RS002 MARKETING MANAGEMENT
CHAPTER 13: DESIGNING AND MANAGING SERVICES
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
How do we define and classify services, and how do they differ from goods?
What are the new services realities?
How can we achieve excellence is services marketing?
How can we improve service quality?
How can goods marketers improve customer-support services?
SUMMARY
1. A service is any act or performance that one party can offer to another that is
essentially intangible and does not result in the ownership of anything. It may or
may not be tied to a physical product.
2. Services are intangible, inseparable, variable, and perishable. Each characteristic
poses challenges and requires certain strategies. Marketers must find ways to
give tangibility to intangibles; to increase the productivity of service providers; to
increase and standardize the quality of the service provided; and to match the
supply of services with market demand.
3. Marketing of services faces new realities in the 21st Century due to customer
empowerment, customer coproduction, and the need to satisfy employees as well
as customers.
4. In the past, service industries lagged behind manufacturing firms in adopting and
using marketing concepts and tools, but this situation has now changed.
Achieving excellence in service marketing calls not only for external marketing,
but also for internal marketing to motivate employees, as well as interactive
marketing to emphasize the importance of both “high tech” and “high touch.”
5. Top service companies excel at the following practices: a strategic concept, a
history of top-management commitment to quality, high standards, self-service
technologies, systems for monitoring service performance and customer
complaints, and an emphasis on employee satisfaction.
6. Superior service delivery requires managing customer expectations and
incorporating self-service techniques. Customers’ expectations play a critical role
in their service experiences and evaluations. Companies must manage service
quality by understanding the effects of each service encounter.
7. Even product-based companies must provide postpurchase service. To provide
the best support, a manufacturer must identify the services customers value most
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and their relative importance. The service mix includes both presale services
(facilitating and value-augmenting services) and postsale services (customer
service departments, repair and maintenance services).
OPENING THOUGHT
The teaching of “services marketing” can pose a challenge to the instructor by the
very nature of a “service”—its intangibility, inseparability, variability, and perishability.
Challenges to the instructor in teaching this course lies in connecting these concepts
to the students in ways that they will relate to and understand. Students use services
every day, in their role as a student, it means that they are receiving a service—
instruction.
The instructor is encouraged to use the example of “instruction” or the university
setting to demonstrate the four dimensions of services that differentiates it from a
physical product: intangible, inseparable, variability, and perishability. Most students
will understand that a service cannot be felt, touched, or inventoried; some students
will not fully understand the interconnectiveness between the service provider and
the service “receiver” or consumer.
Students may have some difficulty in conceptualizing the service dimensions of
reliability, responsiveness, assurance, empathy, and tangibles as part of the service
marketing dimensions. The instructor is encouraged to use multiple examples of
excellent service companies, guest speakers, and personal or student real life
examples to illustrate the challenges facing the marketing of services to the public.
The interaction or role that the customer plays in the delivery of a service may pose a
barrier because many students (and of course actual consumers) do not fully
understand their part in the service process or maximize their participation in the
process. This topic is a good one for an in-class discussion or outside assignment.
Students, as well as instructors, can and do like to tell service stories (positive or
negative) that can illustrate and/or demonstrate good and bad service marketing.
MARKETING DEBATE
Is Service Marketing Different From Product Marketing?
Some service marketers vehemently maintain that service marketing is fundamentally
different from product marketing and that different skills are involved. Some traditional
product marketers disagree, saying, “good marketing is good marketing.”
Take a position: Product and services marketing are fundamentally different versus
product and services marketing are highly related.
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Pro: Marketing is marketing. Consumers buy a product or use a service to answer a
particular need or want. The customers’ value hierarchy: The customers’ decision-making
process and their own consumption system does not change when purchasing a service
versus a product. How the consumer comes to understand the core benefit, potential
product, or the functionality of the service is based upon branded marketing theory. The
differences between marketing a service versus marketing a product lies in the execution
of the marketing process for the service. Product, place, price, and promotion concepts
are still valid—albeit with some changes in either their weight in the consumer-decision
process or their means of communication to the consumers.
Con: The dimensions that distinguish a product from a service vary: intangibility of the
service (that it does not contain physical properties for the consumer to feel, touch, smell,
or “try-on”). The inseparability of the service provider from the consumer; the variability of
service from encounter to encounter; and the fact that the service is perishable all create
new and different marketing challenges for the service marketer. The service marketer
must make an “intangible” tangible, make variability consistent, tell the customer that you,
the customer, have a role in this process, participate in the successful outcome, and that
the service marketer must adjust for fluctuating demand and supply timing, are different
from product marketers.
Finally, the service marketer must ensure that customer expectations are matched by
customer perceptions after the service is performed. The service provider can either
communicate lower expectations for their customers or develop processes to deliver to
the customers’ expectations each time. Less than a 100 percent “match” between
expectations and performance for the service provider leads to dissatisfied consumers
who use past experiences, word-of-mouth (mouse), and physical clues with assigned
higher degree of importance than for physical products.
Marketing Excellence: THE RITZ CARLTON
1) How does The Ritz-Carlton match up to competitive hotels? What are the key
differences?
Suggested Answer: The Ritz-Carlton occupies a distinctive “niche” in
consumer/customer expectations and performance—ultimate luxury and unparalleled
customer service. The Ritz-Carlton invented this niche by revolutionizing how the U.S.
traveler viewed and experiences customer service and luxury in a hotel.
The Ritz-Carlton fulfills its customer service promise by providing impeccable training,
and in its 12 Service values, which also include self-reflection and respect in the
employee’s professional appearance and behavior.
2) Discuss the importance of the “wow stories” in customer service for a luxury hotel like
The Ritz-Carlton.
Suggested Answer: The “wow stories” serve as a way to highlight and make
real/concrete one of The Ritz-Carlton’s 12 service values. By communicating
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individual “wow stories” to all employees it communicates to them that everyone has
the power to “wow” a guest.
Marketing Excellence: MAYO CLINIC
1) Explain why Mayo Clinic is so good at customer service. Why has it been so
successful at practicing medicine differently from other hospitals?
Suggested Answer: Student answers will vary but good students will cite and refer to
the 5 dimensions of reliability, responsiveness, assurance, empathy, and the tangibles
and will cite these examples from the case—core values of the founders, new modern
facilities, new modern procedures, teamwork, salaried doctors, and not-for-profit
status as examples.
2) Do conflicts of interest exist between wanting to make your patient happy and
providing the best medical care possible? Why or why not?
Suggested Answers: Student answers will vary and a strong case can be made for
both.
Yes: Patient “happiness” is an emotion that has no definition that is universal to all. If
the demand to make the patient “happy” is overwhelming, medical judgments might
be impaired. For example, a doctor could decide not to order a medical “test” because
the procedure would inflict emotional or financial harm to the patient (i.e., make them
not happy). This lack of procedure could wind up causing harm to the patient.
No: Happiness is an integral part of what makes us human and emotions control or
have been known to control or speed up the healing process. Responding to the
“customer/patient” should not conflict with good medical care—it should be part of the
definition of good medical care.
MARKETING DISCUSSION
Colleges, universities, and other educational institutions can be classified as service
organizations. How can you apply the marketing principles developed in this chapter to
your school? Do you have any advice as to how they could become better service
marketers?
Student answers will differ. However, the following marketing principles developed in the
chapter were:
•
A service differs from a product in its intangibility, inseparability, variability, and
perishability.
