assume leadership when producers are too weak to do so. Large department store chains, for instance, are channel leaders for many of the items that they sell. By contracting with weaker manufacturers, to provide items sold under the chains' own brands, both the retailer and its affiliated producers benefit. The department stores are able to control the entire marketing effort of their products and manufacturers obtain access to large markets they would otherwise be unable to penetrate.

Second, strong intermediaries can develop leadership roles by helping to differentiate otherwise basic commodities. To illustrate, many shoppers think of cans of corn being pretty much alike despite their production origins. Reasonable quality is important in determining which brand they select, but so is price. Intermediaries can and do develop their own brands. In this case, the intermediary brand provides an assurance of reasonable quality.

Finally, when producers experience difficulty in forecasting or stimulating demand in local areas, intermediaries are in a good position to become channel leaders. This is largely the case for fashion-oriented apparel and household items. The "in" clothing in New York is different from what is found on the West coast or in Kansas City. Locally, intermediaries generally are in the best position to judge what consumers will demand in their trade areas. Accordingly, they generally assume channel leadership.

In short, whichever channel member is in the best position to absorb risk is best able to assume control. When adjusting to local conditions is critical, retailers or wholesalers are often in the best position. When a larger scale is required, producers generally assume channel leadership. It is the leader's responsibility to develop an effective channel system and to see that it functions properly. This requires making plans and strategies, monitoring the performance of the channel, motivating channel members toward overall goals, and taking remedial action when necessary.

A pasta manufacturer has found that retailers tend to be leaders for its company brands. This is likely because many consumers consider pasta to be a commodity, that is, a product class where most of the brands are physically similar. If many consumers think that the pasta produced by manufacturer A is about the same as those produced by other manufacturers, there is limited opportunity for differential advantage at the manufacturer level. Promotion expenditures used in an attempt to establish differential advantage are likely to be wasted. On the other hand, retailers can develop their own brands and build demand for them, perhaps on a low price basis or based upon perceived quality of store brands.


Channel leaders, in order to be effective, should have clear-cut objectives. The primary objectives which should be pursued are:

1. To develop an integrated and effective marketing program.

2. To develop a smooth-running channel system relatively free of inter-organizational conflict.

3. To control inventories for customer service and corporate costs.

4. To provide adequate service to customers and other channel members.

Not all channel leaders will have the same objectives, of course. And one channel leader may place more emphasis on one of the objectives and relegate others to a position of lesser priority. Nevertheless, these four objectives should be incorporated into the plans of any channel leader, in order to increase the probability of success in the marketplace.

The first objective--to develop an integrated and effective marketing program--is perhaps the most important. Leaders must see to it that all channel participants integrate their efforts with one another in such a way that all contribute to channel goals. The leader should produce an effective marketing program--one that will succeed in customer satisfaction and overcoming the efforts of rivals.

A manufacturer of sandwich, yard, and garbage bags has an objective of controlling inventories for customer service and corporate costs. This objective is important because one of the most important reasons for using intermediaries is to provide adequate yet not overly expensive inventories. Many producers are not in a financial position to provide these inventory carrying services to their customers. And many lack experience in this function. This being the case, they retain intermediaries, but they must continually monitor the work of these companies to ensure that they purse inventory policies that are compatible with the goals of the producer.


In order to accomplish their objectives, leaders must realize that all participants, including themselves, tend to adopt a comparative profit approach when determining the extent of their involvement in a particular channel. That is, the degree of support that a channel member is willing to provide is in direct proportion to the profit that it can expect by so doing. Thus, the captain should see that adequate financial incentives are available for all channel members. Beyond this, interpersonal leadership and a sound marketing program are necessary for channel member support.

Finally, some researchers propose that large firms should utilize a channel manager to coordinate channel decisions. The firm would receive benefits such as coordination and control and full time attention to the channel field. Further, this would ensure that the company affords channel decisions as much attention as decisions in areas such as product planning and advertising.

A producer of degreasers for professional and do-it-yourself mechanics is the channel captain. In order to get high involvement on the part of channel members, the producer should see to it that all channel members receive adequate profits from the channel. If they do not receive adequate profits, wholesalers and retailers will concentrate their efforts on other products and brands. Degreasers tend to be a relatively high margin offering, so it should not be difficult to arrange for adequate profits to all channel members for this product. Competition for degreasers, however, is keen and the firm will have to offer equal or better compensation to channel members as do rivals.








The Physical distribution System:



Define, in your own words, what a physical distribution system is used for. Then go into this section for further insights.


A carrier of bulk natural gas and petroleum products--a pipeline company--is one of the strongest contenders in the industry. It has assembled an impressive 37,000 mile coast-to-coast pipeline network, one of the industry's largest. Equally important is its access to the nation's fastest growing gas markets--California and Florida. When coupled with the company availability to cheap unregulated Texas natural gas, the firm is well-positioned to stave off any future competitive threats.


Many laymen equate marketing with promotional activities. They are familiar with advertising, personal selling, and sales promotion. On the other hand, physical distribution remains an unknown quantity. Yet, this is a vital aspect of marketing. Following is a list of examples illustrating physical distribution activities and providing a general idea of the nature and importance of this function:

1. A producer of electronic components for computers learns that it can reduce total transportation costs by using an airline, rather than a railroad, to move the components to customers.

2. A supermarket chain purchases a fleet of medium-duty trucks because the price is competitive, the trucks do not require extensive servicing, and the wheel turning diameter is up to 45 degrees.

3. A German steel company builds oil-storage tanks in Belgium for an American oil company.

4. A university installs off-campus branches in five cities.

5. A sporting good store decides to increase its inventory of roller blades and accessories.

Physical distribution (PD), also called logistics, is an important function that is closely related to channel management. PD refers to a broad range of activities involving the efficient and effective movement of products. PD also involves the many ways to move items, from trains to ships, from planes to pipelines.

PD itself relates to the flow of products across space and time from producers to consumers. In contrast, PD management involves the design and implementation of systems to control this flow. PD management is related to but distinct from channel management. On the one hand, channel management is concerned with who is to participate in a channel structure as well as the flow relationships between the participants. On the other hand, PD management focuses on the efficient and effective movement, storage, and handling of items.

A lumber distributor uses a PD management system. This involves the design and creation of systems to control this flow. The essence of PD management is not to be continually contending with problems as they arise. Rather, it is to set up a well-conceived and smoothly- running system in the first place and then take steps to insure that the system is operating properly. The system has a number of components, such as transportation and warehousing. These must be coordinated with each other so that they all are moving toward achievement of company goals. It is possible to set up PD management systems that achieve both high customer service and low costs.


PD management seeks to gain efficiencies in the mechanical problems of:

1. Warehousing and storing--how much inventory should be stored and where.

2. Transportation and handling--what is the best means of moving goods from one point to another.

3. Order processing--what is the most efficient and effective means of processing and placing orders.

4. Location selecting--where should warehouses, stores, inventory stocks, and other elements be located.

Historically, marketers have not granted as much attention to PD as they have to the activities of locating customers and motivating them to buy. But today this is changing. With rapidly rising transportation, storage, and handling costs, marketers are increasingly treating PD as a last frontier for gaining efficiency. PD functions historically have accounted for nearly half of a firm's total marketing costs or about 14 to 30 percent of sales. Consequently, a relatively modest improvement can bring about startling rewards.

A large wholesaler has automated and computerized systems in all 72 of its chemical warehouses. This allows the firm to streamline ordering, delivering, invoicing, and developing customer profile data. The system makes it possible for one warehouse to serve an entire region rather than only one local market.

A charity raises funds by the sale of gifts and cards through catalogs. Buyers receive both the material they order and the knowledge that they have made a contribution to the needy. The charity has utilized sophisticated computerized inventory control methodologies borrowed from industry, allowing it to cut inventory costs substantially.

Advanced computer analytic techniques showed a manufacturer of electronic equipment that an annual savings of nearly three million dollars was possible by redesigning the PD system of just one subsidiary with sales of fifty million dollars--a profit improvement of six percent of sales. To appreciate the size of this savings, consider the fact that business profits often average five to ten percent of sales. Thus, business profitability could even double if all firms could gain the same relative improvement by carefully controlling PD activities.

A physical distribution manager for a marketer of laminated plastic is likely to have control over transportation and handling, warehousing and storing, and location selecting. All of these relate to the physical movement of goods from producer to consumer. Transportation and handling involve the actual movement of the goods. Warehousing and storing have to do with the bringing together and holding of goods. Location selecting refers to the placement of physical handling facilities and stocks of goods after they have been produced.


Most people are confronted by systems throughout the day. Our bodies are dependent upon respiratory, circulatory, and other systems. We work and make purchases in an economic system. And we make governmental decisions, through elected representatives, by using a political system.

It is useful when making PD decisions to think of the function as a system. In turn, a system is an entity made up of interdependent parts that absorbs inputs and emits outputs. When one part of the system is altered, this tends to have an impact on other parts.

If, for instance, management takes steps to speed up transportation, this will affect inventory levels. If it lowers inventory levels, this can impact upon how the transportation function is carried out. Decision making in the PD area should always take the systems nature of this function into consideration.

The systems approach to physical distribution is especially useful when making decisions about various physical movement alternatives. The overriding objective is to minimize total PD costs while maintaining a desired level of service.

When making PD decisions, management should first establish the level of service that it seeks to offer customers to attract their business. Some firms define their delivery goals as "third morning delivery anywhere in the U.S." Others define their goals as a percentage of customers who should get their order in a certain number of days. Still others think of holding out-of-stock conditions down to a certain level. To customers, service takes several forms.

1. Time from order receipt to order shipment.

2. Order size and assortment restrictions.

3. Percentage of items out of stock.

4. Percentage of orders filled.

5. Percentage of orders filled accurately.

6. Percentage of orders filled within a reasonable number of days.

7. Percentage of orders that arrive in good condition.

8. Time from order placement to order delivery.

9. Ease and flexibility of order placement.

10.Consistency of delivery times.

In general, the greater the service level the higher the PD costs. Conversely, lower service levels involve smaller PD costs, but sales tend to drop as the service level falls, so management should not lower the level of service too far.

Customer service policies in physical distribution refer to accomplishments in transportation and handling, warehousing and storage, order processing, and selecting locations. Examples are to fill 90 percent of orders within 4 days, to deliver 99 percent of orders in good condition, and to not have more than 5 percent of goods out of stock. All of these policies relate to benefits that customers will receive. They do not necessarily reflect benefits to the seller, although benefits such as improved sales and profits should be derived from achievement of the customer service standards.


Determining the level of service to offer is one of the most difficult tasks in marketing. Each situation is unique. In essence, the appropriate level of service should reflect current competitors' services as well as estimated customer and competitor reactions to alternative levels of service. Even rough estimates are useful in leaning the impact of PD alternatives.

The costs of a PD system include warehousing and storage, order processing, transportation, handling, and operating the facilities in given locations. The objective is to minimize the total of these costs, while providing a desired level of service.

All of a PD system's components are interactive, meaning that management must make tradeoffs when attempting to minimize costs. Adding another warehouse means larger associated costs but could also result in a less-expensive means of shipping goods and fewer lost sales due to out-of stock conditions. Because PD should be thought of as a system, total costs and their overall implications on channel effectiveness are the important evaluative criteria, not the individual costs of any single component.

It may be cheaper to ship goods by barge than by truck, but this will increase inventory costs because barges are slower than trucks and this slow transportation is the same as tying goods up in inventory. Because PD should be thought of as a system, total costs and their overall implications on channel effectiveness are the important evaluative criteria, not the individual costs of any single component.

Using the systems approach to PD, the likely effect on a wholesaler's cost of changing from rail to air transportation is a decrease in inventory costs. The change will increase transportation costs. But it will reduce inventory costs, since the goods will be in transit for a shorter period of time. If the decrease in inventory costs more than offsets the increase in transportation costs, the change was successful. The systems approach calls for making tradeoffs of this kind.




The Components of a Physical Distribution System:



Attempt to list the major parts of the physical distribution system. Then pursue this section for details regarding the components.


Some firms experience difficulty in coping with physical distribution problems. An automobile accessory producer makes spark plugs for new automobiles, trucks, and other vehicles and replacement parts (the after-market). In recent years its physical distribution problems have increased dramatically.

After-market parts remain in stock for a long time. The Model T Ford has not been made since 1927, for instance, yet in recent years the manufacturer has produced over 17,000 Model T spark plugs. Recently the number of new spark plugs needed to keep in inventory has increased substantially because of the number of older vehicles still on the road.


The components of physical distribution that are most critical to marketing managers are inventory decisions, warehousing decisions, and transportation decisions. These are the focus of this section.

Inventories are held for two major reasons: to enable relatively even production levels over time despite sales fluctuations and to take advantage of the most economical means of transportation, which usually means bulk shipments.

If sales were always constant, say 1,000 units per day, and if transportation, ordering, and handling costs were the same per unit, regardless of the size of the batch, then maintaining inventories would be economically wasteful. Production would be set at 1,000 units per day and inventories would be eliminated.

But these costs do vary per unit, with larger quantities usually resulting in lower average ordering costs. And if sales are lost because of not having an adequate stock on hand, termed a "stock out" condition, the customer may be lost forever. Firms generally try to maintain some inventory level in reserve, called "safety stock, to enable them to meet unexpected demand. Thus, inventories facilitate sales and enable efficiencies in shipping, handling, and ordering.

Many firms produce goods until they have accumulated what is called an "optimal shipment level", which permits efficient transportation. Then they arrange for a shipment and inventory falls to zero. This process is repeated over time, permitting both even production runs and low cost transportation.

Holding inventory is costly because of:

1. The cost of capital (interest costs from tying up funds).

2. Opportunity costs (inability to use funds for other purposes).

3. Theft, spoilage, obsolescence, and breakage of items stored.

But not holding adequate inventory is also costly because of:

1. Lost sales due to stock-outs.

2. Excessive overhead caused by placing and filling small orders.

3. Not being able to take advantage of quantity discounts, both for purchases and for reduced lot size transportation rates.

Properly managing an inventory consists of attempting to minimize total inventory costs--balancing the costs of holding inventory against the costs of not holding adequate inventory. The complexities can be great. Keeping track of hundreds, even thousands of different types of items is common.

Technological advances in computers, software, and complex mathematical models have greatly expanded management's ability to manage inventories and determine optimal stock levels for even extensive product lines. The resulting cost and efficiency improvements can be remarkable. Even smaller firms can gain efficiencies through the computer software that is widely available at reasonable prices.

A furniture retailer will find that the costs of not holding adequate inventory include lost sales due to stock-outs. Some customers will come to the store, discover that the products they want are not available, and will go to other stores to buy them. Or they may change their minds and forget about buying the products. Some of these consumers may even become hostile toward the store, because it did not fulfill their needs, and not return to buy other items in the future. Further, they may voice their complaints to friends and other acquaintances, further damaging the store. It is evident that stock-outs can be very costly.


Inventory and warehousing decisions are closely related. Warehousing is the storing, housing, and handling of goods from the time they are produced to the time they are sold. Included are all activities from the time items arrive at a warehouse until they leave for shipment to customers. Warehousing is required for accumulating and storing items in assortments and breaking large quantities into smaller ones for allocation to customers at the appropriate time. Two types of decisions are needed: determining the number of warehouses and selecting their locations.

Maintaining a large number of warehouses can make very effective servicing of customers possible, especially if the warehouses are situated near clusters of customers. When inventories are located nearby, stock-out conditions are less likely to occur. Further a larger number of warehouses may reduce shipping costs, since part of an item's movement can be in large batches from the point of production toward final buyers, Conversely, a greater number of warehouses drives up inventory costs, as larger total inventories and more handling is usually required. As a result, deciding on the appropriate number of warehouses to use involves making a cost tradeoff.

Locating warehouses is another decision area. Companies have two choices when deciding where to house inventories. First they may hold an inventory at a central point in or near the firm's production facilities. Loads are then shipped to customers as orders are received. The second choice is to transport goods to storage points near customers and then reship them to fill orders.

Centrally located storage has the advantage of tying up less capital in inventory since the firm requires fewer items to be held. Random fluctuations in sales within regions tend to offset each other, thus necessitating smaller safety stocks. However, centrally located inventories may result in higher transport costs if shipments to customers are so small that the firm incurs costly transportation rates. Further, central storage may result in a longer time being required to fill orders, which can produce stock-outs and lost sales.

Regionally located inventories, on the other hand, usually permit rapid servicing of customers and efficient transportation, at least to the point of storage. But a firm's total inventory level can be substantial, resulting in large holding costs. Consequently, management's deliberations on which, if any, locations to select as storage points are based on tradeoffs between costs of central versus regional storage.

A common arrangement is to utilize regional warehouses that are located near clusters of customers. Large shipments are transported to the regional warehouses and then re-transported to individual customers. This is called "break bulk" and has two advantages to the producer. First it is less costly than direct shipment of orders to customers from a central warehouse because transportation carriers such as railroads charge lower per-unit rates for large than for small shipments. The break bulk alternative allows the producer to ship large quantities of goods at low rates to the warehouse. The shipments at higher freight rates in smaller volume units from the warehouse to customers are for short distances. This lowers total costs.

Also regional warehouses allow the producer to serve customers rapidly. Since the warehouses are located near customers, orders can be quickly transported over short distances. This can be important if customers demand quick delivery.

If a lumber mill uses a large number of warehouses to serve customers, stock-out conditions are less likely to occur than if it uses only a few warehouses. Each regional warehouse can carry an assortment of goods that fits the merchandise requirements of the area that it is assigned. If a regional warehouse runs out of inventory for a particular item, the central warehouse can ship that item to the regional warehouse, allowing it to fill in the assortment deficiency. If the company has a small number of warehouses, this is more difficult to achieve.


Transportation management is another very important component of PD. This is the administration of the physical movement of goods from point of origin to point of destination. Managers are faced with two major decisions: when to ship and what mode to use.

Should marketers send goods to customers as soon as they receive orders? Sales managers are tempted to say "Yes". They know that stock-outs can lead to lost sales and therefore seek to make rapid shipments. However, cost-oriented managers are tempted to answer: "Wait until we can assemble a large enough lot for shipment to the same destination at lower rates." They know that handling costs are smaller with large orders and that transportation rates are lower too.

A cement producer has a policy of combining orders for shipment to customers. The major advantage to the company is lower transportation costs. The company can combine orders to make larger shipments. Rail carriers charge less for carloads (normally more than 40,000pounds) than for less than carloads. The difference in the two rates is often very large--carload rates may be as small as one fifth of less than carload. Further, truck carriers have truckload and less than truckload rates. The cement producer can move the large shipments to a warehouse located near the customers and take advantage of these volume discounts that the carriers provide.


All physical distribution decisions are characterized by the necessity for cost trade-off. Thus knowing when to ship depends on the characteristics surrounding a particular firm: factors relating to its customers and the nature of the product and upon management's strategies. Management should make an attempt to minimize both direct transportation costs and lost-customer costs.

A decision must be made as to the mode of transportation to use. The major choices are railroads, motor carriers, airlines, water carriers and pipelines.

Railroads are very competitive in the movement of bulky and heavy commodities over long distances. Most shippers find that if they ship goods by truck, rather than by rail, the unit costs of transportation for smaller shipments tend to be lower. As shippers increase the load size they eventually reach a point where rail transport is less than truck rates. Shippers of such commodities as cement, bulk salt, lumber, coal, grain, and quarried rock use rail freight.

There are a number of disadvantages associated with rail shipment. It is slower than air and many truck carriers, and some railroads have spotty records for damaging goods in transit and for unreliable delivery. In addition, service is available only in those areas where tracks exist.

Motor transportation is superior to rail shipping under certain conditions. Trucks have a competitive rate advantage in conveying small shipments over short distances. They can reach areas that are not accessible to rail, such as rural sites, and can pick up goods at loading docks and transport them to receiving docks without the necessity of reloading. For short distances, trucks are faster than railroads. Damage in transit is less of a problem than it is with rail freight.

Speed is the major advantage that airlines enjoy. For many shippers, this advantage more than compensates for the high freight charges. They can achieve inventory reductions and consequent savings on warehousing costs as a result of rapid transportation. Generally, airlines have good records for minimal damage in transit. In addition, they can reach difficult-to-access areas in foreign countries.

Water carriage is a slow and low cost method of conveying heavy and bulky commodities, such as lumber and sand. One obstacle is that ice closes some passages during winter periods; shippers must transport their goods while the harbors are open or utilize other modes during the winter. Also, many destinations are not located near seaports or navigable waters.

Pipelines are very specialized carriers that move natural gas and liquid petroleum. They transport crude oil from individual wells to treatment and storage centers. From here, pipelines carry the liquids from large trunk lines to various refineries.

The pipelines are a reliable and low-cost mode of transportation that can move large quantities of liquid or gas from one location to another. Oil producers own and operate most of the larger pipelines.

Each shipper must review the advantages and disadvantages of the various modes and decide which is best for the particular firm. The nature of the product, customer needs, and the strategy of the marketer are all determinants of the optimum mode.

An automobile producer is considering the use of either rail or truck transportation of cars from the plant to dealers. An advantage of truck transportation is damage in transit is less of a problem than with rail freight. Railroads subject their freight to considerable turbulence while in transit. Railroad cars are less stable than trucks and vibrate and move about on the tracks in a manner that can damage shipments. Also the process of loading and unloading cars subjects cargo to damage. Some railroad employees have been found to be not overly concerned with damaging shipments, and this is a major problem to railroad managers.






Chapter 7

Promotion Management


Section (7.1) The Promotion Function.

Section (7.2) The Communication Process.

Section (7.3) The Promotion Mix.

Section (7.4) Overall Advertising Strategy.

Section (7.5) Specific Advertising Decisions.

Section (7.6) Personal Selling Strategy.

Section (7.7) Sales Management: Initial Steps

Section (7.8) Sales Management: Other Steps




The Communications Process:



Try to define all of the variables that are included in the process where people communicate with one another. Then go into this section to review and analyze this process.


A new development in marketing communications is the audio-visual point-of-purchase display. These use filmstrip projectors coupled with product displays to sell products. Normally, these are placed at the end of aisles. Heat sensors in the units detect the presence of people when they come within nine feet of a unit. This activates the audio-visual display. The sales gains can be dramatic. In a market test, for instance, a windshield cleaner for auto headlights enjoyed sales gains of 2,695 percent. The tests have been so positive that numerous retailers are investigating their immediate installation.


Once a company's objectives are set, management is ready to design a promotional program. When designing the program, much can be gained by keeping the findings of communications researchers in mind. A conceptual model of the communications process is:


Effective promotion begins by learning as much as is possible about the intended receivers, also called the audience, as is practical. This group is usually composed of the target market. This is not always the case, however. Sometimes the two groups differ. Saturday morning commercials for expensive toys have an intended receiver group made up of children, for instance, while the target market consists of parents.

A producer of men's dress clothing would be most successful in aiming at an audience made up of women. Women are the major purchasers of men's dress clothing. In some cases the clothing is a gift. In other cases, women do the shopping when men's clothing become outdated or worn. This pattern seems to be changing somewhat, as many women are in the labor force, and do not have time to do the shopping, but the practice still exists.


Insights into the intended audience's media consumption habits, brand preferences toward the product, and attitudes toward the company help managers in recognizing what information should be available.

It is especially important not to overlook key attitude information. Research might indicate that prospective customers are confused about certain of a product's attributes. Promotional messages can then be designed (or encoded) to overcome this difficulty. A personal computer producer, for example, discovered that numerous target consumers were intimidated by computers. Accordingly, it designed an advertising campaign framed around the machine's user-friendliness.

Communications channels are means of carrying messages to receivers. The major ones are:

1. Advertising--any paid form of non-personal promotion of ideas, goods, or services by an identified sponsor.

2. Personal selling--personal communication with one or more prospective buyers for the purpose of making sales.

3. Publicity--Non-personal promotion of a product, service, or business unit resulting from planting commercially significant news about it in a published medium or by obtaining favorable unpaid for presentations on radio or television.

4. Sales promotion--promotional activities, other than personal selling, advertising, or publicity that stimulate customer purchasing and dealer effectiveness, such as displays, packaging, demonstrations, and various non-recurring selling efforts not in the ordinary routine.

If a dairy has a limited promotion budget, one way to overcome this is to employ publicity. This type of promotion does nothave any direct costs--it is provided by the media. What is necessary is to derive news that the media will find to be interesting and to convince the media to carry the message. These efforts may require some time and expense on the part of company personnel, but they can be much less costly than the other promotion messages. Further, many consumers believe that messages about a company and its products that they hear about in the media are more credible than messages received from the other sources.


The most important aspect of developing effective messages is for management to grasp the intended audience's mental frame of reference. Audiences interpret (decode) communications from their own perspectives, based upon past experiences, needs, and interests. The problem is that managers tend to design (encode) messages from their perspectives, which are likely to differ significantly from that of the audience.

Studies indicate that perhaps 30 percent or more of all messages tend to be misinterpreted because of this problem. For example, a producer of computer software promoted one of its products as a "fluid format, personal information manager". Most people had no idea what this meant and the promotional expense was wasted.

Designing effective messages requires that management become intimately familiar with the target audience's needs, experiences, attitudes, language, and other factors. A private university, for example, recently had some difficulty in attracting good students.

A naive promotional approach probably would have involved messages telling people about the school's solid reputation, but this would have been inappropriate; the school's reputation was already known. The problem stemmed from the school's high tuition. Accordingly, the school's administration developed a program for tuition loans to be repaid by students after graduation on a scale adjusted to earnings. Promotions for this program were very effective in reversing the declines, since they focused on the key problem restricting the applications.

Ads featuring fear appeals for certain products also illustrate the point of emphasizing key perceptions. For example, breath freshener ads that ask "Will he be able to smell my breath?" focus on key social conditions and are effective as a result.

Other important message ingredients to consider are timing of the important points to be mentioned and whether or not both sides of the issue should be mentioned. Research indicates that the major points should be mentioned first when it is necessary to capture the audience's fleeting attention. Statements such as "Our store drastically cuts the price of ..." and "What if you want to improve your cash flow..." are often desirable.

Further, one sided arguments (avoiding any mention of negatives) tend to be best when the audience's attitudes are already positive. Two sided arguments, on the other hand, tend to be more effective when the message conflicts with existing conditions. To illustrate, anti-drinking ads probably would be more effective if they also acknowledged the realistic pleasures that drinkers do receive from consuming alcohol.

The most important aspect of developing effective messages by a designer of men's deodorant advertisements should be target customers' mental frame of reference. In turn, the frame of reference depends on the experiences, needs, and interests of the target audience. If the target audience consists of men who want to be attractive to women, the ads should stress that theme. On the other hand, the target audience may want to project a pleasant aroma to other people in general, and the message can portray users of the deodorant as being liked by others. It is sometimes necessary to conduct marketing research to discover the appropriate frame of reference.


Above all, the source should be perceived as credible, which means that receivers perceive it as being expert, trustworthy, and likable. The media itself can impart a degree of credibility. Favorable publicity from news columnists, for instance, offer an advantage here, and business ads appearing in highly-regarded business trade magazines connote trustworthiness. Likewise, firms located in certain countries (such as Japan) have more credibility than those headquartered in others (such as Italy).

To build credibility, companies often hire spokespersons to tell their stories. But this can be very costly, involving initial fees, with royalties to follow. Further, studies indicate that in many situations what is most important is a moderate level of credibility, not necessarily notoriety.

Consequently, some companies have avoided the use of celebrities because of the high cost. Others have been dismayed when they used celebrities to endorse their products and later discovered that the celebrities were involved in criminal or unethical behavior, with negative press coverage. A pharmaceutical company successfully uses past customers for its ads.

Finally, feedback--getting information that messages were received as intended by the audience--is important for communication to be effective. The entire communications process is laced with noise, or interference, which may lessen the message's impact, including conflicting messages by competitors, poorly selected channels, and poorly designed messages. Thus, it is important to assure that the messages were perceived by the audience as intended.

Personal communications methods are superior in this regard, because feedback can be elicited during the presentation. Accordingly, many companies provide salespeople with extensive training in listening. With non-personal communications, marketing research is needed to provide the feedback.

A magazine publisher wants to sponsor advertisements that are credible. In order to do this, the company could use a likable and expert spokesperson and a trustworthy source (such as a prestigious magazine). Basically credibility means that the message can be trusted. Research has shown that when trust is lacking, the promotion is bound to be a failure. What is interesting is that credibility demands that all three ingredients--"likeability", expertise, and trustworthy source--must be in existence. If only one or two are apparent, there may be little or no credibility.




The Promotion Mix:



Try to imagine how companies can determine the best promotion methods to use in carrying out their marketing missions. Then go into this chapter for further insights.


Department stores can achieve success through promotion in a number of ways. Some stress attractive advertisements which enhance the images of their stores. Others attempt to feature special programs, such as fashion shows, that attract publicity. Still others stress sales promotion, as through devoting considerable attention to developing attractive displays.

A department store chain in the Pacific Northwest stresses personal selling. Sales personnel are carefully selected, trained, and motivated. They are taught to pay considerable attention to customer satisfaction and the stores have developed a very good reputation among consumers in this regard. Some salespersons have even been known to make deliveries to customers on their own time. This devotion to serving the customer through personal selling has made the company very successful and prospects for the future are bright.


It is generally best to use a mix of promotional channels (called a promotion mix) to communicate messages. This is to achieve promotional synergy, where each type of promotion used complements each other.

Management makes two fundamental types of decisions when designing a promotion mix: deciding how to integrate each of the promotions (the campaign), and determining the relative emphasis to place on each medium (the mix).

A promotional program is integrated through a campaign--a unified, organized series of promotional messages which has one theme or central idea. A cereal producer, for example, used a campaign featuring "the all American breakfast" with appeals to health and vitality through a nutritious breakfast. Within a campaign, management integrates advertising, package design, point-of-purchase displays, and dealer incentives around the central theme to gain a cumulative impact.

Coordination is very important in a promotional campaign. When an automobile producer brings out a new model, numerous promotion efforts must all work together. The producer might announce the new introduction on television, hold a news conference later, follow this by television advertisements, follow this by exhibits in malls and dealerships, follow this with newspaper advertisements, etc. Some of these activities go on at the same time, while others precede or follow other events. But it is important that all of them tell the same story--carry the same theme

The appropriate duration of a campaign depends on its success and whether or not its theme becomes stale to the audience. An unduly long running time results in lost impact. A new campaign may be just the ticket for re-stimulating excitement about messages among customers, management, and dealers.

If a watch manufacturer is bringing out a new model and wants to support it with a major promotion campaign, the most important priority would be to coordinate all elements of promotion. The campaign may involve numerous advertising messages in different media, an aggressive effort by company sales representatives to convince retailers to stock the product, press releases, news conferences, coupon offers, and the like. It is essential that all of these carry the same message, for an integrated effort and that they all support one another. If they do not, the product introduction may be a failure.


Regarding the mix of promotional vehicles to use, there are five factors which are centrally important. These are the target, the budget, the competition, the product, and media cost.

The nature of the target audience is an important factor to consider in choosing particular media to use. Consumers, for instance, are widely dispersed geographically, tend to buy in modest quantities, and are quite varied in many ways. A general promotion aimed at a large number of consumers, therefore, is typically weighted heavily toward mass communication media such as TV.

A company sells plastic cleats that are screwed into the bottoms of chair legs, to protect floor surfaces and allow easy moving of the chairs. The market is national. The medium that would most likely be the most effective is sales promotion. People probably would not notice advertisements for this product. Rather, when they have the need for it, they would go to retail stores and seek it out. If the producers have good displays and packages the product will help sell itself. Advertising and personal selling would not be needed. It is doubtful that a product such as this would be able to get much publicity, as few consumers would consider it to be newsworthy.


Specialized markets such as an industry group (steel mills, for instance) tend to be localized, relatively few in number, buy in larger quantities, and tend to select suppliers on the basis of how well they can adjust their marketing mixes to meet the group's particular needs. Consequently, sales representatives may be a better choice than mass media for such a market. Thus, marketers who sell computers to industry extensively use sales representatives for their promotions. They normally are backed up by other promotion media, however.

The size of the company's budget has an effect on the composition of the promotion mix. Mass media campaigns are usually inexpensive on a per-person-contacted basis, but expensive in total. Just one minute's worth of prime-time TV, for instance, can cost up to a million dollars. (This figure is for Super Bowl coverage. The cost is more like $50,000 for normal prime time). A full page ad in a popular magazine can cost over $100,000. And many ads are usually needed, as each one only makes a limited contribution by nudging the consumer along the path of adoption. Consequently, many companies are forced to select promotional tools within their financial reach.

Companies sometimes use promotion as a principal weapon in their competitive battles. Thus, management must anticipate the promotional efforts of competitors when making its promotion decisions. But relying on promotions to offset product vulnerability is a mistake.

The analgesic industry provides an illustration. Aspirin substitutes were unheard of prior to the mid 1970's. One producer of a substitute moved into the adult market with heavy advertising expenditures and sales soared at the expense of aspirin producers, who, in turn, increased their advertising expenditures. Some of the substitute producers claimed that their products had anti-inflammatory benefits, since they contained aspirin. The courts ruled that this claim was ill-conceived, however. A more logical strategy would have been for the substitute product producers to introduce a line of aspirin--a solid rounding out policy. Thus, promotions should not be considered to be an alternative for a poor marketing strategy.

If a firm has developed a "smart" device that travels in pipelines and detects leaks, the promotion media that would be most effective in appealing to pipeline companies is personal selling. Most of the pipelines, especially the bigger ones, are owned by a few large oil companies. This is a very concentrated industry. A good strategy would be for the firm's sales representatives to make a concentrated effort to call upon the pipeline executives. They can explain how the product works, demonstrate its use with prototypes, and obtain feedback from prospects. Some advertising support for the sales force would be helpful. Trade magazines would be useful media, in this regard. Still, the thrust of the promotion effort should come from the sales force.


The characteristics of the product should be considered when developing a promotional program. Consumers carefully deliberate over expensive items before they make a purchase. Consequently, personalized messages may be very important to answer questions, arrange delivery, and handle other details. Sales personnel are important elements in the sale of refrigerators, washing machines, and clothing dryers in retail stores.

The complexity of the product is also a consideration. If lengthy messages are needed, such as for computers, print is probably a better choice than TV or radio if mass communications are used. In contrast, frequently purchased durables that are simple to understand and are aimed at large markets, such as a new deodorant, can probably be best promoted through rapid-paced mass communications such as TV or radio.

Finally, the cost of each medium should be considered when determining a promotional program. Ideally, the budget should be allocated in a way that the marginal benefit divided by the marginal cost of each is equal. In reality, this is impossible to measure. All promotional efforts interact with each other, and with other marketing mix elements, in a unique way for each company and each promotion objective. Thus, selecting a particular mix tends to be more of an art than a science.

Each channel has both strengths and weaknesses that make it advantageous to use in certain situations. Advertising and personal selling are the major means of promoting products. Accordingly, these topics are treated in greater depth in forthcoming sections.

For a travel agency that specializes in family vacations, personal selling would be the most effective channel. Most family vacations that are booked through a travel agency are relatively expensive. Consumers carefully deliberate before a commitment is made. Personalized messages can be used to answer questions, make suggestions, overcome objections, and handle other details. Many consumers feel that there is risk involved in vacations. This includes financial risk (most are expensive), psychological risk (the vacations may not be as enjoyable as expected) and even physical risk (some destinations are marked by crime and other physical dangers). Sales representatives can assist in guiding vacationers to sites where they are comfortable with respect to risk. Travel agencies are well-advised to recruit, train, and motivate a highly qualified group of agents. Their efforts can be backed up by advertising.



Overall Advertising Strategy:



Try to determine how you would go about developing an advertising strategy for a company. Then pursue this section for more insights.


Most people think of advertising as a tool that is employed by traditional marketers, such as food processors and over-the-counter drug producers. But professionals also make extensive use of this tool. A dental center, for example, launched three new offices with a quarter million dollar media blitz. The dental center, which already operated one successful office in a mall, rented space from a department store and planned to expand to additional department store facilities.

The campaign featured an animated 30 second TV advertisement, focusing on women and family members, which ran during early morning and evening time periods. The firm also used print and billboard support and direct mail to department store credit card customers. The dental centers plan to introduce still more offices in department stores in the future, backed up by large advertising campaigns.


Advertising is a very important promotion medium. In the United States, organizations spend over $120 billion annually for this activity. In general, though, companies allocate less than two percent of their sales dollars to advertising, which is a modest fraction of their total marketing costs.

Advertising is by no means a tool only for large companies. To the contrary, organizations of virtually every size use it in some way. Advertising is not a tool reserved just for business. Governmental organizations, charities, political candidates, and other nonprofits utilize this vehicle.

Marketers should set specific goals for advertising. These serve as focal points around which budgets can be formulated and also provide a means of evaluating performance. To develop realistic goals, managers are forced to critically examine what they know and what they do not know about their intended customers, how well past advertising efforts performed so that needed corrections can be made, and what types of messages are needed.

Rather than general statements, such as "increase sales", it is best if the stated advertising goals are specific about both the time involved and audience conditions. The following illustrate several possible concrete advertising goals:

· "An increase in target brand awareness from 30 to 35 percent in three months."

· "A shift in the proportion of target customers having a preference for our brand from 12 to 14 percent by Christmas."

· "A reduction from 50 to 40 percent of all target customers who do not know that our landscaping service costs less than our competitors in the same area by this coming March.

Besides attainability, an important criterion for judging the reasonableness of advertising goals is their compatibility with the company's overall promotion objective. Because one of its objectives is promoting a high-quality image for its brand, a producer of barbecue grills states "available at better stores" in its advertising.

Further, experienced marketers try to design advertising goals so that they augment other personal communication promotional efforts, especially personal selling To illustrate, a large food and other consumer products conglomerate uses advertisements to create name recognition for the parent company, making it easier for sales representatives to place the company's new products in retail stores.

"To make a large proportion of homeowners in the community aware of our liberal returns policy" is not a useful advertising goal for an appliance store. It is not sufficiently specific. It does notdelineate what is meant by "the community". Does this include just the closely-surrounding area or some larger region? Further, the goal is not quantitative. It refers to "a large proportion, but does notindicate what is meant by "large". Further, the goal does notinclude a time frame. Just when is the increased awareness supposed to materialize? These deficiencies are substantial and it is difficult to see how such a goal could provide much guidance to the managers of the store.


A useful guideline to advertising strategy is the "two-step flow of communications". This concept holds that opinion leaders in reference groups can be turned into a company's unpaid sales force. The way it works is by influencing opinion leaders through directed advertising, who in turn, talk up the products to others in their reference groups. A health and beauty products manufacturer has successfully used the two-step flow idea for a brand of shampoos by stating in its advertisements: "You tell two friends, and they'll tell two friends, and so on and so on.

At one time, marketers believed that opinion leaders would be mainly the upper class--the rich and famous financiers, bankers, executives, famous lawyers, writers of best selling books, and the like. However, research has shown that these tend not to be the opinion leaders. Rather, opinion leaders are often friends and acquaintances of the consumer--people that he or she interacts with every day. Further, opinion leaders tend to have skills that are valued by the consumer. Thus, in a group of bird-watchers, the opinion leader is likely to be the one who is most successful in sighting large numbers of rare birds.

In a group of women, the opinion leader, when it comes to matters pertaining to cooking, is likely to be the middle age woman in a group of younger people. This individual, due to her station in life, probably has more experience in cooking than most or all of her younger counterparts. Further, many young women today are very busy with their careers and have not taken the time to develop cooking skills to the extent that past generations have. They probably will appreciate the advice and assistance of someone who was brought up at a time when girls and women were highly trained by their mothers to excel in this role.


Interpersonal interaction can be stimulated in subtle ways. Firms can stimulate personal influence by:

1. Providing opinion leaders with items on attractive terms.

2. Designing advertisements to feature conversations between those readily identified as leaders (such as movie stars and sports figures) and others.

3. Developing advertising that is high in conversation value, that is, worth talking about.

Opinion leaders are typically early adopters of a product or idea. Once Identified, messages may be directed to them to get them to spread the word to the majority of adopters. Identifying opinion leaders is not a simple task, since they tend to be product specific and differ over time. Nevertheless, gaining their help through the two-step process can well be worth the effort.