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•
•
•
•
•
Service marketing must be done holistically and calls for external, internal, and
interactive marketing.
Service marketers must manage service quality by understanding the effects of each
service encounter.
To brand a service, the company must differentiate its brand through primary and
secondary service features and often employs multiple brand elements.
Service companies that excel in service have the following practices: A strategic
concept toward service, top-management’s commitment to quality, high standards,
self-serving technologies, systems to monitor service performance and customer
complaints, and an emphasis on employee satisfaction.
Product-based firms must provide postpurchase service by identifying the “services”
customers value the most and the relative importance of each.
DETAILED CHAPTER OUTLINE
As product companies find it harder and harder to differentiate their physical products,
they turn to service differentiation. Many find significant profitability in delivering
superior service, whether that means on-time delivery, better and faster answering of
inquiries, or quicker resolution of complaints. Top service providers know these
advantages well and also how to create memorable customer experiences.
THE NATURE OF SERVICES
The Bureau of Labor Statistics reports that the service-producing sector will continue
to be the dominant employment generator in the economy, adding 20.5 million jobs
by 2010.
Service Industries Are Everywhere
A)
B)
C)
D)
E)
Government sector
Private nonprofit sector
Business sector
Manufacturing sector
Retail sector
A service is any act or performance that one party can offer to another that is essentially
intangible and does not result in the ownership of anything. Its production may or may not
be tied to a physical product.
A) Manufacturers, distributors, and retailers can provide value-added services or simply
excellent customer service to differentiate themselves.
B) Many pure service firms are now using the Internet to reach customers.
Categories of Service Mix
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The service component can be a minor or major part of the total offering. We
distinguish five categories of service offerings:
A)
B)
C)
D)
E)
Pure tangible goods
Tangible goods with accompanying services
Hybrid
Major service with accompanying minor goods and services
Pure service
1) Services vary as to whether they are:
a. Equipment-based
b. People-based
2) Service companies can choose among different processes to
deliver their service.
3) Some services require the client’s presence and some do not.
4) Services differ as to whether they meet a personal need or a
business need. Service providers typically develop different
marketing programs for personal and business markets.
5) Service providers differ in their objectives (profit and nonprofit) and
ownership (private or public).
F) Customers cannot judge the technical quality of some services even after they have
received them.
1) Goods high in search qualities—characteristics the buyer can evaluate before
purchase.
2) In the middle are goods and services high in experience qualities—characteristics
the buyer can evaluate after purchase.
3) Goods and services high in credence qualities—characteristics the buyer normally
finds hard to evaluate even after consumption and that comprise most services.
G) Because services are generally high in experience and credence qualities, there is
more risk in purchase. This has several consequences:
1) Service consumers generally rely on word of mouth rather than advertising.
2) Service consumers rely heavily on price, personnel, and physical cues to judge
quality.
3) Service consumers are highly loyal to service providers that satisfy them.
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4) Because of the switching costs involved, much consumer inertia can exist. It can
be challenging to entice a customer away from a competitor.
Distinctive Characteristics of Services
Services have four distinctive characteristics that greatly affect the design of
marketing programs: intangibility, inseparability, variability, and perishability.
Intangibility
A) Unlike physical products, services cannot be seen, tasted, felt, heard, or smelled
before they are bought.
B) To reduce uncertainty, buyers will look for evidence of quality. They will draw
inferences about quality from the place, people, equipment, communication material,
symbols, and price that they see.
1) Therefore, the service provider’s task is to “manage the evidence,” to “tangibilize
the intangible.”
C) Service companies can try to demonstrate their service quality through physical
evidence and presentation.
D) Service marketers must be able to transform intangible services into concrete benefits.
E) Because there is no physical product, the service provider’s facilities—its primary and
secondary signage, environmental design and reception area, employee apparel,
collateral material, and so on—are especially important.
F) All aspects of the service delivery process can be branded.
Inseparability
A) Services are typically produced and consumed simultaneously.
B) Because the client is also present as the service is produced, provider-client
interaction is a special feature of service marketing.
C) Several strategies exist for getting around this limitation:
1) Work with larger groups
2) Work faster
3) Train more service providers
Variability
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A) Because they depend on who provides them and when and where they are provided,
services are highly variable.
B) To reassure customers, some firms offer service guarantees that may reduce
consumer perception of risk.
C) There are three steps service firms can take to increase quality control:
1) Invest in good hiring and training procedures.
2) Standardize the service-performance process throughout the organization.
a. Prepare a service blueprint that depicts events and processes in a flowchart,
with the objective of recognizing potential fail points.
3) Monitor customer satisfaction.
Perishability
A) Services cannot be stored.
B) Perishability is not a problem when demand is steady.
C) When demand fluctuates service firms have problems.
D) Several strategies can produce a better match between supply and demand. On the
demand side:
1)
2)
3)
4)
Differential pricing
Non-peak demand
Complementary services
Reservation systems
E) On the supply side:
1)
2)
3)
4)
Part-time employees
Increased consumer participation
Shared services
Facilities for future expansion
THE NEW SERVICE REALITIES
At one time, service firms lagged behind manufacturing firms in their use of
marketing because they were small or professional businesses that did not use
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marketing, or faced large demand or little competition. This has changed. Some of
the most skilled marketers are now service firms.
A Shifting Customer Relationship
Not all companies, however, have invested in providing superior service, at least not
to all customers.
Savvy services marketers are recognizing the new service realities, such as the
importance of the newly empowered customer, customer coproduction, and the need
to engage employees as well as customers.
Customer Empowerment
Customers are becoming more sophisticated about buying product-support services and
are pressing for “unbundled services.”
They may desire separate prices for each service element and the right to select the
elements they want. Customers also increasingly dislike having to deal with a
multitude of service providers handling different types of equipment. Some third-party
service organizations now service a greater range of equipment.
Most importantly, the Internet has empowered customers by letting them vent their rage
about bad service—or reward good service—and send their comments around the world
with the click of a mouse.
Most companies respond quickly. Comcast allows contact 24-7 by phone and e-chat but
also reaches out to customers and monitors blogs, Web sites, and social media. If
employees see a customer report a problem on a blog, they get in touch and offer help. Email responses to customers must be implemented properly to be effective.
More important than simply responding to a disgruntled customer, however, is preventing
dissatisfaction from occurring in the future.
Customer Coproduction
The reality is that customers do not merely purchase and use a service; they play an
active role in its delivery. Their words and actions affect the quality of their service
experiences and those of others, and the productivity of frontline employees.
Customers often feel they derive more value, and feel a stronger connection to the
service provider, if they are actively involved in the service process.
Preventing service failures is crucial, since recovery is always challenging. One of the
biggest problems is attribution—customers often feel the firm is at fault or, even if not, that
it is still responsible for righting any wrongs.
1. Redesign processes and redefine customer roles to simplify service encounters.
2. Incorporate the right technology to aid employees and customers.
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3. Create high-performance customers by enhancing their role clarity, motivation,
and ability.
4. Encourage “customer citizenship” so customers help customers.
SATISFYING EMPLOYEES AS WELL AS CUSTOMERS
Excellent service companies know that positive employee attitudes will promote
stronger customer loyalty.
Instilling a strong customer orientation in employees can also increase their job
satisfaction and commitment, especially if they have high customer contact.