After the goals have been developed, management should define the target audience. This process parallels that of defining a target market, as the members of the target market and audience are generally one and the same. Demographic and lifestyle variables are useful for this purpose. An airline, for instance, has targeted its advertising at frequent travelers, featuring comfort and prestige, to upper- income achievers--people who are upwardly mobile.

It is important to learn as much as is practical about the audience: its needs, when the needs arise, and the types of media that are most likely to reach members during need arousal. This helps to develop better messages and to select the most appropriate advertising vehicles to reach the intended audience. The goals is to send messages when the selective perceptions and exposures of audience members are "tuned in".

A bank could effectively use the two-step flow of communications concept by featuring advertisements where community business leaders are visiting with bank customers. Business leaders tend to be opinion leaders in the banking industry. Thus, consumers who are looking for a bank could be swayed by the fact that the business leaders have relationships with the bank. The advertisements could impact upon the business leaders, as they see that they are portrayed as opinion leaders and as supporters of the bank. Hence, this advertisement could be effective in influencing both business leaders and their followers.


It is necessary for the company to put together an advertising budget. There are various ways of doing this, including assigning some percentage of anticipated sales, setting an amount to create a level of parity with competitors, basing the decision upon the amount of funds available, and using the "task build-up" method. This requires examining the advertising goals and then determining how much money would be required to achieve these goals. This method is the preferred one, since it is based directly upon goal achievement through the advertising medium.

Cooperative advertising--where two or more firms combine their efforts--is an important way to stretch an advertising budget. Most cooperative advertising takes place among companies vertically related in a distribution channel. A milling company, for example, offers its retailers an incentive to advertise its towels, sheets, and bedspreads by reimbursing 50 percent of the related costs. While many consumer product companies have similar programs, their particular arrangements vary. Some reimburse 50 percent and others a different percentage. The idea is to get the entire channel supporting the promotion effort.

Besides stretching the budget, cooperative advertising offers several advantages, including favorable media rate structures for ads placed by a local firm (local retailers can place more ads for the same budget), the fact that intermediaries are more likely to aggressively support a product if they have shared in its promotional cost, and retailers are in a better position to adjust messages to coincide to local conditions and events, such as festivals, sporting events, parades, and fairs.

A toy producer is likely to benefit from cooperative advertising because retailers aggressively support its products, retailers are better positioned to adjust messages to local conditions, and retailers can place more ads with the same budget. The latter advantage requires some explanation. Advertising media, such as newspapers and radio stations, give lower rates for local than for non-local advertisers. Retailers typically qualify as local, while manufacturers who are located outside the community do not. The retailers receive a discount on their advertising, then. By engaging in cooperative advertising, non-local producers can benefit by receiving part of the discount.



Section (7.5)

Specific Advertising Decisions:



Resolve, in your own mind, how you would go about developing advertising messages. Then go through this section for insights into this process.


A large watch producer changed its strategy in an interesting way-- it developed an advertising campaign to be aired on a sports network. Even though more women than men purchase wristwatches, the company decided in favor of the sports network. Research by the company indicated that sports programming tested better than prime time network programming. The company felt that its advertising would be effective since it would be positioned next to the makers of such products as beers and razors.

The advertisements featured several of the company's new lines being worn by several attractive men and women getting dressed for evening dates. In the background there was music and the models hurried to change their sporting outfits and checked their company-brand watches frequently to keep on schedule.


Developing a message is an important part of advertising. The media to be used should be considered so that the messages fit the characteristics of the media. Billboards, for instance, require relatively simple messages. The time of year is also important, as in the case of Christmas, because the messages must be designed around the seasons. Most important is that the message should coincide with the needs of the audience.

Message development involves making decisions about an ad's three basic components:

· Theme (the overall information to be conveyed). Themes are essentially appeals the ads make to potential buyers. For instance, an exercise studio emphasizes "the best workout my body ever had"; becoming fit and having fun in the process.

· Copy (an ad's pictures, words, and symbols used to present the theme. For example, a breaded fish filet advertisements featured an intelligent and trendy woman in a grocery store, puzzling over what to buy for dinner.

· Format (the layout specifications, including specific colors used, the length of a TV or radio commercial, the space for print, type sizes, and so on). A retail drug chain uses a "bargain" format, listing large numbers of products and prices in one ad.

Creative copy and presentation are essential to effectiveness in advertising. Thus, marketers usually rely on specialists, designers and illustrators formally trained with creativity in mind to actually develop the ads. Nevertheless, management should be familiar with guidelines for generating favorable audience response so that it can evaluate the messages suggested by such experts.

The AIDA model is widely used by advertisers. The acronym stands for Attention, Interest, Desire, and Action. To be effective, advertising must first get and then hold the audience's attention. Color, loud voices, humorous lines, or something to "grab" the audience is necessary.

Using popular celebrities is another technique used to catch an audience's attention. Sometimes even the president of the company is sufficiently well-known for this purpose. In most cases however, popular sports, motion picture, and television stars are used. However, some celebrities' fees are so high that only very large advertisers can afford them.

Effective commercials must stimulate interest in both the ad and the product. Some ads stimulate interest but not in the product. Picturing a sexy man or woman, for example, might generate interest in the ad, but it would be ineffective unless it also developed interest in the product. Interest in the product can be generated by suggesting that it may assist buyers in satisfying their needs. Another way to build interest is to arouse curiosity.

Advertisements should generate desire among the audience to try the product. This can be difficult, because it requires a knowledge of the audience's motivation and needs. Desire can be built by showing how an item can satisfy these needs. U.S. Postal Service Express Mail ads describe the speed, reliability, and economy of the service. Sometimes advertisements that favorably compare the company's brand with those of competitors can be very useful in building desire.

Finally, the ultimate test of a message's effectiveness is whether or not it effects the action desired. Sales can best be stimulated by offering a need-related incentive for buying. A toothpaste offers the possibility of reducing tooth decay. A oil filter ad shows a mechanic working on an engine, stating "either pay me now [for a filter] or "pay me later" [for a major engine repair].

The AIDA model does notimply that silly or cute advertisements are necessarily effective. Rather, messages should state something desirable about a product in terms of needs, something unique or exclusive about a brand compared with close substitutes, and the statements should be believable.

A technique that can be useful for building desire for an expensive pen and pencil set is to state that the pen and pencil will last a lifetime. This states directly how the items can satisfy the needs of the purchaser or someone else who will receive the writing set as a gift. Many consumers buy pen and pencil sets because of their prestige value. An associated desire is to have items that will last for a long time, rather than losing their functional value after a short time period. Durability appeals to many buyers and those who buy expensive goods often expect that this quality will be present.


Another important step in advertising is to select media-- the communication channels. It is necessary to first decide on the types of media to employ, and then to choose specific media.

In selecting types of media, the target audience's media consumption habits and the characteristics of both the product and the message are important factors to consider. In the case of prescription drugs, physicians, acting as gatekeepers, make the product decision and therefore comprise the target audience. They rely on medical journals, information that drug companies provide about recent product tests and developments, and personal contacts with pharmaceutical reps and peers to keep them abreast of product performance. Consequently, ads appearing in medical journals and direct mail pieces are useful in influencing these gatekeepers.

Over-the-counter medical products are usually best advertised over mass media, such as TV, radio, and magazines. Billboards can also be effective in reaching some mass markets, particularly if the message is received at the time of need, such as to sell gasoline or sunscreen near recreation areas.

After determining the types of media to use, management's next task is to choose specific media vehicles, i.e., specific magazines, television programs or newspapers. In making the choice, it is useful to focus on advertising objectives, media circulation, media cost, and the type of message to be conveyed.

The objectives to be accomplished through advertising are key when evaluating specific media. If the objective is to make upper income people aware of a new luxury sports car, full page ads in magazines that target the wealthy are useful. If the objective is to get small business owners to ask for a demonstration of a new copier, an advertisement in a trade journal that caters to small business might be the best choice.

Media circulation is an important criterion. Media are chosen on the basis of whether or not their readers, viewers, or listeners comprise market targets for the product. For example, women's home magazines are logical choices for soup ads urging homemakers to use a company's tomato soup in meat loaf recipes. Likewise, NFL football telecasts are good vehicles for beer commercials.

Media companies acquire and make available data on their audiences, often categorized by income, geography, age, occupation, and sometimes ownership of durable goods. While the reported data may not be fully complete for each marketer's needs, e.g., psychographic variables may not be reported, they provide a good indication of the audience's general characteristics.

Media cost is an important criterion in choosing particular media. One measure is total cost. This is one of the reasons why smaller companies often use low-cost media, such as local radio and newspapers. Another cost factor is to consider "cost per thousand" which is calculated as follows:

Cost per thousand = Price of one message/circulation size in thousands

For example, assume that an ad would cost $10,000 and the circulation of a magazine is 50,000 people. The cost per thousand is:

Cost per thousand = $10,000/50 = $200

Calculating cost per thousand provides a quantitative way of comparing different media. But, the circulation of the medium may not be made up of target consumers. And cost per thousand does notconsider the image of the medium. A pornographic magazine, for instance, may have a large circulation, but a poor image among the general public.

Finally, the type of message to convey has an impact on the selection of media. The character of the media chosen should be compatible with the message. If management wishes to create interest and excitement in a new product, television may be useful. If the objective is to convey detailed information about a product's specifications, a print medium may be better.

If a producer of salted snacks is attempting to determine what specific advertising media to employ, it should consider media costs, media circulation, and the advertising objectives. If the producer is small, it may wish to avoid channels that are expensive in total, such as prime time television. In all probability, management will be interested in cost per thousand, since salted snacks are a mass market product. The media circulation should be considered, so that the company advertises in channels that reach the target audience. Finally, management should review the advertising objectives for the snacks and make sure that the objectives are compatible with the circulation of the media. It is unlikely, for example, that management would choose to promote the snacks in health food magazines (unless of course they have some health benefits).


An important decision step is to determine when ads should be placed. One possibility is to evenly space advertisements throughout the year. Another is to bunch them together.

If there are periodic patterns in purchasing, as where consumers buy most beer near the end of the week for weekend consumption, it is useful to advertise on or just before these heavy-buying days. In the same vein, recliner chairs are usually advertised heavily just before Father's day.

Daily consumption and purchasing patterns can have an effect on when advertisements should appear. Promotions for soup, for example, should be used during the late morning, when consumers are preparing lunch. These individuals are "set" for lunch products at this time. For most people, liquor advertisements would not be appropriate until later in the day.

A manufacturer of home exercise equipment is well advised to heavily advertise its offerings around Memorial day. It is during the spring and early summer that consumers in the United States and many foreign countries purchase exercise equipment. Summer is the time to wear shorts, swimming suits, sleeveless T shirts, and other articles of clothing that reveal the body. Many consumers decide that they should get into shape and/or lose weight around this time of year.


Forgetting rates can be important. The more rapidly the audience forgets about a brand, the more evenly spaced should the pattern be to reinforce past learning. Fast food companies follow evenly- spaced patterns to continuously remind people about their stores.

Competitor advertising patterns can be important. Ideally, the company should space ads in such a way as to help ward off attitude inroads made by competitor ads. A candy company decided to move its advertising into prime-time TV on an intermittent unevenly spaced basis to coincide with holiday buying, because its competitors were using that time and attracting large audiences.

A common practice is to use "flights" or "waves" (called pulsing) where the advertiser follows an intermittent pattern by concentrating large expenditures in a short time period followed by an absence. There are two reasons for using pulsing. First, research indicates that people retain in memory longer information that is learned rapidly than information they learn slowly. The second reason is that it is less costly. Fewer ads need to be placed to have the same impact as continuous advertising.

Many companies retain advertising agencies--specialists in preparing and placing ads. They help in designing campaigns, determining objectives, selecting and contracting with media, designing themes and appeals, and copy design.

Many agencies provide a wide range of services beyond straight advertising help. They can offer assistance in designing products, pricing them, designing packages, developing channel of distribution strategies, conducting marketing research studies, and related functions. Agencies that perform such activities have become marketing specialists or consultants. Smaller agencies may not provide all of these services, but can offer needed assistance to clients, especially in the creative area.

An important reason why a producer of bottled water might be a believer in pulsing is that individuals retain in memory longer information that is learned rapidly. Pulsing permits rapid learning because it is concentrated, rather than spread out over a period of time. When information is spread out, it is sometimes ignored. People become used to the information and tend to ignore it. If a loud clock is placed in a classroom, it may annoy many students at first. Over time, however the ticking may fade into the background, as the students become accustomed to it and ignore it. The same thing can happen with bottled water advertisements--they can just fade into the background if they are constantly presented.



Section (7.6)

Personal Selling Strategy:



Think about how you would go about selling a product of which you are reasonably familiar, if you held such a job.


One of the most successful sales representatives (measuring success by earnings) of all time was a new car salesman. He averaged two car sales per day for many years, and grew wealthy in a profession that many people are not that familiar with.

One of the major strengths of this person was his dedication to satisfying consumers. He made a major effort to find out what people wanted and then made an equally diligent effort to locate what they needed. After a consumer had made a purchase, the salesman contacted him or her to make sure that satisfaction was securely in place. If a buyer was not satisfied, the salesman did everything he could to overcome this situation, including allowing the car to be returned. This individual carried out his responsibilities in a truly professional manner. And he became a rich man in the process.


Few professions have borne the brunt of as much stereotyping as sales and few are so widely misunderstood. Some people have a negative view of the profession. This stems largely from a general confusion about salespeople and what they do.

Essentially, many sales representatives, also called "reps", are highly-trained problems solvers. They focus their efforts on identifying customer needs and on helping them solve their problems.

Most companies rely on a "sales force" for their promotion mix mainstay. This being the case, marketing managers should become very familiar with this important activity.

About seven million people are employed as salespeople in the U.S. This amounts to about 7 percent of the work force and is around 14 times as many as are employed in advertising. Personal selling expenditures generally run about 8 to 10 percent of a company's sales. Further, most firms do not reduce personal selling expenditures during economic downturns. When they must downsize, sales reps are normally among the last to go.

Some people mistakenly assume that all sales jobs and people are pretty much alike. This is far from the case. Following is a classification of sales jobs that vary according to their degree of professionalism:

1. Positions where the sales representative is primary a product deliverer (drivers of beer, milk, and fuel trucks).

2. Positions where the sales representative is basically an inside order taker (retail clerks in hardware stores).

3. Positions where the sales representative is basically an outside order taker (representatives for soap or packing house companies).

4. Positions where the sales representative builds goodwill, instead of taking orders (some computer and pharmaceutical sales reps).

5. Positions where a major emphasis is placed on technical knowledge of the product or service (sales engineers who serve as consultants to their customers).

6. Positions where creative selling of tangible products is necessary (jewelry and appliance reps).

7. Positions where creative selling of an intangible item is important (sales reps for professional business services).

As you can see, all selling jobs are not alike. Certainly, in the sphere of professionalism, they differ widely.

One of the jobs that requires a very high degree of professionalism is a stockbroker. This individual is selling an intangible. It is easier to sell a tangible product, because potential customers can see, feel, touch, and otherwise examine it. If the product is a good one it may help sell itself. This is not true for an intangible like stock. The stockbroker can sell it only through his or her own creative abilities. Sellers of intangibles must rely upon themselves to create a demand for their offerings through problem solving and analysis of customer wants. If they fail in this regard, the product will not sell itself.


It is important to realize that a sales representative is unique among the employees of a firm. To many customers, the representative is the company--the person who transforms the inanimate object--the firm--into flesh and blood; a real person who may or may not offer products that solve the customer's problems, answer complaints, quote prices, and provide other services. The sales force is also invaluable in gathering important marketing information about customers and competition. Whether or not a marketing effort is successful often depends upon the sales force's ability to satisfy customer needs.

Personal selling is a powerful weapon in a marketer's promotional arsenal. This is largely due to its flexibility--its principal characteristic. Because it uniquely involves direct feedback from customers through interaction, personal selling enables messages to be individualized for specific circumstances and potential customers.

Astute salespersons are able to "read" their audiences through questions, listen to their concerns, and monitor their gestures for nonverbal communication. This enables them to instantly adjust their presentations to the situation, which increases effectiveness.

Further, personal selling can increase the flexibility of an overall marketing mix. Salespeople often have considerable latitude in making adjustments in delivery schedules, credit terms, promotional allowances, and prices to tailor-making an offering for a prospect. In fact, salespeople are often instrumental in configuring the product itself, as where a computer salesperson presents a customized proposed package of computer hardware, software, maintenance, and support to a customer.

This flexibility means that personal selling is often far more effective in conveying messages than other promotional forms. It is not the only means used, however, as it is not always the most efficient method. While personal contacts by salespeople for industrial goods can cost companies hundreds of dollars per call, the cost of reaching target customers with mass promotion may be only a few dollars each. Thus, management must make a tradeoff of efficiency versus effectiveness when deciding how much of each type of promotion to use.

Personal selling tends to be better than other forms of promotion when certain factors exist. These are:

1. The product is relatively complex (computers) thus requiring extensive individualized information and demonstrations either for users or intermediaries.

2. The purchase represents a major commitment, such as expensive products (machinery) and those requiring substantial lifestyle or operating style changes (toupees or a new line of items for a wholesaler).

3. Advertising and other non-personal forms of communication do not efficiently convey the message, such as for unsought goods (cemetery plots), items where the marketing mix requires adjustment for unique needs (professional business services) and where prices are negotiable (construction).

4. A "pushing" strategy is adopted to get goods through the channel. With a pushing strategy the company uses sales representatives to get intermediaries to stock the product. This is the opposite of a "pulling" strategy, where the company advertises to consumers and assumes that they will demand that intermediaries stock the product.

5. Margins are relatively high and enable the cost of personal selling to be absorbed (diamonds versus candy).

6. The marketer's size is relatively small and thus does notenable efficiencies from mass communication (most industrial firms).

7. Order sizes (measured in dollars) are high, enabling the firm to cover the costs of sales calls.

8. Promotion messages must be customized for individual potential buyers.

When these conditions exist, it is likely that personal selling will be more effective than advertising, sales promotion, and publicity.

Sales representatives would be advantageous to an industrial consulting firm in a number of ways. Sales representatives have flexibility and can individualize their messages for customers. In industrial consulting this is important as the consulting needs of individual clients often vary. Salespeople have latitude in making adjustments for customers. This too is important in industrial consulting. The personalized nature of the service requires that salespeople be able to consider the specific demands of each client and to tailor-make a package of utilities that will satisfy each. Sales representatives can provide information to management. They can inform management as to the conditions in the marketplace--what customers want and what rivals are doing--so that management can make adjustments for these. Sales representatives are not necessarily efficient means of promotion. If the consulting firm wants a low cost per contact, advertising would be superior.


To make better marketing decisions, all marketing managers should be at least familiar with the orderly process that effective salespeople take in performing their jobs. The steps in the personal selling process are:

1. Pre-sale preparation

2. Prospecting

3. Planning a route

4. Sales presentation

5. Post-sale activity

Pre-sale preparation involves becoming intimately familiar with the company's (and competitor) products so that customer problems can be effectively solved by the salesperson. Company training programs and personal study of new developments by each salesperson are essential for effective performances.

Prospecting involves developing a list of names of potential customers who are most likely to purchase. The idea is to minimize wasted time calling on those who have little or no probability of purchase. This involves:

· Formulating prospect definitions--developing demographic and sometimes psychographic profiles of those who are likely to buy.

· Searching for potential accounts--developing a list of potential customers who meet the prospect characteristics definition.

· Qualifying prospects--evaluating prospects along a set of criteria to establish if they have a need for the product or service, if they have the money to make a purchase, and if they have the authority to make a purchase.

· Relating company products to prospect requirements--attempting to solve the prospect's particular problems with company products.

A producer of air compressors for use around the home and in bicycle shops is in the process of deciding how to qualify retail store prospects. The producer should consider if the retailer has the authority to make a purchase. In some retail chains purchasing decisions are not made by the retail store manager but by a central buying committee. The manager does notqualify as a good prospect. Also the producer should determine if the retailer has the money to make a purchase. The producer may have a minimum purchase quantity that the retailer cannot meet. Finally, the producer should determine if the retailer has a need for the product. Perhaps the retailer already stocks a competing brand of air compressor and has no need for this one.


The next step in selling is to establish a route to follow. Rather than wasting time aimlessly calling on prospects, effective salespeople carefully plan their calls and make appointments ahead of time to reduce wasted time.

The fourth step is the actual sales presentation itself. In all cases, the emphasis should be on solving the customer's problems. Beyond this the presentation should be structured such that the promotional message is effectively communicated.

Certain principles are useful in the presentation. The rep should attempt to be a creative problem solver for prospects. Creativity in identifying new, previously unrecognized solutions to prospects' problems is essential to successful sales effort.

Sales representatives should be committed to solving the needs of prospects. Ideally the prospect and the sales representative will work together as partners to solve the problems of the prospect.

Effective sales representatives ask questions and observe. They listen to prospects to find out about their needs. This involves asking questions and observing the customer's operations as well as his or her body language (nonverbal communications conveyed by gestures, posture, and so on). Participation is important. Getting the prospect to participate in the sales presentation is much more effective than presenting a message to a passive audience. Having the prospect try the product, such as a personal computer, is much more effective than merely describing the virtues

Salespeople should have empathy. They should be able to mentally place themselves in the place of the prospect. This helps to gain an understanding of the prospect's perspective and leads to more effective presentations.

The final step in personal selling is post-sale activity. Sales reps do not discharge their responsibilities when they take an order. A host of post-sale activities are almost always needed to assure full customer satisfaction. At the minimum, orders should be followed up to ensure that deliveries arrive on time. Other actions include making sure that proper product installation is made, that the right items are received in good condition, and that the right quantities arrive. Many of the most successful salespeople even contact customers after they have used the items for a while to make sure that they are satisfied.

If the personal selling process is done correctly, sales representatives will develop a relationship with customers over a period of time. This is essential, because repeat orders are a key to sales success. Getting one order from a prospect may not be especially profitable to the company or the rep. Repeat business, brought about through a satisfying relationship, is essential.

In order to be effective, sales representatives for a hardware wholesaler should follow certain steps. They should get prospects to participate in the presentation. Teachers have known for years that student participation assists learning. The same is true for selling.

The reps should get prospects to try, feel, hold, and talk about the product, in order to generate participation. The reps should also ask questions and observe. They should take advantage of two- way communication and allow prospects to reveal their problems and needs. Only by doing this can the reps be true problem solvers. Also the reps should develop empathy with customers. They should be able to put themselves in the shoes of prospects and imagine what their needs are and how these can be solved. Experience indicates that it is a mistake to run down rivals' products. Most prospects will perceive this as evidence of a lack of professionalism and will react negatively.




Sales Management--Initial Steps:




Try to imagine what are the major areas to consider in managing a sales force. Then pursue this section for more insights.


The sales force for a computer producer is the envy of the industry. One major reason for this is that they are so highly trained. College graduates with top grades and other accomplishments are recruited by the company. The new hires go right back to school. They are sent to a training center where they live in dorms, attend classes, and have homework. They are trained in selling, computers, and finance, so that they can be competent representatives of the company and problem solvers for customers. The training is so good that some competing companies try to recruit those who have just finished the training program.


While sales work often provides an excellent background for a person to later move into management, many managers will progress in a different direction. All managers, nonetheless, must be concerned about the effectiveness of personal selling. Perhaps more importantly, most successful managers will eventually be exposed to sales force development and training decision making, either directly or indirectly, at some point in their careers, making this activity of vital interest to all.

In developing a sales force, management decides on its size, how to recruit, and how to structure the sales force. These are the subjects of this section.

Determining the size of the sales force is an important decision for management to make. Too small a force results in sales that are too low, too large a force results in excessive costs.

Most companies use a method called the workload approach in establishing the size of the sales force. The steps are as follows:

1. Group customers into classes according to their relative value to the company. The "A,B,C" system is often used, where A customers are large and valuable prospects, B are intermediate size less valuable prospects, and C are small and are the least valued prospects.

2. Determine the call frequency per year for each class of customer. The judgment of management and of the sales force are useful here.

3. Multiply the number of accounts in each class by the call frequency to yield the firm's total annual sales force workload.

4. Determine the average number of calls that each sales rep can make. This requires considering geographic dispersion, the average time per call, waiting time, and other time-consuming factors. Usually reps can make a different number of average calls to each class.

5. Calculate the number of reps needed by dividing the annual workload by the average number of calls.


A food wholesaler uses the A,B,C system, where large accounts are designated as A, medium sized as B, and small as C. The details are as follows:

Class Number Call frequency Needed Calls Calls per rep Reps needed

A 20 50 1,000 50 20.0

B 30 20 600 70 8.5

C 40 10 400 90 4.4 ____ Total 32.9

In this case, the company needs 33 reps


Recruitment decisions are another major area of concern for sales managers. The difference between a poor or even average sales performance and a good one can be dramatic. It is estimated that less than 30 percent of all sales representatives account for over half of a typical company's sales. There is strong motivation, then, for management to recruit the best qualified people once they have determined a sales force's size.

The first step in recruiting is to determine the specific abilities that good candidates should have. Studies have indicated that important characteristics of good salespeople are ability to ask questions and stimulate answers, enthusiasm, a sense of humor, human relations leadership, optimism, and above all persistency. Selling is not a job for quitters. Most sales do not materialize until the fourth, fifth, or even later calls.

Beyond these generalities, managers need to specify factors such as education, maturity, and experience. Some technical companies require that candidates have formal schooling in technical subjects. For others, such as food processors, a degree in business administration is valuable.

A producer of kitchen and bathroom cabinets is in the process of hiring sales representatives. A critical characteristic of successful applicants should be persistency. Sales representatives may have to call on a prospect many times before they receive an order. And they may have to call on many prospects before they find some that are interested in company products. Often, prospects will say "no" to suggestions of the sales representative and he or she will have to possess the ability to react to negative responses. Many experts in selling argue that persistency is the number one ingredient to success in this field.


In determining needed characteristics, most managers consult the job description. This is a written account of the job duties and responsibilities and gives an indication of what kinds of people are needed. Another useful technique is to divide the sales force into two classes:

(A) those who are superior and

(B) those who are inferior, based on some criterion such as how often they equal or exceed their sales quotas.


Then the personal characteristics of individuals in (A) can be compared with those in (B) and differences noted. A company might discover, for instance that most of those in (A) have a degree in business administration and have strong references from previous employers, whereas most in class (B) have changed jobs frequently and have a record of excessive debt.

Obtaining applicants is the second step in recruiting. The task is often quite difficult, especially for entry-level positions, as some people feel that sales work is low in prestige. Many college graduates, for example, would rather take a 9 to 5 routine job with limited advancement potential so that they will be labeled a "junior executive".

Personal selling offers many advantages. These include considerable freedom, with each person in effect running his or her own business. Further there is often considerable turnover in sales positions, especially in low-level jobs where the compensation is modest. Consequently, many managers feel that recruiting is an ongoing continuous activity.

In large companies, personnel departments usually handle the matter of locating applicants after working with the head of sales to determine the types of people to seek. Operating management usually must get involved in the process in smaller companies. Applicants can be located in a number of ways, including newspapers, college campus interviews, and from employee references. For senior and mid- level positions many companies have a policy of hiring from within the organization. Some experts argue, however, that outside sources should also be considered. And it seems that numerous companies do look outside, as many are filling even the topmost positions from outside sources.

The next recruiting step is screening and hiring applicants. The annual turnover rates (resignations and dismissals combined) in some successful companies approach a low of 5 percent. This largely results from carefully designed, formalized means of screening and hiring applicants. Specific procedures vary but often include the use of detailed application forms, formal assessments of experience, reference checks, and formally evaluated interviews.

Some companies use psychological exams (aptitude, intelligence, and personality inventories) in the screening process. While costly to use and evaluate, some organizations are avid users of such tests because they can provide insight into a candidate's motivation. But interpreting the tests requires highly trained specialists.

A common mistake during screening is to have several persons vote, as a committee, on who should receive an offer. While several people (such as supervisors, other managers, and personnel officers) should talk to candidates, the successful candidate's immediate supervisor should be the one to decide who is hired, since the supervisor is the one who is ultimately held responsible for the department's operations.

Finally, once a candidate is selected, the company should be marketed to the person. Good candidates are likely to be attractive to other firms as well, and the effort is necessary to solidify their interest. This can be done by portraying the person's role in the company, remuneration possibilities, benefits, and other highlights.

Managers should take care in not overselling the company. An honest appraisal of what the candidate can expect is the best long-run policy. Further, follow-up procedures should be used once the candidate comes aboard, involving introducing the new person to others, making sure that all forms are properly filled out, and getting to know the new employee. Lasting impressions of a company are often formulated by employees during their first few days.

A department store manager who wants to hire high caliber sales personnel should compare the characteristics of successful and unsuccessful sales representatives. This can be done by reviewing personnel files and sales records. First the sales force is divided into two groups--the successful and the unsuccessful. The basis for this subdivision could be their sales records or their evaluations by superiors. Then, the personnel records are examined in search of characteristics that differentiate each group from the other. It could be that better sales representatives are better educated, have a better credit rating, have a better record of stable employment, and other factors. Once these characteristics have been uncovered, they can be employed for recruiting decisions.


Another critical development task involves determining the "sales force structure", which is the deployment of individuals among potential customers. Three factors are considered here: territory design, territory shape, and other structure decisions.

The simplest way of deploying a sales force is to structure it around exclusive geographical territories. Territory design requires assigning each person a particular territory to cover along with the responsibility of representing all of the company's products to every current and potential customer located in that area. Moreover, each representative is restricted to selling exclusively within an assigned territory.

This structure has several advantages. For one, it encourages the development of strong customer/representative interpersonal ties. Particular sales representatives know who their customers are and can work to build lasting relationships. Another is that it simplifies the problem of evaluating performances, as management can easily determine who is to receive credit for which sales. Finally, the structure encourages coverage of all types of customers. If sales persons were free to sell anywhere, most would concentrate their efforts in large cities and forget about prospects in smaller locations.

Territory shape is another factor to consider. Territories really represent the sum of smaller units, such as counties, which, when combined, comprise a desired sales potential or workload. Sales managers combine the smaller units after considering several factors, such as the location of natural boundaries, transportation ease between prospects, and city locations.

Companies typically try to achieve a certain geographical shape for each territory, as this can influence the cost of calling on prospects, ease of calling on them, and the sales force's overall morale. Headquartering representatives at the center of a circular territory helps to reduce wasted travel time. If reps follow a circular pattern of calling on accounts, they lose little time when backtracking to the office. Moreover, representatives are headquartered as near as possible to all customers, which helps in expediting any special trips.

A cloverleaf pattern is quite similar, because it divides the total territory into smaller circles. If the leaves are of the right size, representatives can cover each in a circular pattern in a week of travel. In a month they can cover all accounts with minimal backtracking by penetrating successive leaves each week.

Firms often employ a wedge shape in metropolitan areas too large for one sales representative to handle. Its virtue is in balancing urban, suburban, and rural accounts among all representatives in the area. But each salesperson becomes headquartered a greater distance from some accounts than with other shapes, resulting in greater wasted time in backtracking.

Finally, companies sometimes utilize a rectangular territory, especially in rural areas where highways and other travel routes tend to parallel latitudinal and longitudinal coordinates. Sales managers use this shape to conform to natural boundaries.

Other sales force structures deserve consideration. Structuring a sales force solely around geographical territories works best when a company markets a relatively narrow product mix to relatively homogeneous prospective customers. But consider a large producer that sells everything from light bulbs to electric generators to many different companies, from small retailers to large utilities. It would be impossible for a single sales rep to know much about all company products and all customer needs in one geographic area.

Whenever large differences exist between customers and/or products, it is usually best for management to structure the sales force around predominant groups of similarities, such as by customer type or major product group, or both.

There are two major disadvantages of non-geographic sales forces, however. Some travel may overlap, leading to additional costs, and two or more salespeople could call on one account for different items. If customers think of both sets of items as being parts of the same line, the structure is undesirable as it can lead to confusion and lost sales. Like other elements of the marketing mix, the appropriate sales force depends on both market and cost factors.

Sales representatives for a producer of consumer electronics products call on wholesalers. Some advantages of using geographical territories are available. It encourages the development of strong customer/ representative interpersonal ties. Representatives call on customers repeatedly over time and get to know them. The two parties develop relationships that can be invaluable to the supplier. Further, the plan simplifies the problem of evaluating performance. Since each rep is assigned to a territory, company success in that territory is attributed to the assigned salesperson. If the company does notfare well in the territory, the sales rep is held responsible. Also, geographic territories encourage coverage of all sizes of customers. Sales reps are responsible for calling on all of the prospects in their territories, not just the big ones. This means that a firm can get full market penetration in these territories.




Sales Management--Other Steps:



Think about how you believe that sales representatives should be compensated. Then go through this section for insights into this topic.


A producer of corporate jets compensates its sales force with a salary of $50,000 per year plus one percent of sales commissions. This means that a very productive sales representative can receive a total compensation package close to a third of a million dollars in a good year. Some sales representative earn amounts of approximately that much on a regular basis. Management has considered eliminating the commissions, as a cost-cutting device, and raising salaries. However, they have rejected this possibility, realizing that it could de-motivate the sales force by cutting back on their incentives.

Management's opinion is that, although this compensation plan is expensive, it works , in terms of producing sales for the company. It simply cannot afford to make a change.


An important decision area for management is determining which representatives to assign to specific territories. Most companies classify territories according to levels of importance and difficulty. Auto companies, for example, generally use the following three classes: Rural territories (comprised of small dealers with low potential sales volumes), city territories (mostly consisting of medium-sized dealers in moderately-sized towns with greater potential volumes, and metropolitan territories (made up of the largest potential volume dealers because of high population densities in their trade areas).

For all companies, each representative's experience, ability, and motivation should be the prime factors management considers when assigned specific people to specific territories. Metropolitan dealers are of the greatest importance to auto companies because of their large volume potentials. Also, these dealers face the greatest competitive pressures, justifying more calls than their smaller counterparts by the most experienced and able representatives.

Rural dealers, in contrast, usually have small potential volumes and they face less intensive competitive pressures. Moreover, travel time between them can be substantial. Thus, they provide a good training ground for new representatives. The point, of course, is that sales management should assign the best people to the most critical and difficult tasks.

A computer manufacturer should assign its more experienced and able sales representatives to the business computer market. This is a huge market and it is growing at an even pace. Competition is severe and most of the major rivals are very capable marketers with well- trained and experienced sales forces. Selling computers to this market requires a thorough knowledge of much more than computers. Successful sales representatives must have a comprehensive knowledge of business management and its opportunities and problems. This market demands sales representatives who can speak the language of business and are aware of customary patterns of negotiating and dealing with suppliers.


One of the most fundamental of the sales force development decisions relates to compensation. Essentially there are three major compensation methods; straight commission, straight salary, and a combination plan.

Under a straight commission plan, sales reps are paid a percentage of their sales volumes. The plan may be a simple one, where the percentage is applied to sales dollars, or it might be more complex, where a percentage is applied against the related contribution margin (sales less variable costs). While requiring more record keeping , the latter is generally better because it bases commissions on profits generated, not simply revenue.

Some commission plans are tied to quotas. A quota is a target that represents what the salesperson should be expected to reach, under normal circumstances. Quotas can be stated in terms of total sales, sales after returns and allowances, profit, contribution margin, and other measures of output.

The plan has several advantages. It is especially attractive to aggressive sales representatives as it rewards them for their efforts and it alleviates much of the sales force's fixed costs.

However, under this plan sales representatives may resist directives by management, such as filling out forms and developing new accounts, as time spent on these activities might negatively affect earning commissions. Also commission structures do not reward, at least in the short run, servicing accounts, such as helping with product installation. Thus, there is a real potential to slide over post-sale activities.

At the opposite extreme are straight salaries, which are fixed amounts regardless of volume. The plan offers several advantages, but most significant is that it offers management the greatest ability to direct people. Because the plan does nottie compensation to sales volume, management can easily insist that attention be placed on things like post-sale activities and developing new accounts or territories.

But, there are disadvantages with the payment scheme, especially that it does notoffer as much incentive for extra effort as does a plan involving commissions. Consequently, aggressive salespeople with high promotional ability tend to avoid such positions. Therefore, straight salary plans should be used in situations where management wishes to highly control the activities of its people and where aggressive efforts are not required. Inside order takers, for instance, are usually paid a straight salary.

A combination plan offers both a base salary and a commission or bonus on volume. The idea is to enable management to control the sales force, yet to provide incentives for good performance.

The base portion of a combination plan sometimes takes the form of a fixed monthly salary with commissions paid above some specified volume. An electronics producer, for instance, developed a plan where no bonuses are paid until a representative reaches 80 percent of quota. Above that threshold, however, the plan doubles the average bonus in the industry. Another scheme is to offer a "draw", which is something like a loan in slow periods against future commissions.

A draw works like this. A salesperson is guaranteed some fixed amount per month, say $3,000. If commissions are less than this, the sales representative can draw the difference between the guaranteed amount and the commission. In most cases this must be repaid to the company out of future commissions.

If a sales representative for a meat wholesaler has a draw of $4,000 per month, receives a commission of ten percent of sales, and sells $30,000 worth of merchandise in February, the earnings for the month will be $4,000. That is the guaranteed amount. In this case, the rep made a draw of $1,000 because the commission was only $3,000. If this individual sells $60,000 worth of merchandise in March, the earnings for the month will be $6,000 in commissions minus $1,000 (to pay back the draw for the previous month) which equals $5,000.


Three objectives are central in determining which compensation method is appropriate. It should attract and keep desired people, keep expenses under control, and help in attaining company objectives. In general, the greater the control desired over the individuals and the lower the promotional abilities they need, the greater should be the tendency to pay straight salaries. The greater the need for aggressive promotional efforts, in contrast, the more important is a commission. The most widely-used method is salary plus commission.

An important issue is the general pay level to be used. The scale should provide enough incentive to attract and retain good people, but it should also remain competitive to scale for jobs of similar importance within the company. Large companies employing highly professional people are increasingly turning to management consulting compensation specialists to periodically update their compensation packages.

Another important issue is the handling of "house accounts"-- very large customers which management, rather than a salesperson serves--usually because of the large volume. In the case of a heavy metals producer, for instance, the chairman of the board takes on some house accounts. The question is: "Should the salesperson assigned the territory be given credit for such sales?"

If a sales representative never had anything to do with the account, then logically he or she should not receive credit. But some managers convert large customers into house accounts, just to avoid paying hefty commissions. Management should avoid this practice as it is sure to alienate good salespeople. The best practice is to bring in house accounts when the company promotes, transfers, or terminates a person. Then it can design territories to treat all sales representatives equitably.

If a book wholesaler wants its sales representatives to assist bookstores in arranging displays and upgrading their inventory control systems, the best compensation system is salary. With this plan, sales representatives earn the same amount, regardless of how much they sell. They should not mind helping to service the bookstores because this interference with their selling efforts will not affect their earnings. In the case of commission, salary plus commission, and commission plus a draw this is not true, however. The sales representatives are likely to resent requirements that interfere with their sales efforts. They may simply not do these service activities, or if they do them may do so half-heatedly. Some good performers may leave the company if they perceive the requirement to be unfair.


Training is an important sales management function. At the minimum, management should make new recruits familiar with company products, policies, procedures, and important documents for reporting key information. Moreover, salespeople should receive as much information as possible about leads, prospective customer profiles, competitor activities, company plans, new products, and ways to improve presentations.

Some firms even train their customers' sales representatives. For instance, a large forklift producer provides training for established dealers sales forces to the point that they become materials handling specialists.

Generally, all sales training programs have the following objectives:

· To inform trainees about company developments.

· To explain responsibilities and procedures.

· To provide information about customers and competitor actions.

· To help improve sales presentations.

Motivating the sales force is another key management activity. Compensation is one important motivation source.

Management should extend beyond compensation to motivate people, however. Pep talks, contests, meetings to build enthusiasm, and other related techniques are all important. However, the best single way to motivate salespeople is for management to clearly and formally define exactly their expected tasks and how they will be evaluated. The design of a sales job is also a factor in motivating reps. Considerable job satisfaction is likely if salespeople feel that their jobs encompass variety and allow them autonomy.

A final sales management concern is that of evaluating the performance of the sales force. Regular evaluation enables the early identification of deviations from plans, which allows management to initiate corrective action before it is too late for remedy. It also fosters the identification of star and poor performers early, which helps to develop a better sales force in the future.