Employees thrive in customer-contact positions when they have an internal drive to
A)
B)
C)
D)
pamper customers,
accurately read customer needs,
develop a personal relationship with customers, and
deliver quality service to solve customers’ problems.
Given the importance of positive employee attitudes to customer satisfaction, service
companies must attract the best employees they can find.
They need to market a career rather than just a job.
They must design a sound training program and provide support and rewards for
good performance.
They can use the intranet, internal newsletters, daily reminders, and employee
roundtables to reinforce customer-centered attitudes.
Finally, they must audit employee job satisfaction regularly.
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ACHIEVING EXCELLENCE IN SERVICES MARKETING
Marketing Excellence
Marketing excellence with services requires excellence in three broad areas: external,
internal, and interactive marketing (see Figure 13.5).
A. External marketing describes the normal work of preparing, pricing, distributing,
and promoting the service to customers.
B. Internal marketing describes training and motivating employees to serve
customers well. The most important contribution the marketing department can
make is arguably to be “exceptionally clever in getting everyone else in the
organization to practice marketing.”
C. Interactive marketing describes the employees’ skill in serving the client. Clients
judge service not only by its technical quality (Was the surgery successful?), but
also by its functional quality (Did the surgeon show concern and inspire
confidence?).
Best Practices of Top Service Companies
In achieving marketing excellence with their customers, well-managed service
companies share a strategic concept, a history of top-management commitment to
quality, high standards, profit tiers, and systems for monitoring service performance
and customer complaints.
A. Strategic Concept
Top service companies are “customer obsessed.” They have a clear sense of
their target customers and their needs and have developed a distinctive strategy
for satisfying these needs.
B. Top management commitment
Companies such as Marriott, Disney, and USAA have a thorough commitment to
service quality. Their managements look monthly not only at financial
performance, but also at service performance.
C. High Standards
The best service providers set high quality standards.
D. Profit Tiers
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Firms have decided to raise fees and lower service to those customers who
barely pay their way, and to coddle big spenders to retain their patronage as long
as possible.
E. Monitoring Systems
Top firms audit service performance, both their own and their competitors, on a
regular basis. They collect voice of the customer (VOC) measurements to probe
customer satisfiers and dissatisfiers.
We can judge services on customer importance and company performance.
•
Importance-performance analysis rates the various elements of the service
bundle and identifies required actions.
Table 13.2 lists the 4 quadrants for performance ratings for an auto dealership.
Satisfying Customer Complaints
On average, 40% of customers who suffer through a bad service experience stop
doing business with the company.
Companies that encourage disappointed customers to complain—and also empower
employees to remedy the situation on the spot—have been shown to achieve higher
revenues and greater profits than companies without a systematic approach for
addressing service failures.
Getting frontline employees to adopt extra-role behaviors, and to advocate the
interests and image of the firm to consumers, as well as take initiative and engage in
conscientious behavior in dealing with customers, can be a critical asset in handling
complaints.
Differentiating Services
Finally, customers who view a service as fairly homogeneous care less about the
provider than about the price.
Marketing excellence requires service marketers to continually differentiate their
brands so they are not seen as a commodity.
Primary and Secondary Service Options
Marketers can differentiate their service offerings in many ways, through people and
processes that add value. What the customer expects is called the primary service
package.
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The provider can add secondary service features to the package. In the hotel
industry, various chains have introduced such secondary service features as
merchandise for sale, free breakfast buffets, and loyalty programs.
Innovation with Services
Many companies are using the Web to offer primary or secondary service features
that were never possible before.
MANAGING SERVICE QUALITY
The service quality of a firm is tested at each service encounter.
Customer Expectations
A) Customers form service expectations from many sources:
1) Past experiences
2) Word-of-mouth
3) Advertising
B) In general, customers compare the perceived service with the
expected service.
1) If the perceived service falls below the expected service customers are
disappointed.
2) If the perceived service meets or exceeds their expectations they are apt to use
the provider again.
C) Successful companies add benefits to their offering that not only satisfy customers but
also surprise and delight them.
D) Delighting customers is a matter of exceeding expectations.
Flawless service delivery is the ideal state for any service organization.
Marketing Memo: Recommendations for Improving Service Quality
Lists the ten lessons that are essential for improving service quality across service
industries: listening, reliability, basic service, service design, recovery, surprising
customers, fair play, teamwork, employee research, servant leadership.
Managing Customer Expectations
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Customers form service expectations from many sources, such as past experiences,
word of mouth, and advertising.
In general, customers compare the <emphasis>perceived service with the expected
service.
If the perceived service falls below the expected service, customers are disappointed.
Successful companies add benefits to their offering that not only customers but
surprise (Repetitive)
1)
2)
3)
4)
5)
Gap between consumer expectations and management perception.
Gap between management perception and service-quality specification.
Gap between service-quality specifications and service delivery.
Gap between service delivery and external communications.
Gap between perceived service and expected service.
A) Based upon this service-quality model, these researchers identified the following five
determinants of service quality, in order of importance:
1)
2)
3)
4)
5)
Reliability
Responsiveness
Assurance
Empathy
Tangibles
B) Based on these five factors, the researchers developed the 21-item SERVQUAL
scale.
One dynamic process model of service quality was based on the premise that
customer perceptions and expectations of service quality change over time, but at
any one point they are a function of prior expectations about what will and what
should happen during the service encounter, as well as the actual service delivered
during the last contact.
Tests of the dynamic process model reveal that the two different types of
expectations have opposite effects on perceptions of service quality.
1. Increasing customer expectations of what the firm will deliver can lead to
improved perceptions of overall service quality.
2. Decreasing customer expectations of what the firm should deliver can also lead
to improved perceptions of overall service quality.
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Much work has validated the role of expectations in consumers’ interpretations and
evaluations of the service encounter and the relationship they adopt with a firm over
time.
Consumers are often forward-looking with respect to their decision to keep or switch
from a service relationship. Any marketing activity that affects current or expected
future usage can help to solidify a service relationship.
With continuously provided services, such as public utilities, health care, financial
and computing services, insurance, and other professional, membership, or
subscription services, customers have been observed to mentally calculate their
payment equity—the perceived economic benefits in relationship to the economic
costs. In other words, customers ask themselves, “Am I using this service enough,
given what I pay for it?”
Long-term service relationships can have a dark side. An ad agency client may feel
that over time the agency is losing objectivity, becoming stale in its thinking, or
beginning to take advantage of the relationship.
Incorporating Self-Service Technologies (SSTs)
As with products, consumers value convenience in services.
A) Many person-to-person interactions are being replaced by self-service technologies.
B) Not all SSTs improve service quality, but they have the potential of making service
transactions more accurate, convenient, and faster for the consumer.
C) Marketing academics and consultants Jeffrey Rayport and Bernie Jaworski define a
customer-service interface as any place at which a company seeks to manage a
relationship with a customer, whether through people, technology, or some
combination of the two.
D) Some companies have found that the biggest obstacle is not the technology itself, but
convincing customers to use it, especially for the first time.
MANAGING PRODUCT-SUPPORT SERVICES
No less important than service industries are product-based industries that must
provide a service bundle. Manufacturers of equipment—small appliances, office
machines, tractors, mainframes, airplanes—all must provide product-support
services. Product-support service is becoming a major battleground for competitive
advantage.