Management should spend time to regularly evaluate the individual efforts of salespeople. Formal individual reviews work best because they let people know exactly how they measure up and what the company expects of them in the future. When reviews are done frequently, such as monthly or quarterly, they help management increase their control and results. There are a number of criteria to evaluate, including:

· Sales volume.

· Number of new accounts.

· Number of service calls.

· Batting average (number of orders divided by number of sales calls).

· Percent of quota.

· Number of lost accounts.

· Number and size of orders.

· Selling expenses.

· Calls per week.

· Total sales divided by selling expenses.

Qualitative factors, such as customer relations, eagerness, attitude, and knowledge of both the product line and customer needs should be evaluated as well. Management should also consider comparisons of sales reps against company averages and also against previous- year results.

If an appliance dealer wants to take steps that will highly motivate members of the sales force, the best way to do this is to clearly and formally define exactly their expected tasks and how they will be evaluated. In order to be motivated, sales representatives need to know what kind of role the company wants them to fulfill. If they are unsure of this, feelings of role ambiguity arise. They may not know if they should represent the company or the customer, for example. Also, sales representatives should know how they will be evaluated. Everyone, whether they are in sales or in some other profession, has a desire to learn what steps will be made to measure their performance. This serves as a guideline to proper performance and helps them avoid stress which invariably accompanies ambiguity.




The Promotion Function:



Answer this question: "Why do marketers engage in promotion? Then go into this section for answers.


Many people think of advertising as a tool of big business--of expensive Super Bowl commercials, big spreads in national magazines, and full-page ads in large city newspapers. But advertising is an important tool for hundreds of thousands of small businesses.

A small music store was experiencing difficulty in maintaining sales. The owner of the store had tried upgrading the product line and improving the store interior, but these had little or no effect. She decided to mail advertisements to past customers, notifying them of their "preferred customer" status and inviting them to shop at reduced prices one afternoon a week. The campaign was a tremendous success, as numerous customers responded to the advertisement and took advantage of the offer. The store owner now uses this campaign frequently throughout the year and credits it with improving her sales far beyond her initial hopes.


Numerous companies allocate substantial resources to promotion, which is communicating with potential buyers about a product's existence and uses to stimulate sales. Many organizations engage in promotion, including both large and small businesses, political candidates, not-for-profit organizations, and even doctors and lawyers engage in some kind of promotion.

Some examples of this activity are:

1. A magazine advertisement proclaims to consumers that their cats do not really have nine lives, and that consumers should purchase the company's brand to protect the cat's health.

2. Television commercials for a mouthwash announce that the company brand lasts two times longer than competing mouthwashes.

3. A computer sales representative calls upon a committee of school board members, school principals, and the superintendent of schools of a local district. The sales representative attempts to convince them that they should purchase the company brand for their system.

4. A paint manufacturer provides its retail outlets with mailers which can be sent to customers and with displays carrying the producer's insignia.

5. An auto manufacturer executive sends a press release describing a new automobile model to various newspapers.

6. A candidate for the United States Senate makes a speech to a Women's rights group and promises that he will fight for equal opportunity in the workplace.

All promotional activities have the same general objective of changing the behavior of potential buyers--to turn them into actual buyers of a particular product, service, or idea. In its simplest form, management might promote a product by simply telling people about its existence. One example is the signs that one sees along highways that call out "Food ahead" or "Five Miles to Jim's family restaurant."

More often, however, promotional activities extend far beyond this by involving persuasion--attempting to convince people that the sponsor's product, service, or idea is better than others. For instance, through promotion, marketers can persuade some customers to believe that a brand is "favorable".

To illustrate, many studies have indicated that in blindfold tests (where people are asked their preferences when the brand names are not revealed) most consumers cannot distinguish between brands of cola, beer, turkey, cigarettes, and many other products. Yet, due to promotional themes, most consumers have decided preferences for many items. Consumers who place a high value on time tend to be brand-loyal, for instance. Presumably they have neither the time nor the inclination to experiment with different brands. Promotion campaigns help to develop and maintain such preferences.

TV ads, contests, and sweepstakes are among the many promotional techniques that can help to position a product and develop its link with needs and social acceptance. This does notmean that false promises lead to lasting marketing relationships; lasting relationships depend on delivering products which do, in fact, satisfy needs. But promotion efforts can help to bring this about.

An advertising campaign for a marketer of ski boots has the general objective of changing the behavior of target customers. This objective is very general, indicating that advertising and other forms of promotion can be used for many purposes. The advertisement, for example, may be designed to induce consumers to replace their old boots with the latest innovation. Or it may urge consumers to visit a ski shop and try on the boots. In addition, it could ask target consumers to compare the price of the boots with those of competitors. Many other behaviorally-oriented objectives are possible.


While fundamentally geared toward influencing behavior, management may have any of several secondary objectives in mind for a given promotional activity. It is important to identify these ahead of time, so that more effective promotions can be designed. While many objectives are possible, they essentially fall into one of three categories: stimulating demand, building a company image, or reinforcing past behavior.

The most widely adopted purpose for engaging in promotion is to directly stimulate the demand for a product, service, or idea. This might be accomplished through efforts to stimulate primary demand (for a generic type of item) or selective demand (for a brand).

Stimulating primary demand focuses on building the demand for a generic type of item, for example artificial sweeteners. The aim is to get people to choose the generic type over a substitute product, such as sugar. Using this focus in designing promotions makes sense in three circumstances:

1. To help build a market for a generic product that is in the early stage of its product life cycle. This strategy was used when artificial sweeteners were first introduced. Consumers were not aware of the product and its advantages, so primary demand stimulation was a good decision.

2. When the collective efforts of all competitors can be mustered together to battle against sellers of a substitute. Examples are where the beef producers or the pork producers promote their products as being superior to other meats. Associations of tourist businesses in southern states advertise in northern states during cold months to attract tourists. Trade associations, agricultural commissions, and shopping center associations often engage in this practice.

3. When the sponsoring company has a dominant market share in an industry. If this is the case, most of the benefit of the promotion will go to the dominant company. If several companies had approximately equal market shares in the industry, one company's promotion efforts would assist its competitors as much as the sponsoring company. Beef producers are willing to promote their products, as a group, rather than against each other because competition between types of meat is greater than between producers of any one type. There is only limited competition between individual beef growers because, to a large degree, beef is a commodity. Brand preference among consumers ranges from limited to none. On the other hand, there is considerable competition between types of meat, as the groups of producers attempt to convince consumers that their products taste better, are more nutritious, are more healthful, have fewer calories, and other benefits. Meats differ in many ways and differences have been created in the minds of consumers through advertising. Promotions by members of trade associations and cooperatives are common.


Most promotion activity, however, is oriented around building selective demand for a particular brand. This is especially prevalent among companies with products in the later stages of their life cycles. The focus is to stress actual or even psychologically perceived differences in brand attributes. Aspirin, for instance, is a widely- known long-used remedy for headaches and other ailments. Because significant increases in primary demand are unlikely, it makes sense for individual aspirin producers to stress their own brand in promotional messages, as they all fight for market share.

Breakfast cereal is another product in the later stage of its life cycle. To establish perceived superiority over competitors most companies point out that their brand tastes better, is healthier, stays crisp, or provides other benefits that competing products do not. The individual companies are attempting to establish differential advantage and to maintain or increase the company's share of market.

If the product is a commodity--if the physical products of all companies are basically the same (as in the case of salt) promotion may be the best tool to gain differential advantage. Most consumers cannot tell the difference between their favorite soft drink and other soft drinks in blindfold tests. Since consumers are unable to perceive physical differences, promotion may be the best way to differentiate the brand.

A producer of breakfast cereal is likely to promote selective rather than primary demand because the product is in a later stage of the product life cycle. At present, breakfast cereal is in the maturity stage of the cycle. Here, there is substantial competition among firms in the industry--each of which is fighting for market share. Since the product class has matured, there is probably no point in primary demand creation, as this would not increase total industry sales. If individual companies promoted primary demand, this would help competitors, as well as themselves. Hence, the best approach is to stimulate secondary demand.


Institutional image building is another promotion objective. Companies use promotion to improve their images. This, in turn, can assist the sponsor in attaining its objectives, such as sales, higher stock prices, better relations with public officials, and better terms from banks and other financial institutions. One firm, for example, touted its progress in developing an elliptical radial tire designed for better gas mileage. Telling people about the company's R & D leadership helped in selling other company tires. Similarly, much of the advertising a running shoe producer sponsors for its running shoes is designed to build the company quality image. Its sales representatives stress the same theme.

Promotional activities are also used to offset negative public opinions generated by pressure groups such as consumerists. Many environmentalists, for instance, have condemned tree harvesting in certain wilderness areas. In response, a lumber producer has placed ads showing how modern harvesting techniques can actually enrich both forests and animal life. An oil company sponsors institutional image building promotions in regions of the U.S. where public attitudes toward the company are negative. These promotions help to sway public support to favor a company's activities.

Finally, reinforcement is a secondary promotion objective. Memory decay causes people to forget about products over time, especially those they purchase infrequently (such as major durables) and those associated with low levels of personal involvement in the decision (such as convenience items). Promotional activities may be used to remedy this by reinforcing past learning and brand loyalty.

To illustrate, many credit unions and savings and loan associations send their members monthly or quarterly newsletters to remind them of the financial rewards made possible by making regular deposits. Similarly, an automobile producer publishes a magazine it sends monthly to past new car buyers. Featuring interesting travel articles, the publication also contains considerable narrative praise about company products. The firm reinforces past buying behavior through this medium, enhancing the likelihood of repeat purchases. Small companies sometimes sponsor local softball teams. The name of the sponsor appears on the uniforms and serves to reinforce past patronage of the company.

A food service company that wants to engage in institutional image building could stress that the firm is a sponsor of the Olympics. The objective of this message is that the company does desirable things and is a good citizen. Institutional advertisements do not focus on company products and services or their benefits to consumers. Their objective is not directly to sell goods and services. In the long run, however, institutional promotion may help sell the company's output if it generates enough goodwill among consumers. A consumer may have been exposed to this kind of promotion in the past and the message may have cut into his or her subconscious, promoting purchase of company products at a later time.









Chapter 8

Pricing Management


Section (8.1) Introduction to Pricing.

Section (8.2) Pricing and Marketing Objectives.

Section (8.3) Cost Based Strategies.

Section (8.4) Competition Based Pricing Strategies.

Section (8.5) Some Demand Based Pricing Strategies.

Section (8.6) Other Demand Based Pricing Strategies.

Section (8.7) Transportation Cost.

Section (8.8) Discounts and Product Line Pricing.



Introduction to Pricing:



Decide what you believe to be the major factors that management should consider in setting prices. Then go through this section for details on this subject.


In recent periods, American farmers have experienced considerable difficulties, not the least of which has been falling prices for many commodities. Other problems have been increasing worldwide competition for farm products, reductions in government price supports, and heavy debts.

Some farmers have escaped the low price trap by producing specialty products at a premium price. A New Yorker raises deer and sells the venison to fine restaurants in Manhattan. Other farmers are raising Muscovy ducks and European fallow deer, planting groves of Malaysian carambolas and Chinese lychees and harvesting African eggplants and Japanese cucumbers.

These farmers are cashing in on Americans' increased concern with nutrition, boredom with processed foods, and new tastes for the exotic. The prices charged for the specialty products routinely run double, or more, those of the standard fare routinely earned in agribusiness.


Pricing is one of the most important marketing decisions that management makes. Too high a price means that the product will not sell, while too low a price dictates low profits or even losses. Basically, there are three major instances when management makes pricing decisions:

1. For new products.

2. In reaction to competitor-initiated price changes.

3. When the firm itself initiates the price changes for some reason.

The field of economics has contributed heavily to price theory. It focuses mainly on the behavior of revenues and costs and management's reactions to these variables as they attempt to drive the company toward maximizing profits.

Revenues are clearly important in pricing, since they represent the cash generated to cover the costs of producing and/or selling the product or service, plus any profit. Revenues are a function of the demand for the product; customers balance the cost of acquiring a product (its price) against the anticipated benefits from owning it. Marketers must understand the relationship between price and demand, before making a decision on an item's price.

The seller's ability to set a price depends a good deal on the type of market in which the product competes. There are four types of markets: pure competition, monopolistic competition, oligopoly, and pure monopoly. Each one represents a different pricing challenge.

Under pure competition, the market is composed of many buyers and sellers who trade in a homogeneous commodity, such as wheat. No single buyer or seller is large enough to have much impact on the market's going price.

Purely competitive markets are characterized by both a high mobility of resources and a high level of information among buyers and sellers. This means that if a company's prices and profits rise over the long term, buyers readily shift to buying from less costly suppliers. Also new sellers can readily enter the market.

Sellers in these markets are price-takers, rather than price-setters. Since sellers cannot establish a differential advantage, the role of marketing strategy becomes diminished in importance. However, in most markets today, marketing strategies usually give companies, even farmers, ways of differentiating their product offerings.

Under monopolistic competition the market is composed of many buyers and sellers who transact over a range of prices rather than at a single market price. The reason for the price range is that sellers are able to differentiate their offerings to buyers through differences in style, physical distribution, or some other marketing mix element. Because of these differences, buyers will pay different prices.

Through differentiating their offerings, some of the sellers are able to earn a much higher rate of return than others. Their continued success depends on their ability to establish barriers to entry from other competitors, as through patents, advertising, developing brand loyalty, and keeping one step ahead of the others in developing new products. This makes all marketing activities more important than in pure competition.

Under oligopoly, the market consists of a few sellers who are highly sensitive to each other's pricing and other marketing strategies. The product can be homogeneous (steel, aluminum) or heterogeneous (television sets). The reason there are few sellers is that there are high barriers to entry, such as heavy capital costs, patents, and control over distribution channels. Each seller is alert to competitors' strategies and moves.

An oligopolistic company is never sure that it will gain anything permanent through a price cut. But it is also never quite sure that competitors will follow a price increase and cause a retraction. Often competition tends to be based most heavily on non-price means of differentiating products, which greatly elevates the importance of all marketing activities. Most major industries are oligopolistic today.

Under a pure monopoly there is only one seller. The firm is free to price at what the market will bear. However, they do not always charge the full price for a number of reasons, including fear of government regulation, desire not to attract competitors, and a desire to penetrate the market faster with a low price. Pure monopoly is rare today.

If an industrial lubricants wholesaler is in an oligopoly-type industry, competition is based most heavily on non-price means of differentiating products. The wholesaler is in a market that is dominated by a few sellers who are highly responsive to each other's marketing activities. If the firm reduces prices, this may set off a price war. On the other hand, if it raises prices, competitors may not follow and the wholesaler may lose revenue. These barriers to price administration are such that the best way to compete is likely to be through product, promotion, and place elements of the marketing mix.


Price elasticity is a concept that relates to how responsive demand will be to a change in price. If demand only changes a small amount when price is changed, demand is said to be "inelastic". On the other hand, if there is a sizable increase in demand when price is changed, demand is termed to be "elastic". Elasticity is calculated by the formula:

Elasticity = % Change in quantity demanded/ % change in price

If the computed elasticity is a positive number, between zero and one, demand is elastic. If it is a negative number between zero and minus one, demand is inelastic. If the elasticity equals one, this is called "unitary elasticity, where a price change brings about an equal demand change.

With elastic demand, if price decreases, demand increases by a greater percent. With an inelastic demand, demands does notincrease by a greater percent.

A good question to ask is "What determines the price elasticity of demand?" The answer is that demand is less likely to be elastic under the following conditions:

· When there are few or no substitutes or competitors, including situations involving highly segmented markets and differentiated products.

· When buyers do not readily perceive the relatively higher prices; for example if items are paid for by third parties (parents, insurance companies, and gifts).

· When buyers are loyal to certain brands and habits and are slow to search for alternatives.

· When buyers believe that the higher prices are justified by high quality products, normal inflation, and other factors.

If demand is elastic, sellers will probably consider lowering their prices to increase total revenue. This is logical so long as the costs of producing and selling additional volume do not increase disproportional. However, many of the activities of marketers are designed to segment the market and position their products in such a way as to increase the inelasticity of the demand. This

A tire dealer might consider dropping the prices of a premium brand that it stocks, in order to increase demand if buyers are readily aware of prevailing prices. If they are aware, demand is likely to be elastic. Consumers are not aware of prices in cases such as when parents buy clothing for their children and individuals buy gifts for others. Another case is for medical coverage when the bills are paid by an insurance company and the consumer is complacent about how much is paid. In other cases, however, consumers are very much aware. This may be because the items are purchased frequently or because prices are widely advertised. In the case of tires, prices are widely advertised and it is likely that many consumers are aware of the going price for premium brand tires. Thus, demand is likely to be elastic and the price cut probably is justified.


Costs are important to the pricing of a product because they set a boundary--a floor below which prices cannot fall without causing the company to suffer losses. Further, profit is simply a matter of the total revenue less the cost to produce a profit, and business is very oriented toward earning profits.

There are various types of costs that marketers consider when setting prices. "Fixed costs" (also called overhead) are those costs that do not vary in total as a company's volume changes. An example is property tax on a warehouse. "Variable costs", in contrast, do vary in total as the company's volume changes. A cereal producer has additional costs for ingredients, packaging, and transportation for every box of cereal that it produces. If the company increases its output, total variable cost will also increase.

Sometimes, for pricing purposes, management finds it useful to compute "average fixed costs". This is total fixed cost divided by the number of units of product produced. Often average fixed cost declines as the number of units produced increases. This effect can lead management to adopt marketing mix strategies designed to increase unit sales. By spreading the fixed cost over larger numbers of units, management can sometimes lower the total unit cost.

The "average variable costs" are another variable that can be employed for pricing purposes. This consists of total variable cost divided by the number of units of product produced.

For a Laundromat, electricity would be a variable cost. As more clothing is washed and dried, more electricity is used to power the machines. This is one of the major costs for most Laundromats. The monthly lease payment, depreciation on washers and dryers, and labor cost stay the same, regardless of how busy the Laundromat is.


"Total costs" are the sum of fixed plus variable costs. They too vary in total as the company's volume changes, because one of the components--variable cost--varies proportionally with volume.

"Average costs" are the total cost of a product divided by the total number of units considered. Average costs tend to decline as the number of units produced increases, at least to some point--because the overhead is spread over a larger base.

Average costs depend on long-run effects. In the relatively short- run, say up to a year or so, average costs will fall with volume produced and then perhaps increase somewhat. In the long-run, however, average costs will decline further.

There are two reasons that average costs tend to fall over the long- run as demand increases. First, "economies of scale" tend to lower costs as volume expands over the long term. This stems from being able to acquire and use more efficient plants and equipment, such as heavily automated manufacturing plants and warehousing facilities. The second reason is the "learning effect" (also called the "learning curve" effect). The more the experience, the greater is the chance that operations can be streamlined and made more efficient due to greater employee familiarity with tasks, and management's expanded experience base from which to draw in decision making.

A producer of pastas could benefit from economies of scale if it receives a volume discount from a supplier. The volume discount means that the more the producer buys, the lower the average cost. Hence, as the producer expands its volume, average costs tend to fall. Economies such as these are available only to firms that are large enough to purchase in large quantities. These economies, then, work in favor of large companies.




Pricing and Marketing Objectives:



Attempt to frame, in your own mind, the objectives that price formulators should pursue.


Auto detailing--the super cleaning of cars--began in Southern California but has spread around the country. Details clean every part of the car with an array of tools, including toothbrushes, cotton-tipped swabs, waxes, electric buffers, and vinyl cleaners.

A typical price is $125 to $150, compared to a simple car wash at a fraction of that price. And many customers have their car done twice a year. As Americans buy ever more costly cars and keep them longer, detailing helps an owner protect his investment.

Detailing has become a prestige element and even has made a mark among owners of Chevrolets and Fords. Franchises are developing rapidly, all selling their services at premium prices, and making high profits.


Before setting a price, management must decide what it wishes to accomplish with the particular product. If the target market and market position have been selected carefully, then the marketing mix strategy, including price, will be relatively straightforward. for example, auto detailers have targeted themselves at the customized, top-quality end of the car cleaning market. Accordingly, they must charge a high price to reflect their time and costs and to portray a prestige image.

If the company portrays itself as a low-price contender, actual prices should reflect this objective. Advertisements may carry the message that the firm offers low prices, but if consumers who consider the product find that the prices are not especially competitive, the promotion effect will fail. In fact, considerable consumer hostility can result when actual prices do not live up to the status promised in the advertisements.

At the same time, management may wish to pursue additional objectives. The clearer management is about its objectives, the easier it is to set a price. Several common objectives are survival, current profit maximization, market share leadership maximization, and product/ quality leadership.

Survival can be an important objective. Companies that are plagued with over-capacity, changing consumer demand patterns, or intense competition often set survival as an overriding objective. To keep the plant going and the inventories turning over, companies must set a low price in the hope that the market demand is price-elastic. Profits are less important than survival. If it turns out that demand is not elastic, this strategy will not work and the company will have to seek out other means of survival--such as creative advertising or product improvement.

In recent years an automobile producer has offered large rebate programs in order to survive. As long as their prices cover variable costs and some fixed costs they can stay in business--at least for a while. And the price incentives can provide enough momentum to bring about a recovery, once the period of slack business has been passed.

A frozen food distributor is worried about survival. The firm can survive, at least in the short run, if prices will cover variable costs and some fixed costs. Variable costs are costs that vary as the firm's volume changes. Hence, if prices can at least cover these, they are recovering extra charges of producing the units that are sold. Fixed costs are those that do not change in total as volume changes. If the food distributor can at least cover a portion of these, it may be able to survive for a time. In the long run, however, all costs must be covered for the firm to continue in existence.


Another objective is current profit maximization. Here, management will attempt to set a price that will maximize short-run profits. They estimate the demand and costs associated with alternate prices and choose the price that will generate the largest current profit, cash flow, or return on investment. This objective places emphasis on current financial performance rather than long run results.

To achieve this objective, management attempts to forecast the revenue that will result in the short run by using various prices. Then it attempts to forecast costs for the short run. The price that produces the greatest difference between revenue and cost is the profit maximizing price.

American companies have been accused of excessive reliance on this objective. In emphasizing the short run, they may be sacrificing long run profits. Many Japanese firms, in contrast, enter a market with relatively low prices. They know that they will incur losses for a time, but will be profitable in the long run.

Market share leadership is another objective. Some companies want to achieve a dominant market share. They believe that the firm owning the largest market share will enjoy the lowest costs and the highest long-run profit. Accordingly, they go after market share leadership by setting prices as low as possible.

A variation of this objective is to seek a specific market share gain, such as an increase in market share from 10 to 15 percent in one year. Management will then choose the marketing program, including price, that will accomplish this.

Market share leadership is a common objective in oligopolistic industries. These are dominated by a few firms and they are very reactive to the moves of others. Often individual companies measure their achievements by the share of market which they enjoy at any particular time. The steel and aluminum industries are characterized by heavy reliance on this objective.

A wholesaler which stocks a wide line of fabrics pursues a current profit maximization objective. A disadvantage is that it can lead to small profits in the long run. This objective encourages high prices for a product or service when lower prices are justified. High prices may cut the company's sales volume, reducing opportunities for economies of scale and the learning curve. Further, high prices may invite competition from other firms that will decide to enter the industry--they are attracted by the possibility of both short and long run profits. This objective is especially disadvantageous if demand is elastic.


Another possible objective is product/quality leadership. Some companies adopt the objective of being the quality leader in the market. They may be pursuing consumers who seek prestige. This objective normally calls for charging a high price to cover the high product quality and high cost of R & D. If the company provides extensive customer services to maintain the brand image, this cost must be recovered by price.

Sometimes high prices are assessed because consumers believe that prices and quality are closely associated. This often happens when consumers perceive that there is risk associated with the product.

The risk might be financial, as when the product is very costly. Or it might be psychological, as when consumers fear the rejection or disapproval of others if a poor product choice is made. Another type of risk is physical. Some products can be physically dangerous. Also there is time loss risk. When some products fail, we waste time, convenience, and effort getting them adjusted, repaired, or replaced. One way to help allay this fear is to "buy the best".

In order to avoid risk, some consumers pay high prices for automobiles. There is considerable risk associated with these products. They are expensive. Next to the home this is the greatest expenditure for most consumers. Also, many people do not have mechanical knowledge and experience so they have trouble evaluating the product. There is psychological risk, in that some consumers are looked down upon and are ridiculed because of the kind of car they own. There is an element of physical risk--some automobiles are safer than others. Overall, then, avoiding risk by paying a high price is a preferred strategy for some consumers.


The product/quality objective is popular among some of the best known companies and brand names in the United States and abroad. Large and powerful corporations have taken advantage of their reputation as producers of premium products. This has protected them from the efforts of other producers and of private brand intermediaries, who desire to penetrate the huge markets held by some of the major corporations. In many cases, however, these large corporations have been able to retain their market shares, primarily because of the strong brand loyalty that they have developed among consumers.

A calculator producer has pursued the product/quality objective for many years. It is a leader in introducing new features, emphasizes specially designed products to meet the needs of market segments, and prices its calculators well above others in the market. And because of this leadership, the firm's success has continued throughout the turmoil within the calculator industry, where the "bottom fell out" for other companies.

Firms that pursue the product/quality objective prefer that their prices be sold at premium prices at the retail level. It can harm their status if their products are used as "price footballs". But it is illegal for manufacturers to set retail prices--this is treated as a type of price collusion. The best that the producers can legally do is to select intermediaries who are cooperative and who do not have a track record of discounting.

There are other objectives. Prices might be set low to prevent competition from entering the market or set at the level of competition to help stabilize the market. They might be set at a level to strengthen the loyalty and support of intermediaries, or they might be set to help avoid governmental intervention.

It can be difficult to determine the pricing strategy that will assist in preventing government intervention. If the marketer sets prices too low, this may drive some competitors out of business and convince the government to bring charges of monopolizing. On the other hand, if prices are too high, government officials may investigate to determine the reason for this. It appears to many experts that the antitrust laws urge companies to compete, but not to compete too hard.

Prices might be temporarily set low to generate customer enthusiasm, or they might be set temporarily high to offset demand for items in limited supply. Further, prices might be set to help the sales of other items in the product line. Film prices, for example, could be at low levels to promote the sale of company cameras. Thus, pricing may play an important role in helping to accomplish a number of company goals at many levels.

A manufacturer of motors for washing machines follows an objective of product/quality leadership. This is likely to be reflected in setting prices high to enhance the company's prestige image. The manufacturer apparently has the objective of being, or at least as perceived as being, the quality leader in the market. This, plus the prestige element requires charging high prices. If the machines are to be promoted as prestigious, high quality and attendant high prices are necessary.



Cost Based Pricing Strategies:



Try to imagine how costs should be used to set prices. Then go into this section for insights into this issue.


A supermarket chain operating in western states has steadily outperformed rivals over the past seven years, with an annual sales growth rate exceeding 15 percent, while the industry grew at a rate of about 5 percent.

This company caught its competitors off guard when it closed a number of stores and then reopened them with a low price strategy that touched off a price war with other supermarkets. The strategy was effective. This firm had cut its costs to levels below those of rivals and was able to absorb the price decreases better than them. The result was large profit gains for the firm.


What variables should management consider when setting prices? There are several approaches adopted by marketing managers in the pricing decision making process. These can be categorized into three types: cost based, competition based, and demand based pricing strategies. This section examines the cost based strategies.

Cost based pricing strategies are those where management sets prices specifically in relation to costs--that is, heavy emphasis is not placed on factors such as demand and competition. The four major strategies in the category are markup, cost-plus, target return, and pay back period pricing.

Markup pricing is widely-used. Here companies mark up products by a fixed percentage over costs. This is a very common pricing method for intermediaries. For instance, clothing retailers traditionally apply a markup of 40 percent while confectionery wholesalers generally use a 10 percent margin.

At one time many trade associations issued books or lists of suggested markups for members of the industry. Basically, items with elastic demand had smaller percentage markups than did those with inelastic demand. However, the courts have ruled that the suggested markups were an illegal form of price collusion. Today, many intermediaries adhere to markups that are traditional in the industry. Essentially, they are emulating their competitors and this is legal under the law. Companies can imitate each other in pricing, but they cannot arrive at outright agreements.

Many producing and service marketers also use "markup pricing". To illustrate, accounting and law firms normally bill clients at a percentage over labor costs and automobile manufacturers mark up vehicles first in determining their sales prices to dealers, then again to consumers to establish a suggested retail price.

Some companies that market many different items find standard markups to be the only feasible way to set prices. Large retail firms sell thousands of different products. One soon realizes that complicated pricing methods are impractical, despite other virtues that they might have, after multiplying the difficulty of using such methods for a single product by the many items that a firm might handle. More complicated pricing methods make estimates of demand, cost, and competition and combine these estimates to produce sophisticated pricing models.

A major reason why drug stores use markup pricing is that they have a very wide product line. Markup pricing is not time consuming, in that the drug store has only to multiply the invoice cost of each product by the percentage markup. This is especially useful when the product line is large and it would be unduly time consuming to make estimates of demand, cost, and competition for each item stocked in the store. Further, retailers know that their rivals use this method and if they all adhere to standard industry markups, each company will be competitive and not price most of its items too high to be competitive or too low to return a satisfactory profit.


Intermediaries generally do not have great incentive to tinker with finding an item's optimal price through complex methods. They are content to use the markup method. With retailers, shelf space is a valuable commodity, and items that do not meet established markup-volume expectations are logical candidates to be dropped and replaced with new product offerings that meet these expectations, in an attempt to achieve the organization's overall goals.

Optical scanners at the retail level are very useful in indicating which products are and are not meeting markup-volume expectations. Scanner data enable the retailers to determine, on a daily basis if necessary, the volume of sales for each product and each product group. If a product is not contributing adequate levels of sales, it is quickly replaced.

In most industries there are customary markups. Usually these fall in a range, with more discount oriented companies at the bottom end and more prestige oriented at the upper end. Most competitors stay within these boundaries, although departures sometimes occur. Some retailers have policies of meeting any competitor's prices, which may place them below the customary markups for very competitive items.

Companies with high markups normally expect that their inventory will turn relatively slowly. They realize that they will make high profits on low volumes. Conversely, firms that employ small markups aim for high turnover, knowing that they must sell a large number of units in order to make a satisfactory return.

Furniture and jewelry stores tend to have high markups. Their inventory turnover is slow, sometimes taking 6 months or more to complete. At the other end of the scale, supermarkets and discount houses keep markups very slim and can enjoy inventory turnover rates at as low a level as two weeks. Their lifeblood is store traffic, which they must gain and retain, in order to stay profitable.

A ceramic figurine retailer may use markup pricing because items with inadequate markup/volume performance will be dropped, markup pricing is not difficult to apply, and the retailer has a large product mix. This is not one of the more sophisticated tools for determining price, however. More sophisticated methods make estimates of demand, competition, and costs and combine the estimates for developing pricing models. These methods can require considerable time and expense, however. A particular problem is estimating demand at various prices. There are both quantitative and judgmental tools for estimating demand, but these are very complex and are often subject to error.


Cost-plus is somewhat similar to markup pricing. Typically contracts involving custom construction or manufacturing work require these methods. A defense contractor, for instance, billed the federal government on a cost-plus basis for much of its work in building space capsules for the National Aeronautics and Space Administration (NASA). With this method, management does notspecify an item's price until it knows all associated costs. Then it adds on an agreed upon percentage or a fixed amount, depending on the contract, to provide a profit.

While it may not be readily apparent, cost-plus pricing is a more comprehensive technique than is markup pricing. This is because management considers demand implications when establishing profit margins to be included in the price.

Usually, cost-plus contracts result only after considerable negotiation between buyer and seller. If sellers insist on excessively high margins or overly extensive profits, they may lose contracts to competitors. Consequently, the method indirectly takes both cost and demand characteristics into consideration. Further, it provides sufficient flexibility to both buyer and seller to alter a project, as necessary, practically up to the completion date. If costs turn out to be higher than expected, or if other unanticipated events take place, the contract may be re-negotiated on the eleventh hour.

Cost-plus is common for government contracts, but it also is used for private industry. When companies have major projects which they want completed, they often negotiate with other firms on a cost-plus basis. This is especially common in large-scale contracts, involving substantial expenditures.

Some cost-plus pricing arrangements have brought negative publicity to companies. There are a number of cases where firms have billed governmental agencies at costs which far exceeded original estimates. Some of these have come to the attention of the media and, as a result, have alienated the public. Companies who are caught up in such arrangements should realize that they may lose goodwill in the eyes of the public, as a result.

A producer of newsprint might use cost-plus pricing because it is more comprehensive than markup pricing. This means that cost- plus takes demand into consideration, whereas markup does not.

The newsprint marketing executives will have to think of the effect on demand for their product when they establish the profit margin which they will include in the price. The producer will want to set the margins at a level that will provide the company with an adequate return. On the other hand, if the profit margin is perceived to be too large, the intended customer may award the contract to a rival. Executives who have experience in dealing with buyers develop insights into what profit margins they are likely to accept as reasonable. They also develop insights that allow them to predict the profit margins that rivals will seek. Their experience, then, can be invaluable in setting final prices.


Another common cost-related strategy is to set prices in an attempt to attain a desired target return on investment. This is called "target return" pricing. Here, management calculates the return on invested capital (profit divided by investment) for each price that is under consideration. In order to estimate the profit, management must have forecasts of both demand and cost at each level of price. The price that the firm will charge is the one that is estimated to produce the largest return on invested capital.

A number of firms use this method. Normally it is best for companies that do not produce large numbers of products, because the forecasts needed to perform the calculations require considerable time and effort and this would be prohibitive if numerous products were involved. Further, large companies use the method more extensively than do their smaller counterparts. Small companies normally do not have the skilled specialists needed to make forecasts of demand and costs.

Pay back period pricing requires calculating the price that will enable the firm to cover all costs and capital investment for an item within a specified time period, such as five years. Management calculates the total investment required for the product. Then it estimates the costs and revenues that would result for each price. This makes it possible to determine when the company would be able to cover all costs and capital investment. Those prices producing a longer pay back than management desires are rejected. It is expected that management will select the price producing the shortest pay back.

Target return and pay back period pricing methods can yield identical prices because the approaches are quite similar. They are also subject to similar criticisms. However, pay back period pricing is especially useful in dynamic industries where substantial environmental change is common. This is true within several industries, including high tech and consumer packaged goods--industries where it is difficult to accurately forecast returns for new products. Rapid change injects uncertainty into decision making and this approach forces management to realize the need to recover all costs in a relatively short period of time.

To illustrate, electronic digital watches have experienced dramatic technological breakthroughs over the past decade, which means that related investments tend to be very short-lived. In order to earn a profit, companies foresee the need to recover all developmental costs within a reasonably short period of time before being confronted with some new breakthrough by competitors.

A small hair salon probably would not use return on investment pricing because it does nothave the technical expertise needed to forecast demand and cost. In order to employ this technique, management needs accurate estimates of future revenues and costs.

Costs may not be difficult to forecast, but this is not the case for revenues. And it is necessary to have an estimate of revenue for every price that is being considered. Experts in this field use quantitative methods, such as regression analysis (which uses the historical behavior of one variable to predict the behavior of another variable), computer simulation, surveys, and test markets. The skills required to employ these methods are normally not under the command of small hair salons, where management is more likely to have skill in treating hair than in forecasting.




Competition Based Pricing Strategies:



Think about how marketers might evaluate their competition when they set their prices. Then go into this section to expand your conceptualization of the impact of competition.


In the automobile industry, manufacturers tend to pay close attention to the behavior of their competitors when they set prices. Often, price leadership is apparent, where one company (usually one of the larger ones) raises or lowers prices and this is followed by similar behavior by other firms.

Price leadership is not automatic, however. Sometimes a company will raise its price, expecting others to quickly follow suit. If this does nothappen, the intended leader may be forced to roll back the increase or make some other compensation, such as granting rebates or lowering interest rates.

In some industries, price leadership behavior is popular among members of the industry. They know that if everyone follows the leader this will reduce their risk, because they do not have to guess as to what the others will do. There is always an element of doubt, however--if price leadership breaks down, industry prices may take unexpected and abrupt changes.


Competitor prices play a dominant role in influencing the pricing practices of some firms. Generally, the less differentiated items are within an industry, the greater is the need to determine prices in relation to those of competitors. Thus, as personal computers have become increasingly standardized, price has become a strong weapon and cutthroat competition has forced some into bankruptcy or near bankruptcy. At an extreme, the lack of differentiation forces firms to adopt prevailing market prices.

Probably no industry completely satisfies the conditions of perfect competition. But some closely approximate this condition. Consider the wheat industry. With some minor exceptions, the wheat produced by one farmer is essentially the same as that produced by another. The product is undifferentiated. No farm would raise its price above the market level, because no-one would buy the wheat. And there is no incentive to sell at a price below the market level, because that would only lower profits.

But often there are some differentiation possibilities, such as through delivery schedules, location, or some other variation in the marketing mix. The greater the differentiation, the more a firm is able to price independently from competitors. Nevertheless, many companies try to avoid price wars, if possible, by at least keeping their prices generally in line with competitors. Manufacturers of personal computers have enjoyed little success in this regard, as price competition is severe in that industry.

If a marketer wants to differentiate its offering, but the product is a standardized commodity, there are ways to change the situation. One is to deliver faster or on a more reliable basis than competitors. This may be especially useful in appealing to customers who employ just-in-time inventory strategies. The package can differentiate the product. Producers of bottled water use this technique extensively.

Promotion can be an effective device for convincing consumers that the company's product is superior to those of other firms. The promotion can create a brand image that develops meaning in the minds of consumers and leads to their loyalty.

Retail firms have a number of opportunities to differentiate themselves. They can locate in sites that are convenient to large numbers of consumers, such as near offices and factories. Their personnel can be more knowledgeable or more helpful than competitors' employees. Their stores can be more attractive, cleaner, or more convenient.

In order to differentiate itself from competitors and thereby obtain price independence, a lumber hard could hire salespersons who have experience as a professional or do-it-yourself carpenter, train salespersons in how to apply the marketing concept, or use piped in music to create a pleasant atmosphere. If consumers tend to feel that all lumber yards are boring one-and-the-same units, these steps may be valuable in creating an image of being different.

Unfortunately, many lumber yards are still dominated by the production concept and do not take steps to differentiate themselves in the mind of the consumer. They are forced to price at market levels, since they have not given consumers any reason to pay higher prices. And if they price below market level they run the risk of starting a price war.


The most common competition-based pricing method is that of adjusting a firm's price to reflect existing or anticipated competitor prices. In the largely undifferentiated aluminum market, for example, some of the larger firms constantly try to maintain their prices on a par with other companies in the industry, including foreign rivals. Provided that all competitors have similar cost structures, this practice may result in an acceptable profit for all. Common prices tend to favor large companies, since they are generally better able to take advantage of economies of scale. Thus, common prices often give companies an added potential for substantial profits.

Common prices are frequently found in oligopolistic industries. Most companies prefer not to lower prices, at least not substantially, because this would set off a price war. Some firms, especially if they are price leaders, raise prices from time to time. They know that if rivals fail to raise their prices, the firm may suffer loss of market share. On the other hand they may feel (based on past experience and judgment) that if they raise their prices others will follow. This has been the general pattern in the automobile industry for many years.

Precisely where management should price an item in relation to competitive products depends upon the firm's overall marketing strategy. Some upscale ice cream producers price their ice cream at a high level to signify quality and prestige image. Some mass merchandiser retailers price lower than competitors, as reduced services and lower prices are part of their marketing strategies. Similarly, several airlines have pursued no-strings, low fare strategies.

Many managers have the philosophy that if their company offers superior product quality, services, reputation, and brand loyalty, premium prices can be justified. If they have high prices but fail to delivery acceptable levels of utility, however, they will not be competitive in the marketplace.

In the steel industry, large companies would prefer to have all producers charge common prices. Large firms are best able to take advantage of economies of scale. If all firms charge similar prices, the large firms can sell substantial volumes of steel without cutting their prices. This protects their profit margin. Further, if they had to cut prices to attain economies of scale, this might set off price wars in the industry that would damage all companies. If the price wars damage small companies more than they do large, the federal government is likely to step in with charges of monopolizing or unfair methods of competition. Large firms, for obvious reasons, want to avoid these consequences.