Marketing Memo: Assessing e-service quality
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Defining service quality for online services included the core dimensions of regular
service quality were: efficiency, fulfillment, reliability, and privacy.
Identifying and Satisfying Customer Needs
The company must define customer needs carefully in designing a service support
program.
A) Customers have three specific worries:
1) They worry about reliability and failure frequency.
2) They worry about downtime.
3) They worry about out-of-pocket costs.
B) A buyer considers all of these factors in choosing a vendor.
C) The buyer tries to estimate the life-cycle cost that is the product’s purchase cost plus
the discounted cost of maintenance and repair less the discounted salvage value.
D) Where reliability is important, manufacturers or service providers can offer guarantees
to promote sales.
E) To provide the best support, a manufacturer must identify the services customers
value most and their relative importance.
F) A manufacturer can offer and charge for product support services in different ways.
1) It can provide a standard offering plus a basic level of services.
2) If the customer wants additional services, it can pay extra or increase its annual
purchases to a higher level, in which case the additional services would be at
extra costs called value-augmenting services that extend beyond the functioning
and performance of the product itself.
3) Many service companies offer service contracts (also called extended warranties).
4) Companies need to plan product design and service-mix decisions in tandem.
Postsale Service Strategy
The quality of customer service departments varies greatly. In providing service,
most companies progress through a series of stages from simply transferring
customer calls to the appropriate department for action to those companies eager to
receive customer requests who handle them expeditiously.
Customer Service Evolution
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Manufacturers usually start by running their own parts-and-service departments.
They want to stay close to the equipment and know its problems. They also find it
expensive and time consuming to train others and discover they can make good
money from parts and service if they are the only supplier and can charge a premium
price.
The Customer Service Imperative
Customer-service choices are increasing rapidly, however, and equipment
manufacturers increasingly must figure out how to make money on their equipment,
independent of service contracts.
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CHAPTER 14: DEVELOPING PRICING STRATEGIES AND
PROGRAMS
LEARNING OBJECTIVES
1. How do consumers process and evaluate prices?
2. How should a company set prices initially for products or services?
3. How should a company adapt prices to meet varying circumstances and
opportunities?
4. When should a company initiate a price change?
5. How should a company respond to a competitor’s price change?
SUMMARY
1. Despite the increased role of nonprice factors in modern marketing, price remains a
critical element of the marketing mix. Price is the only element that produces revenue;
the others produce costs.
2. In setting pricing policy, a company follows a six-step procedure. It selects its pricing
objective. It estimates the demand curve, the probable quantities it will sell at each
possible price. It estimates how its costs vary at different levels of output, at different
levels of accumulated production experience, and for differentiated marketing offers. It
examines competitors’ costs, prices, and offers. It selects a pricing method. It selects
the final price.
3. Companies do not usually set a single price, but rather a pricing structure that reflects
variations in geographical demand and costs, market-segment requirements,
purchase timing, order levels, and other factors. Several price-adaptation strategies
are available: (1) geographical pricing; (2) price discounts and allowances; (3)
promotional pricing; and (4) discriminatory pricing.
4. Firms often need to change prices. A price decrease might be brought about by
excess plant capacity, declining market share, a desire to dominate the market
through lower costs, or economic recession. A price increase might be brought about
by cost inflation or overdemand. Companies must carefully manage customer
perceptions in raising prices.
5. Companies must anticipate competitor price changes and prepare a contingent
response. A number of responses are possible in terms of maintaining or changing
price or quality.
6. The firm facing a competitor’s price change must try to understand the competitor’s
intent and the likely duration of the change. Strategy often depends on whether a
firm is producing homogeneous or nonhomogeneous products. A market leader
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attacked by lower-priced competitors can seek to better differentiate itself, introduce
its own low-cost competitor, or transform itself more completely.
OPENING THOUGHT
Students should have a good understanding of “price” in their role as consumers.
The instructor is encouraged to expand the student’s definition of “a price” by using
examples of different pricing structures (cell phone plans for example), promotional
pricing, geographical pricing, and price discrimination.
An area for some misunderstanding for students new to marketing is how the firm
reviews competitor’s reactions to price changes. Students will have some degree of
difficulty in assuming the “role” of a competitor and formulating defensive and/or
offensive plans to price changes. Sufficient classroom time should be spent in
clarifying these roles.
Discriminatory pricing is also an area that students new to marketing can have some
difficulty understanding for the first time. Although discriminatory pricing is not illegal,
per se, the distinctions are sometimes porous between the two.
MARKETING DEBATE
Is the Right Price a Fair Price?
Prices are often set to satisfy demand or to reflect the premium that consumers are willing
to pay for a product or service. Some critics shudder, however, at the thought of $2 bottles
of water, $150 running shoes, and $500 concert tickets.
Take a position: Prices should reflect the value that consumers are willing to pay versus
prices should primarily just reflect the cost involved in making a product or service.
Pro: Price, perhaps more than any other element of the marketing mix, communicates
value to the consumer. In the consumer decision-making process, we have learned that
customers are value-maximizers. They form an expectation of value and act on it. A
buyer’s satisfaction is a function of the product’s perceived performance and the buyer’s
expectations. So, if the product meets these consumers’ value definitions and the given
price point reflects these values, price is seen as acceptable. If the price and the product’s
value definition in the minds of the consumer are not consistent, sales will decline and
prices will drop until prices reach equilibrium with the consumers’ definition of value.
Con: Marketers have an obligation to the consumers to produce products (or services)
that meet consumer needs at the lowest price possible. Fair pricing does not assign any
consumer “value” definition into its equation and it should not because each consumer will
have differing definitions of “value” according to their prejudices. When marketers try to
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“assign” a “value definition” to its product, it runs the risks of alienating current customers
and missing other potential customers. Therefore, assigning a “fair” price, composed of
actual costs plus fair margins, allows the marketer to maximize its customer bases.
MARKETING DISCUSSION
Think of the pricing methods described in this chapter—markup pricing, target-return
pricing, perceived value pricing, value pricing, going rate pricing, and auction-type pricing.
As a consumer which method do you personally prefer to deal with. Why? If the average
price were to stay the same, which would you prefer: (1) for firms to set one price and not
deviate, or (2) to employ slightly higher prices most of the year, but slightly lower
discounted prices or specials for certain occasions.
Student answers will differ. However, the following notation from research is worth reenforcing during the class discussions.
•
The two different pricing strategies have been shown to affect consumer price
judgments.
•
Deep discounts (EDLP) can lead to lower perceived prices by consumers over
time than frequent shallow discounts (high-low) even if the actual averages are
the same.
Marketing Excellence: EBAY
1) Why has eBay succeeded as an online auction marketplace while so many others
have failed?
Suggested Answer: eBay’s success truly created a pricing revolution by allowing
buyers to determine what they would pay for an item; the result pleases both
sides because customers gain control and receive the best possible price while
sellers make good margins due to the site’s efficiency and wide reach. For years,
buyers and sellers used eBay as an informal guide to market value. eBay has
evolved to also offer a fixed-price “buy it now” option to those who don’t want to
wait for an auction and are willing to pay the seller’s price.
2) Evaluate eBay’s fee structure. Is it optimal or could it be improved? Why? How?
Suggested Answer: eBay’s pricing structure was developed to attract highvolume sellers and deter those who list only a few low-priced items. With eBay’s
expansion into a wide range of other categories—from boats and cars and travel
and tickets to health and beauty and home and garden—collectibles now make
up only a small percentage of eBay sales and eBay can and should revisit its
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pricing structure to maximize profits on products that more and more people are
buying—the fixed price option.