Regardless of the pricing strategy used, management should maintain some flexibility in its pricing structure to enable reaction to competition. If rivals such as discounters continually reduce their prices and carve away portions of the market, a company may have to change its strategy, at least for a time. No pricing structure should be so rigid that it is impossible to change.

Small firms tend to be more flexible in their pricing than do their larger counterparts. This is largely due to the bureaucratic nature of large firms where change can take place only after considerable study and completion of bureaucratic procedures, such as processing documents. Smaller companies do not suffer under this burden, however. The owner of a pet shop can change his prices tomorrow, if necessary.

Whenever demand is highly price-sensitive, competitors discount willingly, and customers are aggressive bargains, there is a need to be flexible in pricing to permit price adjustments in response to competitive pressures. The management of an airline once found it necessary to slash its prices by up to 70 percent in more than 2,400 markets because of tight fare competition from discount airlines.

One way to retain flexibility in pricing is to involve sales representatives in any price changing decision making. These individuals are often in a good position to judge when adjustments in prices are needed to obtain orders. Of course, management must use discretion in evaluating the inputs of sales representatives in these decisions, as they are inherently motivated to lower prices to push volume.

Some companies utilize selling agents (wholesalers). These agents have the authority to set prices and terms of sale of the items that they handle. Many are willing to change prices when circumstances dictate. They are generally more familiar than is the producing company with the markets they serve and the need to alter prices in accordance with changes in the environment.

There is a need for a producer of machine tools to be flexible in pricing when customers are aggressive bargains. In some industries, especially machine tools, buyers conduct extensive negotiations with vendors before they make purchases. The buyers sometimes play one vendor off versus another, getting a concession from one and then trying to get a better one from another. This makes it very important to be in a position to alter prices, as the situation dictates. A number of companies grant to sales representatives the authority to negotiate over price. Buyers like dealing with a sales representative who has this authority. Many dislike arrangements where sales reps receive offers from buyers and then have to clear any agreements with management. Many industrial goods markets follow this pattern.


Government, custom machinery and equipment, and building construction purchasers often require interested sellers to competitively bid on a contract. These bids are formal proposals made to the buying organizations and stating a specific price, terms of sale, product specifications, and other important characteristics of the product offering.

Sometimes buyers insist that bidders submit their bids in a sealed envelope, called a "sealed bid", so that competitors remain unaware of the prices and terms of sale proposed by each other. Under this practice, the lowest bidder generally receives the contract, although the buyer often evaluates other aspects of a proposal, such as the buyer's ability to deliver, reputation, and factors other than price alone.

The competitive bidding process poses difficult decision choices for a bidder. On the one hand, bidders would like to propose high prices. On the other hand, the higher the price, the greater is the chance that competitors will bid lower, meaning that the contract will be lost. Several quantitative analysis techniques have proven useful in helping managers assess these probabilities and potentials for profits in bidding.

Most important to continued success, however, is past experience in bidding against competitors and understanding both their cost structures and pricing practices. Experience provides a manager with A "gut feeling" of how badly competitors want a contract and, consequently, what prices they are likely to propose.

Governmental procurement agencies forbid collusion among bidders. Further, collusion is prohibited by federal and state antitrust laws. There is temptation for vendors to get together and fix bids. One vendor would bid low for one project and another vendor for another. This would reduce competition and help each one get its "fair share". Despite the regulations which prohibit it, collusion still exists, especially in particular industries, such as construction. Regulatory authorities do not have the resources to detect every occurrence of this violation of the law.

A competitor for governmental work is bidding for a contract. An important area that the firm should gather information on, as input to the bid is competitors' cost structures. This information usually is not readily available, but can be estimated. The company can begin by analyzing its own costs. Then it can compare the factors that produce costs, such as size of the work force, wage scale, quality and quantity of fixed assets, suppliers, and other factors to estimate the costs of rivals. These may not be exact but do reveal something about these costs. With experience, management can forecast what profit levels rivals want. If it is possible to estimate costs, then, price forecasts can be developed.




Some Demand Based Pricing Strategies:



Think about how companies should include demand estimates when they set price. Then go into this section for an introduction to the usage of these estimates.


Historically an overlooked market, auto manufacturers had a virtual monopoly for years in the after-market for parts. Producing and supplying replacement fenders, hoods, bumpers, and other parts was one of the most profitable portions of the business. Body shops were happy to go along with the high prices charged by the companies, as they marked up the inflated parts and generated high profits for themselves. Only insurance companies (who were left to pay the bill) and consumers (who paid high insurance premiums as a result) suffered in the process.

Offshore manufacturers (most in Asia) began to produce several of the most commonly-used replacement parts as early as the early 1980's. A large car insurer commissioned a company to develop a computerized repair estimating and parts locating system from a customized data base. The system enabled the insurance company to make their claims estimates using the "gypsy" parts sold by the copycat companies.

There were complaints about the quality of the replacement parts by the auto manufacturers, body shops, and some customers. But the monopoly by the auto manufacturers was broken. The prices of many parts went down in several years, by as much as half.


Management is wise to consider all aspects of demand when making pricing decisions. As is illustrated in the auto parts manufacturing after-market example, inattention to demand can result in major losses of profit and market share. This section looks at price perceptions and price discrimination and skimming strategies.

Price perceptions are an important phenomenon for management to consider. In reality, consumers' perceptions of the appropriateness of a particular price, rather than the actual price level, are what is important in considering demand. A retail drug store, for instance, has a low-price reputation. This firm uses newspaper advertising that frequently mentions the discounts and bargains available. The interior of the store is very cluttered and disorganized. In addition, the salespersons are very difficult to find.

In fact, this store charges prices that are no lower than others in the same market area. Yet consumers believe that they are lower. The store manager might err if she tried to improve the appearance of the store and hire better salespersons. Many bargain-hunting consumers would interpret these moves as signifying that the retailer is no longer a low-price outlet.

Marketing managers, then, should study the perceptions of consumers regarding prices and not the actual prices. To do otherwise is to ignore the very important role of demand.

An important demand-related pricing strategy is price discrimination. Price discrimination exists when a marketer charges different prices for items of the same kind and grade to different buyers. The discount fare structures for advance purchases of major airlines are examples of price discrimination.

This method is generally illegal under the provisions of federal price discrimination laws for the sale of goods (not services) to different members at the same level of distribution channels, unless the firm can raise one of the legally prescribed defenses. However, this law does notprohibit price discrimination involving consumers.

Further, foreign markets sometimes present an opportunity to charge different prices to channel members, although an increasing number of countries have passed "anti-dumping, laws that prohibit the selling of excess inventories in foreign markets at lower-than-normal prices. The United States has such a regulation in effect against Japanese cars.

It would not be wise for a bicycle manufacturer to discriminate in the prices charged to retailers when it sells in foreign countries with anti-dumping laws. These laws prohibit selling excess inventories in foreign markets at lower-than-normal prices. Many foreign countries do not like the idea of serving as depositories of goods that foreign producers want to dispose of at depressed prices. They feel that such practices harm producers (in this case, of bicycles) who are headquartered in the foreign country. Often companies are willing to get rid of excess inventory at very low prices because the only alternative is to destroy it or give it away. And foreign markets are appealing because of the price discrimination laws in effect in the United States.


By pricing to meet the demand of each individual buyer, a seller can realize a high average price and total profit. For example, prices for most durables such as automobiles, furniture, and major appliances as listed by retail stores are typically negotiable. Further, industrial goods marketing, especially for large purchases on items such as plant and equipment, involves extended price negotiations. This practice enables sellers to increase their overall profits in the process.

Some buyers are willing to pay high prices (their demand is inelastic). Others are willing to buy only at lower prices (elastic demand). In some regions of the country, for example, competition may be less severe than others and demand may be more inelastic. In the case of stylized clothing, for instance, demand on the west and east coasts tends to be more elastic than it is in the interior of the country, because competition is much more severe on the coasts.

There are major differences in demand elasticity's for gasoline. Gasoline stations and convenience stores located just off major freeways often charge high prices for gasoline. They know that travelers--both business and tourist--leave the highway and look for a convenient source of gasoline. They probably will stop at the first service station they see, provided that it appears to be reasonably clean and well-kept. They ordinarily will pay whatever price is posted, rather than taking the time and effort to drive to other areas in search of lower prices. Their demand tends to be inelastic.

In contrast, gasoline stations and convenience stores located away from the highways primarily serve local residents. Marketers know that these individuals will shop around for gasoline. If one station posts a lower price than others, many consumers will purchase there. Demand is elastic in this case and prices tend to be relatively low. In short, price discrimination in this industry has a rationale.

How much will a price discriminating marketer be willing to reduce prices in sectors where demand is elastic? In most cases, each item's average cost plus some minimally acceptable unit profit serves as a floor below which the seller is very reluctant or unwilling to sell.

A paint wholesaler might decide to discriminate in price if customers in different markets differ in their brand loyalty toward company brands. The markets in which their loyalty is high will have a lower elasticity than those in which loyalty is weak. This would justify a higher price in the first market than in the second. If the extent of competition does notdiffer between the markets, buyers in all of the markets do not readily perceive prices to be high, and if buyers in all markets believe that higher prices are justified by inflation, the elasticity would be similar from one market to another, and price discrimination might not be justified.


In effect, the objective of price discrimination is to turn consumer surplus into profit for the firm. "Consumer surplus" is the term used to describe the "net savings, that people would accrue by not having to pay the amount they would be willing to pay for an item. It reflects a value to consumers--somewhat like an unexpected gift.

To illustrate, under "normal" circumstances, such as if there were pure competition, the price that people would have to pay would equal average cost plus the prevailing margin in the industry. This is called the "equilibrium price", because it is where the quantity that buyers are willing to buy equals the amount that sellers are willing to pay. Consumers would like to obtain a lower price, but marketers are not interested. Marketers would not hesitate to charge higher prices, were it not for the fact that consumers would simply patronize another company.

Some of the buyers would be willing to pay a higher price for the item but do not have to because the market price is lower. The net "savings" for these buyers is called consumer surplus. Thus, under price discrimination, management adjusts its prices to turn this surplus into profits. It earns extra profits because at lower prices more consumers will buy the product and some of those who already buy it will purchase larger quantities.

A major problem with price discrimination is that it requires extensive control and the ability to "feel out" a buyer's demand through negotiation. Consequently, a price discrimination strategy makes most sense in situations involving substantial personal selling effort and where negotiation is the norm. So long as the lowest price covers the firm's average costs plus an acceptable profit margin, it can result in higher overall profits than if all customers paid identical prices.

Firms that discriminate need to take steps to see that the markets are insulated. This means concealing the fact that some buyers pay a higher price than others. If a sporting goods company sells an exercise machine through retail stores at a high price to reach one market segment and through the mail at a lower price to reach another segment, there is always the danger that the retail buyers will discover that they are paying a premium price for an identical product. If a department store sells products in a "bargain basement" at a lower price than it sells the same items upstairs, some upstairs consumers are likely to find out about this and tell their friends what is happening and the price discrimination strategy will not only fail but will create hostility among some customers.

If a home appliance dealer wants to sell its coffee-maker at a higher price in department than it does in discount stores, it can insulate the market by advertising to the two segments in different media. This will not fully insulate the markets, of course, but it should help. Research can be conducted to discover the media viewing habits of each market segment and what qualities they want in a coffee pot. Then media can be chosen based on the research, with different appeals for each set of target customers. If the research and advertising effort are well-conceived and implemented, only one group of target customers will receive each of the sets of advertisements.


Skimming is another strategy designed to turn consumer surplus into profits. In this case, management initially establishes high prices for a new product or service and directs it to market segments with relatively inelastic demand. As these high-price segments become saturated, the firm lowers its price to capture additional customers. Successive rounds of price cuts follow until further reductions appear unprofitable.

A telephone company provides a classic example of skimming. The firm charges a significant premium rate for new items it offers customers, such as extra-long telephone cords, color phones, caller identification, and new types of phones. After it satisfies initial demand, the company reduces an item's premium rate to attract additional customers. To bring in still more customers, it lowers prices still further so that any premium is essentially nominal.

There are two major problems with skimming:

· Initial high prices raise the temptation for competitors to market similar items, but at lower prices, resulting in low long-run profits for all. An example is the initial high price charged for cordless telephones, which led to intensive competition, falling prices, and eventual poor profit positions for the remaining competitors.

· Cutting prices too often might signal to buyers that something is wrong with the product or the company.

Therefore, a skimming strategy makes most sense in situations where there exists significant barriers to entry by competitors. Further, the strategy should not result in price changes being made too frequently.

A direct alternative to skimming for a new product is "penetration pricing" (also called "preemptive penetration" when accompanied by heavy promotion during a product's introduction) which requires setting initial prices relatively low to rapidly penetrate those who seek bargains and are very responsive to low prices.

This pricing method is closely related to competition-based approaches, as management intends for it to generate economies of scale before competitors have a chance to enter the market. By successfully obtaining a large sales volume through low prices, a firm might be able to attain low average costs due to the scale of its operations and its experience. This may drive away potential new competitors because entry into a new market is generally accompanied by low volumes and high average costs.

Penetration pricing does mean that a firm foregoes the opportunity of generating extra profit from first setting high prices to meet high initial demand and then lowering them, to capture further customers. But in large, highly-competitive markets, such a strategy makes sense; it serves to strengthen a company's long-run profitability.

When new supermarkets open they frequently pursue a penetration strategy. During the first few weeks of operation, the stores sell many items, or sometimes their entire stock, at very low prices. The idea is to attract substantial store traffic. After the initial discount period is over, the store gradually increases most or all of its prices to market levels.

If a baked goods company is about to enter the market with a new cracker and will use a skimming strategy, a possible problem is that competitors may be attracted by the high prices and enter the market at lower prices. This may prevent the company from attaining economies of scale and taking advantage of the learning curve. The problem is even greater if demand is elastic, as the firm may quickly lose market share. The competition may force the company to lower its prices, which often sets off price wars. In such cases the firm, as well as its competitors, may not earn an adequate return on invested capital.



Other Demand Based Pricing Strategies:



Think about if there are ways of considering demand, when making pricing decisions, that differ from those covered in the last section.


A retail nursery located in the southwest caters to upper-income consumers. Its premises are located on an attractive lot just outside of the city limits of a city of about 80,000. The physical facilities are expensive and immaculately clean and the employees are very customer oriented. Some very rare plants and trees are sold.

This firm charges prices that are higher than any other nursery in the community. Management feels that this is proper, given that customers receive more than those who patronize other dealers. Consumers feel that visiting and buying in the store is well worth the price differential, since they are getting a bundle of satisfactions that is superior to all others.


How would consumers perceive sophisticated 35mm cameras if they sold at a lower price than disposable cameras? Or if mink coats sold off the rack at a discount store for $99.95?

Many studies indicate that buyer perceptions of quality and prestige are often proportional to the item's price. For most products, even aspirins, there are prestige, high-quality market segments made up of buyers who expect to pay more for "the best".

When consumers experience difficulty in objectively assessing a product's quality, many use high price as a signal of quality and prestige. "Prestige pricing", which involves charging a premium price for a product or service, is a strategy designed to capitalize on these perceptions. Some consumers have a strong conviction that "You get what you pay for".

Traditional economic theory predicted that, as companies lowered their prices, they would sell more units. That idea holds true for many goods and services. Prestige items bring about the opposite behavior, however. Price reductions signal that the offerings must be less desirable.

Marketers seeking to penetrate high prestige/quality market segments should be aware that many buyers expect relatively high prices. A furniture store chain, for example increased its demand by marketing higher priced furniture than it once did. This does notmean that non-price elements of the marketing mix are unimportant. An item's actual quality must at least meet buyer expectations. Besides increasing its price, the furniture chain also began to carry merchandise with better materials and workmanship. Similarly, other marketing mix elements such as promotion should be blended with the price mix to augment a high-quality/prestige element. These might include a distinctive package and distribution channels with upscale retailers.

Sometimes even personal mannerisms of sales representatives can assist in conveying a quality image. An exclusive retail men's wear chain, for instance, trains its salespeople to handle the merchandise as if it was fragile china in the presence of store customers. If salespeople treat the product with respect, this is likely to rub off on target consumers.

A golf club producer uses prestige pricing as it is likely that consumers will pay more for the clubs because they experience difficulty in objectively assessing their quality. For most golfers, with the possible exception of the pros, it is not easy to evaluate how well a club will work. One can grip the club, take practice swings, handle it, etc., but this does not provide a very extensive test. Even trying out these products is not a completely objective assessment method, because there are many variables (the course, the golf balls, the grip, the swing, and others) that can determine how well the play goes on any given day. Hence, prestige oriented buyers use price as a substitute measure for quality.


"Leader pricing" is a traditional practice that is becoming more popular at retail. Increasingly, consumers are looking for bargains. They have learned that they can often obtain these if they are willing to compare stores and to wait for discounts.

Frequently, retailers sell products at low prices simply to build store traffic. For example, supermarkets feature special rates on milk, coffee, hamburger, and other often-purchased staples in order to attract customers. Once in the store, shoppers are likely to buy additional items at normal prices and margins. "Leader prices" are below those of competitors and yield less than normal markup percentages. On the other hand, "loss leader" prices are below cost.

Leader and loss leader pricing often makes considerable sense at the retail level. In some industries, consumers make many of their purchases on impulse. It is estimated by some industry experts that approximately three fourths of grocery purchases are made on impulse. If retailers can get consumers into the store with leaders, they know that they have accomplished an important objective.

Leader pricing is not restricted to the grocery industry. In fact, it is found in most types of retailing. Particularly frequent users of this strategy are drug, furniture, hardware, and clothing stores. Even some stores that maintain prestige prices and attempt to build an upscale image may use leader pricing. From time to time, some banks engage in this practice. They may offer low priced check cashing, low ATM charges, or other reductions to attract customers who will pay full price for other services.

A supermarket frequently uses leader pricing for its hamburger. The logical reason for this strategy is to build store traffic and pave the way for consumer purchases of items that are not leaders. Many consumers buy hamburger and it is a mainstay in the diets of numerous individuals and families. Further, knowledge of hamburger prices, from store to store, is fairly extensive. If the supermarket offers attractive prices, this will induce consumers into the store. Some will buy goods at the deli (the most profitable part of most stores). Others will buy non-foods, such as shampoo and cosmetics (the second most profitable part). And consumers will purchase food products, in addition to hamburger. Supermarket margins are very low so they are very dependent on high inventory turnover. And this is only possible with high store traffic.


A possible problem with leader pricing is that some consumers will enter the store, buy only the marked-down merchandise, and leave, without buying anything else. These rational individuals are very much in the minority, however. Most consumers are not willing to expend that much time and energy in shopping--for convenience sake and perhaps because of store loyalty-- they make all or most of their purchases in one store.

Even very rational consumers who plan to buy only the discounted items often find that their plans go astray. They enter the store and walk past attractive displays that are designed specifically to catch their interest. Many end up purchasing items that they did not plan to, prior to entering the store.

Some marketers also use leaders and loss leaders to gain entry to industrial goods buyers. Once on their approved buying lists, a seller may be able to obtain other orders with higher unit profits. However, industrial goods buyers are apt to simply place orders on loss leaders and purchase other items from regular suppliers. Therefore, the use of leaders and loss leaders in industrial markets is quite limited.

Leaders serve little useful purpose for items sold to governmental agencies. Government agency buyers seldom hold allegiances for past favors at special prices. Consequently, marketers typically view each governmental agency purchase as a completely separate transaction where an acceptable profit is necessary.

Leader pricing is not appropriate in some industries where consumers are very concerned with getting the best service and only secondarily with price. It is doubtful that a cancer clinic could benefit much from this practice, for example. Most consumers want a premium service. If they are covered by medical insurance, pricing is even less important to most.

A plumbing supplies wholesale distributor is considering the use of leader pricing. A reason why this may not be a good idea is that many buyers will place orders on leaders and buy other items from other suppliers. Industrial buyers are essentially rational decision makers. They attempt to acquire appropriate quality goods, useful services, favorable terms of sale, all at reasonable prices. They are not likely to purchase goods and services on impulse or because a supplier has previously given them a low price for other goods and services. These buyers evaluate each individual purchase and attempt to do the best job possible of acquiring needed goods and services at a reasonable price, irrespective of the prices charged on previous purchases. Leader pricing probably will not be acceptable in this instance.