3) What’s next for eBay? How does it continue to grow when it needs both buyers
and sellers? Where will this growth come from?
Suggested Answer: Students answers will vary. Some might suggest that eBay
will become or morph into a version of AMAZON.COM. Others think that eBay’s
business plan and popularity will fade as other retailers embark on “auction” type
selling—either English or Dutch auction.
Marketing Excellence: SOUTHWEST AIRLINES
1) Southwest has mastered the low-price model and has the financial results to
prove it. Why don’t the other airlines copy Southwest’s model?
Suggested Answer: Southwest’s business model is based on streamlining its
operations, and is an integrated part of the corporate philosophy and structure of
the company. Other airline companies would have to “discard” their entire manual
of operations, labor relations, and equipment and schedules to copy the
Southwest model.
A few airlines are copying Southwest: JetBlue, RyanAir, and Asia Airlines to
name a few.
2) What risks does Southwest face? Can it continue to thrive as a low cost airline
when tough economic times hit?
Suggested Answer: The risks to Southwest’s strategy are in a number of areas.
Competitors copying Southwest’s low fares and point-to-point route structure is
one, increased fuel costs is two, and three, consumer sentiments about flying is
three.
Yes, there will always be a market for the “low price” leader in any consumer
category—airlines, computers, or retailers.
DETAILED CHAPTER OUTLINE
Price is the one element of the marketing mix that produces revenue; the other
elements produce costs. Prices are perhaps the easiest element of the marketing
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program to adjust; product features, channels, and even promotion take more time.
Price also communicates to the market the company’s intended value positioning of
its product or brand. A well-designed and marketed product can command a price
premium and reap big profits. But new economic realities have caused many
consumers to pinch pennies, and many companies have had to carefully review their
pricing strategies as a result.
Pricing decisions are clearly complex and difficult, and many marketers neglect their
pricing strategies. Holistic marketers must take into account many factors in making
pricing decisions—the company, customers, competition, and marketing environment.
Pricing decisions must be consistent with the firm’s marketing strategy and its target
markets and brand positionings.
UNDERSTANDING PRICING
Price is not just a number on a tag or an item. Price comes in many forms and
performs many functions.
A) Throughout most of history prices were set by negotiation between buyers and sellers.
B) Setting one price for all buyers is a relatively modern idea.
C) Traditionally, price has operated as the major determinant of buyer choice.
A Changing Pricing Environment
Pricing practices have changed significantly.
At the turn of the 21st Century, consumers had easy access to credit, so by
combining unique product formulations with enticing marketing campaigns, many
firms successfully traded consumers up to more expensive products and services.
The onset of the Great Recession—a recession more severe than previous
recessions which resulted in many jobs lost and many businesses and consumers
unable to receive loans due to their poorly leveraged situations—changed things
though.
A combination of environmentalism, renewed frugality, and concern about jobs and
home values forced many U.S. consumers to rethink how they spent their money.
They replaced luxury purchases with basics.
Downward price pressure from a changing economic environment coincided with
some longer-term trends in the technological environment. For some years now, the
Internet has been changing how buyers and sellers interact. Here are some ways:
1. Get instant price comparisons from thousands of vendors.
2. Name their price and have it met.
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3.
4.
5.
6.
Get products free.
Monitor customer behavior and tailor offers to individuals.
Give certain customers access to special prices.
Negotiate prices in online auctions and exchanges or even in person.
Marketing Insight: Giving it all away
Giving away products free via sampling has been a successful marketing tactic for
years; today with the advent of the Internet software, product and service companies
are following suit. Ryanair is an example.
How Companies Price
Companies do their pricing in a variety of ways.
A) In small companies, prices are often set by the boss.
B) Where pricing is a key factor, companies often establish a pricing department to set or
assist others in setting appropriate prices.
C) In large companies, top management sets general pricing objectives, policies, and …
D) Effectively designing and implementing pricing strategies requires a thorough
understanding of consumer pricing psychology and a systematic approach to setting,
adapting, and changing prices.
Consumer Psychology and Pricing
Marketers recognize that consumers often actively process price information,
interpreting prices in terms of their knowledge from prior purchasing experiences,
formal communications, and point-of-purchase or online resources.
A) Purchase decisions are based on how consumers perceive prices.
B) What they consider the current actual price—not the marketer’s stated price.
C) Consumers may have a lower price threshold below which prices may signal inferior
or unacceptable quality.
D) Upper price threshold above which prices are prohibitive and seen as not worth the
money.
E) Consumer attitudes about pricing took a dramatic shift in the recent economic
downturn as many found themselves unable to sustain their lifestyles.
F) Understanding how consumers arrive at their perceptions of prices is an important
marketing priority.
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Reference Prices
When examining products, consumers often employ reference prices.
A) In considering an observed price, consumers often compare it to an internal reference
price (pricing from memory).
B) An external frame of reference (posted “regular retail price”).
C) All types of reference prices are possible.
a.
b.
c.
d.
e.
f.
g.
h.
“fair price”
Typical price
Last price paid
Upper-Bound price
Lower-Bound price
Historical competitor price
Expected future price
Usual discounted price
D) When consumers evoke one or more of these frames of reference, their perceived
price can vary from the stated price.
1) These “unpleasant surprises”—when perceived price is lower than the stated
price—can have a greater impact on purchase.
2) Consumer expectations also play a key role in price response.
Price-Quality Inferences
A) Many consumers use price as an indicator of quality.
B) Some companies adopt exclusivity and scarcity to justify premium prices.
Price Endings
A) Many sellers believe that prices should end in an odd number.
B) Research has shown that consumers tend to process prices in a “left-to-right” manner
rather than by rounding.
C) Prices that end with a 0 or 5 are also popular and are thought to be easier for
consumers to process and retrieve from memory.
D) Pricing cues like “sale” signs and prices that end in a 9 are less effective the more
they are employed.
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SETTING THE PRICE
A firm must set a price for the first time when it develops a new product, when it
introduces its regular product into a new distribution channel or geographic area, and
when it enters bids on new contract work.
A) The firm must decide where to position its product on quality and price.
B) Most marketers have 3 to 5 price points or tiers.
C) The firm has to consider many factors in setting its pricing policy.
1) Six-step procedure
i.
ii.
iii.
iv.
v.
vi.
Selecting the pricing objective
Determining demand
Estimating costs
Analyzing competitors’ costs, prices, and offers
Selecting a pricing method
Selecting the final price
Step 1: Selecting the Pricing Objective
The company first decides where it wants to position its market offering. The clearer
a firm’s objectives, the easier it is to set price. The five major objectives are: survival,
maximum current profit, maximum market share, maximum market skimming, and
product-quality leadership.
Survival
Companies pursue survival as their major objective when they are plagued with
overcapacity, intense competition, or changing consumer wants.
A) Survival is a short-run objective.
Maximum Current Profit
Many companies try to set a price that will maximize current profits. They estimate
the demand and costs associated with alternative prices and choose the price that
produces maximum current profit, cash flow, or rate of return on investment.
Maximum Market Share
Some companies want to maximize their market share. They believe that a higher
sales volume will lead to lower unit costs and higher long-run profit.
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A) This practice is called market-penetration pricing.
B) The following conditions favor setting a low price:
1) The market is highly price-sensitive, and a low price stimulates market growth.
2) Production and distribution costs fall with accumulated production experience.
3) A low price discourages actual and potential competition.
Maximum Market Skimming
Companies unveiling a new technology favor setting high prices to maximize market
skimming.
A) This is also called market-skimming pricing, where prices start high
and are slowly lowered over time.
Product-Quality Leadership
A company might aim to be the product-quality leader in the market.
A) Many brands strive to be “affordable luxuries”—products or services
characterized by high levels of perceived quality, taste, and status with a price
just high enough not to be out of consumer’s reach.
Other Objectives
Nonprofit and public organizations may have other pricing objectives. Whatever the
specific objective, businesses that use price as a strategic tool will profit more than
those who simply let costs or the market determine their pricing.
1. Partial cost recovery
2. Nonprofit hospital
Step 2: Determining Demand
Each price will lead to a different level of demand and therefore have a different
impact on a company’s marketing objectives.
A) The normally inverse relationship between price and demand is captured in a
demand curve.
Price Sensitivity
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The demand curve shows the market’s probable purchase quantity at alternative
prices. The first step in estimating demand is to understand what affects price
sensitivity.
A) Generally speaking, customers are most price-sensitive to products that cost a lot or
are bought frequently.
B) Customers are less price-sensitive to low-cost items or items they buy infrequently.
C) They are also less price-sensitive when:
a.
b.
c.
d.
e.
There are few or no substitutes or competitors
They do not readily notice the higher price
They are slow to change their buying habits
They think the higher prices are justified
Price is only a small part of the total cost of obtaining, operating, and servicing the
product over its lifetime (total cost of ownership—TCO).
D) Companies prefer customers who are less price-sensitive.
Estimating Demand Curves
Most companies attempt to measure their demand curves using several different
methods.
A) Surveys can explore how many units consumers would buy at different proposed
prices.
B) Price experiments can vary the prices of different products to see how the change
affects sales.
C) Statistical analysis of past prices, quantities sold, and other factors can reveal
their relationships. These can be:
1) Longitudinal
2) Cross-sectional
Price Elasticity of Demand
Marketers need to know how responsive or elastic, demand would be to a change in
price.
A) The higher the elasticity, the greater the volume growth resulting from a 1% price
reduction. If demand is elastic, sellers will consider lowering the price.
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B) Price elasticity depends on the magnitude and direction of the contemplated price
change. It may be negligible with a small price change and substantial with a
large price change. It may differ for a price cut versus a price increase, and there
may be a price indifference band within which price changes have little or no
effect.
C) Long-run price elasticity may differ from short-run elasticity. Buyers may continue
to buy from a current supplier after a price increase but eventually switch
suppliers. Here demand is more elastic in the long run than in the short run, or
the reverse may happen: Buyers may drop a supplier after a price increase but
return later. The distinction between short-run and long-run elasticity means that
sellers will not know the total effect of a price change until time passes.
Step 3: Estimating Costs
Demand sets a ceiling on the price the company can charge for its product. Costs set
the floor.
Types of Costs and Levels of Production
A company’s costs take two forms, fixed and variable.
A) Fixed costs (also known as overhead) are costs that do not vary with production
or sales revenue.
B) Variable costs vary directly with the level of production.
C) Total costs consist of the sum of the fixed and variable costs for any given level of
production.
D) Average cost is the cost per unit at that level of production
E) Management wants to charge a price that will at least cover the total production
costs at a given level of production.
F) To price intelligently, management needs to know how its costs vary with different
levels of production.
G) To estimate the real profitability of dealing with different retailers, the
manufacturer needs to use activity-based accounting (ABC).
1) ABC accounting tries to identify the real costs associated with serving each
customer.
2) The key to effectively employing ABC is to define and judge “activities”
properly.
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Accumulated Production
The decline in the average cost with accumulated production experience is called the
experience curve or learning curve.
A) Experience-curve pricing carries major risks.
1) Aggressive pricing might give the product a cheap image.
2) The strategy assumes that competitors are weak followers.
B) Most experience-curve pricing has focused on manufacturing costs, but all costs,
including marketing costs, can be improved on.
Target Costing
Costs change with production scale and experience. They can also change as a
result of a concentrated effort to reduce them through target costing.
A) The objective is to bring the final cost projections into the target cost range.
Step 4: Analyzing Competitors’ Costs, Prices, and Offers
Within the range of possible prices determined by market demand and company
costs, the firm must take competitors’ costs, prices, and possible price reactions into
account.
A) The firm should first consider the nearest competitor’s price.
B) The introduction of any price or the change of any existing price can provoke a
response from customers, competitors, distributors, suppliers, and even the
government.
C) How can a firm anticipate a competitor’s reactions?
1) One way is to assume the competitor reacts in the standard way to a price
being set or changed.
Step 5: Selecting a Pricing Method
Given the customers’ demand schedule, the cost function, and competitors’ prices,
the company is now ready to select a price.
A) Costs set the floor to the price.
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B) Competitors’ prices and the price of substitutes provide an orienting point.
C) Customers’ assessment of unique features establishes the price ceiling.
D) There are six price-setting methods:
1)
2)
3)
4)
5)
6)
Markup pricing
Target-return pricing
Perceived-value pricing
Value pricing
Going-rate pricing
Auction-type pricing
Markup Pricing
A) The most elementary pricing method is to add a standard markup to the product’s
cost.
B) Does the use of standard markups make logical sense?
1) Generally, no. Any pricing method that ignores current demand, perceived
value, and competition is not likely to lead to the optimal price.
C) Markup pricing remains popular.
1) Sellers can determine costs much more easily than they can estimate
demand.
2) By tying the price to cost, sellers simplify the pricing task.
3) Where all firms in the industry use this pricing method, prices tend to be
similar.
4) Many people feel that cost-plus pricing is fairer to both buyers and sellers.
Target-Return Pricing
A) In target-return pricing, the firm determines the price that would yield its target
rate of return on investments (ROI).
B) Target-return pricing tends to ignore price elasticity and competitors’ prices.
Perceived-Value Pricing
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An increasing number of companies base their price on the customer’s perceived
value. They must deliver the value promised by their value proposition, and the
customer must perceive this value.
A) Perceived value is made up of several characteristics:
1)
2)
3)
4)
5)
6)
7)
Buyer’s image of the product performance
Channel deliverables
The warranty quality
Customer support
Supplier’s reputation
Trustworthiness
Esteem
The key to perceived-value pricing is to deliver more value than the competitor and to
demonstrate this to prospective buyers.
Value Pricing
In recent years, several companies have adopted value pricing: they win loyal
customers by charging a fairly low price for a high-quality offering.
A) Value pricing is not a matter of simply setting lower prices.
B) It is a matter of reengineering the company’s operations to become a low-cost
producer without sacrificing quality.
C) Lowering prices significantly helps to attract a large number of value-conscious
customers.
D) An important type of value pricing is everyday low pricing (EDLP) that takes place
at the retail level.
E) A retailer who holds to an EDLP pricing policy charges a constant low price with
little or no price promotions and special sales.
F) In high-low pricing, the retailer charges higher prices on an everyday basis but
then runs frequent promotions in which prices are temporarily lowered below the
EDLP level.
G) The two different pricing strategies have been shown to affect consumer price
judgments.