Most marketers set prices to end with an odd number, such as 99 cents or $7.95. For items priced below fifty dollars, it is customary to set prices at one cent, five cents, or seven cents below an even dollar figure. $7.99, $7.95, and $7.93 are such prices. For items above fifty dollars, common practice is to set the price at one dollar or two dollars below an even dollar amount, such as seventy eight or seventy nine dollars.

Merchants first began such practices many years ago to force clerks to register sales instead of pocketing receipts. "Odd-number prices" required making change, meaning that clerks would need to ring sales on a cash register to gain access to the change drawer. Sales taxes in almost all states today accomplish the same purpose (one dollar plus six cents sales tax), yet the practice continues.

Apparently, many marketers feel that odd-number pricing is effective in inducing sales. Perhaps buyers feel that there are price thresholds. Perhaps they perceive seventy-nine cents as being significantly less than eighty cents because it is in the seventies range. At any rate, odd-number pricing is in widespread use if for no other reason than custom.

A number of researchers have conducted studies to determine if consumers buy more when odd number, rather than even number pricing is used. The studies do not show that consumers do buy more. However, many marketers believe in the practice because it seems to be logical. In all probability they will continue to use it, regardless of what the researchers say.

Many firms use two or more methods simultaneously to set their prices. For example, a retailer might use markup pricing for all items but then adjust the calculated prices to reflect competitor actions. The retailer might further adjust specific prices to attain customary odd-number amounts. Similarly, management may adjust prices to reflect the product's stage in the product life cycle. Most important, management should set prices to coordinate with the company's overall marketing strategy.

A retail grocer employs odd-number pricing, probably in the belief that there are price thresholds in the demand for groceries. A number of marketing research studies have concluded that odd-number pricing does notnecessarily produce better results than even-number pricing, as measured by sales, profits, and other criteria. However, many practicing marketers have a "gut feeling" that consumers respond more favorably to odd numbers. This being the case, the practice is very widespread in virtually every industry.


Transportation Cost:



Attempt to envision all of the factors that determine who pays for transportation costs of products--the buyer or the seller?


A cement producer located in the Rocky Mountain area experienced considerable difficulty for many years in penetrating markets in the Pacific coast area. The producer required that its customers pay the full cost of transporting the cement from the plant to the customers' sites. This meant that the producer was price competitive in a region within approximately 300 miles from the plant, but was not competitive in the Pacific coast area.

Management decided that the market in the Pacific coast area was growing at too fast a rate to be ignored. Accordingly, the company agreed to pay for half of the freight for items shipped into this region. According to management's calculations, this would make the company price competitive. On the other hand, it was somewhat of a gamble, because it would drive up the firm's costs. After six months the cement company decided that it was a gamble worth taking. The delivered price reductions enabled the firm to gain a strong position in the market and the net effect was a gain in company profits.


An important question for management to answer is "How should transportation costs be treated when pricing a product?" Should the company expect a buyer to pay for shipping costs as a separate item? Perhaps buyers should be left to worry about arranging and paying for transportation entirely. Yet, an important way to increase an item's worth to buyers is for management to provide this service to customers and set prices to cover the additional costs. For many companies the answer to these questions is an integral part of establishing marketing strategy and determining the pricing component of the marketing mix.

There are various ways of treating transportation costs. This section examines the major ones.

A frequently encountered term in marketing is F.O.B., which means "free on board". Because quoted prices may or may not include transportation charges (especially for institutional sales), it is often necessary to state the price at a given location.

To avoid confusion, companies use the term F.O.B. to clarify who is responsible for which portions of the transportation costs. F.O.B. identifies the location where the seller's responsibility to cover transportation costs end. Thus, to make F.O.B. meaningful, one must also name a place. There are several possibilities. Assuming that the seller is located in Kansas City:

1. The seller assumes no responsibility for freight. The term "F.O.B. factory" would be appropriate.

2. The seller pays for loading onto railroad cars, but no more. Terms such as "F.O.B. railhead" or "F.O.B. Kansas City" would describe this situation.

3. The seller assumes freight responsibility up to the nearest large city to the buyer. A term such as "F.O.B. Chicago" or "F.O.B. Los Angeles" would be used.

4. The seller pays for all freight and unloading at the nearest major transportation center, but no more. A term such as "F.O.B. unloaded Atlanta" would be appropriate.

5. The seller pays full freight charges to the buyer's location. Then terms such as "F.O.B. delivered" and "F.O.B. buyer's warehouse" are descriptive.

There are many such possibilities. Clearly, the specific terms have an effect on the total price that a buyer pays. "F.O.B. factory" for example, means that the buyer also must do the work to arrange transportation and insurance during transit. If the goods are damaged in transit, the loss falls upon the buyer. It is clear that transportation costs and terms definitely play a significant role in affecting the price of a product offering.

If an industrial purchasing agent is ordering a shipment of chemical supplies, the most favorable terms would be F.O.B. delivered. In this case the seller pays full freight charges to the buyer's location. In addition, the seller would have to do the work to arrange transportation and insurance during transit. In the case of F.O.B. factory, the buyer would have full responsibility for transportation and insurance. If the terms are F.O.B. railhead, the seller would pay for loading onto railroad cars, but no more. For F.O.B. sellers warehouse the buyer would have responsibility for transportation from the seller's warehouse onward to the buyer's destination.


The term "uniform delivered price" means that the seller charges one final price to all buyers, regardless of their location. The seller assumes all costs for transportation. Firms whose shipping costs are relatively insignificant often use uniform delivered prices, which also permits national advertisements to include a product's price since it is the same for everyone.

"Zone prices" are charged when the seller divides the total market area into separate zones. A uniform delivered price is charged to all customers within each zone, but the prices vary between zones, depending on each one's average shipping costs. Many mail order firms use this technique. They believe that assessing shipping costs by zone makes the calculation of transportation charges by buyers relatively uncomplicated.

The term "freight absorption" means that the seller pays (or absorbs) some of the transportation costs that customers would otherwise have to assume. With freight absorption, sellers are able to compete on the basis of delivered price in distant locations where competitors are located.

In some industries such as automobiles and steel, a somewhat unusual pricing method has been used at various times. It is called "base- point" or "basing point". With this system, one or more competitors recognize a particular set of locations as shipping points or base points.

A seller charges each customer for freight under this system, but the charge is from the nearest base point, regardless of the shipment's origin. The number of base points varies from industry to industry.

In the case of a single base-point arrangement, sellers recognize only one location as a common origin. Historically, auto manufacturers have used such a system, with those headquartered in Detroit choosing that location as the base point; even if a car was built in San Jose, a California customer would pay freight from Detroit. Generally the Federal Trade Commission has ruled that most single base-point systems are illegal, because they involve collusion between competitors.

In the case of a multiple base-point system, two or more base points are identified. Such systems are generally legal because they encourage competition between different manufacturers. However, management must be careful to avoid "phantom freight", which refers to charging for freight that exceeds actual transportation costs. This process is illegal. Phantom freight can occur when customers are far from base points but relatively close to actual points of origin for shipments.

A mail order book company regularly charges uniform delivered prices to all customers. The reasons for this probably include that national advertisements can include the book company's price. Book purchasers are price conscious and many like to know what will be the total cost delivered to them, without having to make detailed calculations to find out what delivery charges will be levied. This can be avoided by simply advertising the delivered price. This facilitates comparison, by consumers, of the cost of ordering through the mail order house as contrasted to buying books in a bookstore or through another mail order house.


Generally, marketers of most consumer goods assess one price to cover all marketing and production costs, including the necessary transportation to the place of purchase. Notable exceptions include motor vehicles, where management levies a separate charge for transportation.

In some instances, separate transportation charges are imposed for consumer items requiring home delivery and setup, such as washers and dyers, depending upon the services mix of the selling retailer. But in general, shipping charges are absorbed in the retail price paid by consumers for most of the items they buy.

In contrast, many items sold to producers, governmental units, and to channel members for resale do include transportation charges. Manufacturers frequently assess separate charges for shipping, and this charge can represent a major portion of an item's total cost. Therefore, management must be certain to specify which services a price is to cover.

Whether or not prices include transportation usually depends upon several factors, including the prevailing competitive practices, how sizable shipping costs are in relation to total product costs, and the length of the distribution channel. Normally prices do not include transportation if this is the norm in the industry, if shipping costs are small relative to total product costs, and if the channel is short.

In general, lengthy channels include transportation as one of the functions intermediaries perform to earn their margins. Accordingly prices tend to include transportation in such cases. Conversely, short channels often involve separate charges for shipping, although shipping is usually negotiable when sizable orders are involved.

Also, including transportation is often dependent on the desires of major customers. Some buyers have extensive transportation departments and sometimes prefer to arrange their own shipping, whereas other firms would rather have the seller assume the tasks.

A producer of electric motors to be installed in garage door openers does notinclude transportation costs in prices. A likely reason for this is that shipping costs are large relative to the product's value. Electric motors tend to be relatively heavy items and their shipping cost can be substantial. The products must be packed and handled with care or damage to them can easily occur. Damage can come from mishandling, moisture, excessive pressure and other causes. Hence, shipping tends to be expensive. Conversely, the value of the motors is not great--they tend to be almost commodity-type items. For these reasons transportation costs probably would not be included in prices.


How can a marketer best determine what method is best in handling transportation costs? The answer is not simple, but basically it involves assessing demand, competition, cost, and the law.

Demand is an important factor. It may be necessary to absorb freight or to use F.O.B. buyer's warehouse because buyers demand this. They may prefer to stay out of the freight and insurance business and let the seller worry about this. Many retailers, for instance, are so absorbed in buying, operating their stores, and in promoting their goods that they have little time left to devote to transportation problems.

Demand is probably the most important factor in determining who will cover these costs. Companies are in business to satisfy customers, and demand measures what these customers want. If they are not especially worried about having to pay these costs, then the producer may pass them on down the channel. But if the target customer objects, this probably should not be done.

Cost is another factor. If the cost is substantial, producers prefer to require intermediaries to bear the burden of freight. Buyers often feel that this is justified because it does involve a substantial expense item. It is common for buyers to pay the transportation costs for items that are heavy and bulky and that incur high freight bills relative to their value . Examples are bulk cement, lumber, and grain.

Competition should be considered. If competitors are carrying much of the freight burden, the company may have to do likewise, in order to be a contender for business. Or, if rivals assess buyers for these expenses, the firm may decide to pay them, as a means of attaining competitive advantage. Freight absorption is a strategy that is based primarily upon competition.

Finally, the law is a consideration. Base point systems are often illegal. If the company enters into agreements with rivals to charge identical transportation charges or even to use the same methods to determine these charges, federal authorities may bring charges of price collusion.

An importer of tea from Asia is developing policies for who in the channel of distribution will handle transportation costs. Probably the most important determinant of this decision is demand. The firm is in business to satisfy customers and demand is a measure of this performance. If customers object strongly to paying for the freight, the producer may have to absorb it. If customers are not heavily concerned about this expense item, the likelihood is that it will be passed on to them.






Discounts and Product Line pricing:



Try to imagine all of the possible reasons why marketers might give discounts to buyers. Then go into this section for insights into this field.


Frequent flyer programs are a form of discount. Begun in the early 1980's as a means of luring well-traveled executives into brand loyalty, frequent flyer bonus programs have become almost essential for airlines to attract the business trade. The programs all have the same theme: fly on the sponsoring carrier's routes a certain number of miles and get free tickets. While the programs are open to anyone, they target business travelers since they are the group that does the majority of the flying.

The perks vary but include travel to exotic places such as the Orient. The air miles required for a free ticket bonus vary. And there are more benefits possible, as well, including free car rentals and hotel accommodations.

The programs are in such high demand that many rebelled when some companies tried to get their employees to turn their bonus tickets in for company credit. This is a type of consumer discount that has become a major factor in one industry today. Discounts are also of major importance in selling to industrial users and intermediaries.


Many producers use intermediaries to perform various portions of the marketing process. The conventional ways of paying for their services is through discounts. There are two major types:

· Trade and

· Special discounts.

"Trade discounts" (also called "margins" and "markups") are the price allowances offered to channel members to compensate them for the activities that they perform. They are discounts from the final purchase price allowed to an intermediary.

The amounts of the trade discounts are largely a function of the extensiveness of the functions that intermediaries perform for producers and other intermediaries. If, for instance, a wholesaler provides a sales force, stores goods, delivers them, finances retailer purchases, and provides consulting services for suppliers, the margin is likely to be much greater than if the only function a wholesaler has is to bring buyers and sellers together.

For example, a manufacturer of an item retailing for $100 and distributed directly to retailers might allow a 30 percent markup on retail to the retailers for handling the item. Retailers would then pay seventy dollars for each item purchased.

Margins may be stated either on the basis of the final selling price, as in the above example, or on the basis of cost. It is traditional in most industries to base them upon the final selling price.

Another consideration is when there are several levels of intermediaries involved in the distribution system. Compensation for each level is typically provided through a chain of discounts. Hence, a retailer might pay a wholesaler seventy dollars and the wholesaler might pay the manufacturer fifty dollars, depending on what particular discount structure is in place.

Markups are generally set at customary or standard levels in industry. While some intermediaries such as mass merchandisers rely on low margins to generate volume, manufacturers should establish common discount structures for all channel members at the same level. Federal anti-price discrimination laws prohibit charging different prices to different intermediaries at the same channel level.

A producer of backyard barbecues is in the process of setting a trade discount for a wholesaler. The amount of the discount should be based primarily upon the extensiveness of the functions that the wholesaler provides for the manufacturer and other intermediaries. If the wholesaler is to furnish a full gamut of services for the producer, the trade discount should be large. The purpose of a trade discount is to compensate intermediaries for their efforts. Consequently, if these efforts are substantial, the discount should also be large. Conversely, if only a few functions are to be performed (as in the case of a limited function wholesaler) the discount can be small.

Producers should remember that trade discounts are incentives. If the discount is large, there is an incentive for the wholesaler to sell the producer's output aggressively. If the discount is too small, they may neglect the producer's offerings and concentrate on other producers' products.


Sometimes producers find it necessary to offer intermediaries added incentives to enlist their aggressive support. Audio tape firms frequently reimburse retailers for money spent to advertise certain popular tapes; or manufacturers often offer an additional margin to "kick off" a new product campaign. There are three major types of special discounts; cash, quantity, and advertising and push money.

"Cash discounts" are discounts granted buyers for paying their bills in a short period of time. An invoice amount of two thousand dollars with the statement 2/10/n30 (two percent if paid in ten days, net in 30 days) means that the buyer pays only ,1,960 if the bill is paid in ten days. Otherwise the full amount is due in 30 days. Some companies have been successful in extending these discounts to consumers, as well.

Buyers are well-advised to take advantage of these discounts when offered by suppliers. Saving 2 percent by paying 20 days sooner amounts to a 36.5 percent annualized finance charge for not doing so (365 days/20 days X 2% = 36.5%).

Marketers can use cash discounts to win the loyalty of intermediaries. If producers offer higher cash discounts than do their competitors, wholesalers and retailers have an incentive to handle and to feature the products of the high discounters.

Many buyers, especially industrial ones, expect to receive discounts if they buy in large quantities. There are two types of "quantity discounts". "Non-cumulative" discounts are granted on individual orders above a certain quantity, such as for a full railroad carload. Generally, these discounts are legal, as long as they are made available to all intermediaries.

"Cumulative" quantity discounts are extended to buyers who purchase a large amount--determined by adding individual orders--over an extended period of time, such as a quarter or a year. Cumulative quantity discounts granted to intermediaries are generally illegal under federal price discrimination laws, unless the supplier can document proof that the cost or competition meeting defenses of the law apply.

"Advertising" and "Push Money" allowances are special price reductions offered to intermediaries for them to perform certain promotion functions. "Advertising allowances" are subsidies, full or partial, paid to intermediaries to reimburse them for advertising the sponsor's product, such as when a supermarket advertises that it features a certain brand of shampoo.

"Push Money" consists of additional payments to intermediaries for aggressively selling a particular product. In turn, it is usually expected that intermediaries will pass along the additional incentive to their sales representatives. Generally, these allowances are legal, provided that they do not result in price discrimination. For some items, like groceries, offering special discounts is almost a prerequisite for getting shelf space in a supermarket.

A producer of plastic containers for tools is considering the use of special discounts. Cumulative quantity discounts are not legal under federal price discrimination laws, so they should be avoided. This practice is outlawed because it encourages buyers to place all or much of the purchasing with one company--it tends to weaken competition. Also, non-cumulative quantity discounts can be justified since larger quantity orders tend to have a lower per unit cost. This is not true for cumulative discounts--they cannot be solidly supported as means of reducing costs. In essence, then, the only reason for cumulative discounts is to reduce competition, so federal law is against this practice.


When two or more related products are marketed by a company, the price of each item in the line should be set in relation to the prices of the other items. For example, a manufacturer produces different brands of panty hose at different price levels aimed at different market segments. In such cases, management must coordinate the price of each item so that the overall line contributes to the company goals.

Related items in a line may be substitutes for each other, meaning that they have high "cross elasticities". This term means that a change in the price of one item affects the demand for another. A buyer of a 30 watt stereo set, for example, might trade up if a 40 watt set's price is lowered a bit, or trade down if a 20 watt set's price is too close to the 30 watt set price. (This latter condition is termed "cannibalization").

Thus, if prices are improperly set in relation to market segment differences, there may be cannibalization and a loss in profits. When the prices properly reflect segment differences, however, there is a good possibility of trading up some of the customers.

Cross elasticities can also take place if products are complements, such as rivets and rivet machines, cameras and film, and computer hardware and software. Complements are products that are normally used together. If the price of one is raised, the demand for the other may fall. One possible strategy is to keep the price of one (such as a safety razor) low, so that consumers will purchase many razors and then assess large prices for razor blades that are needed in the razors.

A producer of small appliances believes that there is a high cross elasticity in its product line. This would indicate that changes in the price of one product changes demand for another product. The products in question may be substitutes or complements. In earlier discussions of price elasticity we learned that demand is elastic when a change in price brings out a larger change in the quantity demanded. The same situation holds for cross elasticities, except that it involves two products.


Cross elasticities present a problem in measuring demand. Because of the operational difficulty, many firms establish "price lines" for groups of products within a line. These are pre-established price levels for items within the line. For example, retailers often sell men's slacks at $19.95, $24.95, ,$29.95, $34.50, and $39.95. These price levels are based upon what the managers consider to be distinctive price thresholds in the overall market.

Once set, the firm then develops or locates products that can profitably be sold at each of the price lines. Using cost as a guide, managers can then concentrate on developing items with the intention of satisfying a particular segment's needs as an objective. Women's clothing, appliances, houses, and even motor vehicles are among the many items companies price in this way.

Price lines are preferred by many consumers. In buying clothing, for instance, they dislike having to compare the prices of a variety of items, all selling at different prices. They prefer to go to a price line that they feel fits their budget and preferences and compare the various offerings within that line.

Before leaving the area of price, we should consider an additional item. There are other means of changing an item's price besides altering the price tag:

1. Changing the quantity included. Potato chips, for example, were sold largely in one-pound packages some years ago. Today's large bag costs about the same but is only 8 or 10 ounces. "Unit Pricing " laws (where the price-per-unit, such as an ounce is posted) have been passed in many states, enabling many consumers to better make choices than in the past. Nevertheless, changing the quantity is one alternative to consider.

2. Giving cents-off coupons or rebates. In effect, the mileage bonuses offered by air carriers offer travelers this kind of incentive.

3. Offering specially reduced financing plans. The auto industry frequently uses this incentive to spur purchases.

4. Selling items at special prices through nontraditional channels. For example, some ski areas in Utah sell lift tickets at discount prices in major city supermarkets.

In fact, any component of the overall marketing mix might be altered as an alternative to changing the sales tag price of a product or service. Accordingly, managers should not set prices in a vacuum. All components of the marketing mix must be considered.

A woman's clothing store takes advantage of cross elasticities in the demand for clothing. A way of achieving advantage is to get consumers to trade up in women's clothing. The prices of various clothing items have cross elasticities. If the price of an inferior item is not far below that of a superior product, it may be possible to convince consumers to buy the superior one. This may be accomplished by reducing the price of the higher-quality product, so that it approaches the consumer's price threshold. Some clothing store personnel are very adept at trading up customers and attempt this practice at every turn.