1) Deep discounts (EDLP) can lead to lower perceived prices by consumers
over time than frequent shallow discounts (high-low) even if the actual
averages are the same.
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H) Some retailers have even based their entire marketing strategy around what
could be called extreme everyday low pricing.
Going-Rate Pricing
In going-rate pricing, the firm bases its price largely on competitor’s prices.
A) The firm might charge the same, more, or less than major competitor(s).
B) Going-rate pricing is quite popular where costs are difficult to measure or
competitive response is uncertain.
Auction-type pricing
A) Auction-type pricing is growing more popular, especially with the growth of the
Internet.
B) There are three types of auction-type pricing:
1) English auctions (ascending bids)
2) Dutch auctions (descending bids)
3) Sealed-bid auctions
Step 6: Selecting the Final Price
Pricing methods narrow the range from which the company must select its final price.
In selecting the price, the company must consider additional factors, including the
impact of other marketing activities, company pricing policies, gain-and-risk sharing
pricing, and the impact of price on other parties.
Impact of Other Marketing Activities
The final price must take into account the brand’s quality and advertising relative to
the competition.
A) Farris and Reibstein’s findings suggest that price is not as important as quality
and other benefits in the market offering.
Marketing Insight: Stealth price increase
Companies trying to figure out how to increase revenue without really increasing
prices are increasingly charging additional fees for what had once been free
features/services.
Company Pricing Policies
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The price must be consistent with company pricing policies.
A) Many companies set up a pricing department to develop policies and establish or
approve pricing decisions.
1) The aim is to ensure that salespeople quote prices that are reasonable to
customers, and
2) Profitable to the company.
Gain-and-Risk Sharing Pricing
Buyers may resist accepting a seller’s proposal because of a high-perceived level of
risk.
A) The seller has the option of offering to absorb part or all of the risk if he does not
deliver the full promised value.
Impact of Price on Other Parties
Management must also consider the reactions of other parties to the contemplated
price:
A)
B)
C)
D)
E)
F)
How will distributors and dealers feel about it?
Will the sales force be willing to sell at that price?
How will competitors react?
Will suppliers raise their prices when they see the company’s price?
Will the government intervene and prevent this price from being charged?
Marketers need to know the laws regulating pricing in the United States.
ADAPTING THE PRICE
Companies usually do not set a single price but rather develop a pricing structure
that reflects variations in geographical demand and costs, market-segment
requirements, purchase timing, order levels, delivery frequency, guarantees, service
contracts, and other factors.
Geographical Pricing (Cash, Countertrade, Barter)
A) In geographical pricing, the company decides how to price its products to different
customers in different locations and countries.
B) Another question is how to get paid. This issue is critical when buyers lack
sufficient hard currency to pay for their purchases. Many buyers want to offer
other items in payment, a practice known as countertrade.
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C) Barter. The buyer and seller directly exchange goods, with no money and no
third party involved.
D) Compensation deal. The seller receives some percentage of the payment in
cash and the rest in products. A British aircraft manufacturer sold planes to Brazil
for 70% cash and the rest in coffee.
E) Buyback arrangement. The seller sells a plant, equipment, or technology to
another country and agrees to accept as partial payment products manufactured
with the supplied equipment. A U.S. chemical company built a plant for an Indian
company and accepted partial payment in cash and the remainder in chemicals
manufactured at the plant.
F) Offset. The seller receives full payment in cash but agrees to spend a substantial
amount of the money in that country within a stated time period. PepsiCo sold its
cola syrup to Russia for rubles and agreed to buy Russian vodka at a certain rate
for sale in the United States.
Price Discounts and Allowances
Most companies will adjust their list price and give discounts and allowances for early
payment, volume purchases, and off-season buying (see Table 14.5). Companies
must do this carefully or find their profits much lower than planned.
A) Discount pricing has become the modus operandi of a surprising number of
companies offering both products and services.
B) Some product categories tend to self-destruct by always being on sale.
C) Discounting can be a useful tool if the company can gain concessions in return.
D) Sales management needs to monitor the proportion of customers who are
receiving discounts.
E) Higher levels of management should conduct a net price analysis to arrive at the
“real price” of their offering.
Promotional Pricing
Companies can use several pricing techniques to stimulate early purchase:
A)
B)
C)
D)
Loss-leader pricing
Special-event pricing
Special customer pricing
Cash rebates
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E)
F)
G)
H)
Low-interest financing
Longer payment terms
Warranties and service contracts
Psychological discounting
Promotional-pricing strategies are often a zero-sum game.
Differentiated Pricing
Companies often adjust their basic price to accommodate differences in customers,
products, locations, and so on.
A) Price discrimination occurs when a company sells a product or service at two or
more prices that do not reflect a proportional difference in costs.
1) In first-degree price discrimination, the seller charges a separate price to each
customer depending on the intensity of his or her demand.
2) In second-degree price discrimination, the seller charges less to buyers who
buy a larger volume.
3) In third-degree price discrimination, the seller charges different amounts to
different classes of buyers:
a.
b.
c.
d.
e.
f.
Customer-segment pricing
Product-form pricing
Image pricing
Channel pricing
Location pricing
Time pricing
B) Yield pricing, and yield management systems are used to offer discounts based
upon some criteria.
C) The phenomenon of offering different pricing schedules to different consumers is
exploding.
D) Research shows that constant price variations work best in situations where there
is no bond between buyer and seller.
E) The tactic most companies favor, however, is to use variable prices as a reward
rather than a penalty.
F) Some forms of price discrimination are illegal.
G) Price discrimination is legal if the seller can prove that its costs are different when
selling different volumes or different quantities of the same product to retailers.
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H) Predatory pricing—selling below cost with the intent of destroying competition—is
unlawful.
I)
For price discrimination to work, certain conditions must exist:
1) The market must be segmentable and the segments must show different
intensities of demands.
2) Members in the lower-price segment must not be able to resell the product to
the higher-price segment.
3) Competitors must not be able to undersell the firm in the higher-price
segment.
4) The cost of segmenting and policing the market must not exceed the extra
revenue derived from price discrimination.
5) The practice must not breed customer resentment and ill will.
6) The particular form of price discrimination must not be illegal.
INITIATING AND RESPONDING TO PRICE CHANGES
Companies often face situations when they may need to cut or raise prices.
Initiating Price Cuts
Several circumstances might lead a firm to cut prices:
A) Excess plant capacity
B) Companies may initiate a price cut in a drive to dominate the market through
lower costs.
C) Either the company starts with lower costs or initiates price cuts in hope of
gaining market share and lower costs.
D) A price-cutting strategy involves possible traps:
1)
2)
3)
4)
Low-quality trap
Fragile market-share trap
Shallow-pockets trap
Price-war trap
Initiating Price Increases
A successful price increase can raise profits considerably.
A) A major circumstance provoking price increases is cost inflation.
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1) Rising costs unmatched by productivity gains squeeze profit margins and lead
companies to regular rounds of price increases.
B) Companies often raise their prices by more than the cost increase in anticipation
of further inflation or governmental price controls, in a practice called anticipatory
pricing.
C) Another factor leading to price increase is over-demand.
1) The price can be increased in the following ways:
a.
b.
c.
d.
Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts
D) A company needs to decide whether to raise its price sharply on a one-time basis
or to raise it by small amounts several times.
1) Generally, consumers prefer small price increases on a regular basis to
sudden, sharp increases.
E) In passing on price increases to consumers, the company must avoid looking like
a price gouger. Customer memories are long, and they can turn against
companies they perceive as price gougers.
F) Several techniques help consumers avoid sticker shock and a hostile reaction
when prices rise:
1. Sense of fairness must surround any price increase.
2. Customers must be given advance notice so that they can do forward buying
or shop around.
3. Sharp price increases need to be explained in understandable terms.
4. Making low-visibility price moves first is also a good technique:
a.
b.
c.
d.
Eliminating discounts
Increasing minimum order sizes
Curtailing production of low-margin products
Creating new economy brands
Given strong consumer resistance, marketers go to great lengths to find alternate
approaches that avoid increasing prices when they otherwise would have done so.
Here are a few popular ones.
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1. Shrinking the amount of product instead of raising the price. (Hershey Foods
maintained its candy bar price but trimmed its size. Nestlé maintained its size but
raised the price.)
2. Substituting less-expensive materials or ingredients. (Many candy bar companies
substituted synthetic chocolate for real chocolate to fight cocoa price increases.)
3. Reducing or removing product features. (Sears engineered down a number of its
appliances so they could be priced competitively with those sold in discount
stores.)
4. Removing or reducing product services, such as installation or free delivery.
5. Using less-expensive packaging material or larger package sizes.
6. Reducing the number of sizes and models offered.
7. Creating new economy brands. (Jewel food stores introduced 170 generic items
selling at 10% to 30% less than national brands.)
Responding to Competitor’s Price Changes
How should a firm respond to a price cut initiated by a competitor? The best
response varies with the situation.
A) One way is to assume that the competitor reacts in a set way to price changes.
B) The other is to assume that the competitor treats each price change as a fresh
challenge and reacts according to self-interests at that time.
C) In markets characterized by high product homogeneity, the firm should search for
ways to enhance its augmented product.
1) If not it will have to meet the price reduction.
D) In non-homogeneous product markets, the firm has more latitude. It needs to
consider the following:
1. Why did the competitor change the price?
2. Does the competitor plan to make the price change temporary or permanent?
3. What will happen to the company’s market share and profits if it does not
respond?
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4. Are other companies going to respond?
5. What are the competitor’s and other firm’s responses likely to be to each
possible reaction?
E) Market leaders frequently face aggressive price cutting by smaller firms trying to
build market share.
F) The brand leader can respond in several ways:
1.
2.
3.
4.
5.
Maintain price
Maintain price and add value
Reduce price
Increase price and improve quality
Launch a low-price fighter line
G) The company has to consider the product’s:
1.
2.
3.
4.
5.
6.
Stage in the life cycle
Importance in the company’s portfolio
The competitor’s intentions and resources
The market’s price and quality sensitivity
The behavior costs of /with volume
The company’s alternative opportunities
H) An extended analysis of alternatives may not be feasible when the attack occurs.
I) It would make better sense to anticipate possible competitors’ price changes and
to prepare contingent responses.
Marketing Memo: How to fight low-cost rivals
The first approach to competing against cut-price players is to differentiate the
product or service through various means. Secondly, companies must not use
differentiation tactics in isolation; companies must be able to persuade consumers to
pay for the additional benefits; companies must first bring costs and benefits in line.
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CHAPTER 15: DESIGNING AND MANAGING INTEGRATED
MARKETING
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
6.
What is a marketing channel system and a value network?
What work marketing channels perform?
How should channels be designed?
What decisions companies face in managing their channels?
How companies should integrate channels and manage channel conflict?
What are the key issues with e-commerce and m-commerce?
SUMMARY
1. Most producers do not sell their goods directly to final users. Between producers and
final users stands one or more marketing channels, a host of marketing intermediaries
performing a variety of functions.
2. Marketing-channel decisions are among the most critical decisions facing
management. The company’s chosen channel(s) profoundly affect all other marketing
decisions.
3. Companies use intermediaries when they lack the financial resources to carry out
direct marketing, when direct marketing is not feasible, and when they can earn more
by doing so. The most important functions performed by intermediaries are
information, promotion, negotiation, ordering, financing, risk taking, physical
possession, payment, and title.
4. Manufacturers have many alternatives for reaching a market. They can sell direct or
use one-, two-, or three-level channels. Deciding which type(s) of channel to use calls
for analyzing customer needs, establishing channel objectives, and identifying and
evaluating the major alternatives, including the types and numbers of intermediaries
involved in the channel.
5. Effective channel management calls for selecting intermediaries and training and
motivating them. The goal is to build a long-term partnership that will be profitable for
all channel members.
6. Marketing channels are characterized by continuous and sometimes dramatic change.
Three of the most important trends are the growth of vertical marketing systems,
horizontal marketing systems, and multichannel marketing systems.
7. All marketing channels have the potential for conflict and competition resulting from
such sources as goal incompatibility, poorly defined roles and rights, perceptual
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differences, and interdependent relationships. There are a number of different
approaches companies can take to try to manage conflict.
8. Channel arrangements are up to the company, but there are certain legal and ethical
issues to be considered with regard to practices such as exclusive dealing or
territories, tying agreements, and dealers’ rights.
9. E-commerce has grown in importance as companies have adopted “brick-and-click”
channel systems. Channel integration must recognize the distinctive strengths of
online and offline selling and maximize their joint contributions.
10. An emerging new area is m-commerce and marketing through cell phones and PDAs.
OPENING THOUGHT
Most students are not familiar with channels of distribution, except, perhaps, from the
retailer in which they have bought products. Therefore, the instructor has to ensure
that they clarify the various channels of distribution during this chapter lecture.
Examples of the various channels for products familiar to the students can help
illustrate the complexity of the process.
Second, because marketing channel decisions are mostly hidden from the final
consumer, the instructor should make every effort to diagram the decision-making
process for each level of channel distribution. Starting with the retail price of the
product, then subtracting each distribution level margins or markups shows the
effects of distribution to or for the product.
Managing channels of distribution will be new to most students, as will the definitions
of channel conflict and channel support. The instructor can best serve the student by
fully diagramming a particular product from a channel of distribution perspective and
talking about channel roles, conflicts, training, and motivation.
The students will probably be most interested in, or knowledgeable about, ecommerce and see e-commerce as the future of business. The instructor should
caution the students about assuming that all business transactions (or a great
majority of them) will flow to e-commerce by describing to the students the various
consumer demographic groups, buying habits, and comfortableness with technology.
An in-class discussion on the merits and demerits of e-commerce should provide for
a lively cross-section of opinions.
MARKETING DEBATE
Does It Matter Where You Sell?
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Some marketers feel that the image of the particular channel in which they sell their
products does not matter—all that matters is that the right customers shop there and the
product is displayed in the right way. Others maintain that channel images—such as a
retail store—can be critical and must be consistent with the image of the product.
Take a position: Channel images do not really affect the brand images of the products
they sell that much versus channel images must be consistent with the brand image.
Pro: Buyers buy products or use services to meet a particular need or want. In the
marketing-decision making process, a consumer has a preformed image of the product or
service based upon the company’s reputation or marketing messages. Therefore, where
the consumer finally purchases the product is immaterial to the consumer, as long as, the
product performs to expectations and that the process of purchasing the product is as
simplified as possible. Strongly advertised products, or those products, with strong brand
names will have consumers seeking out their products regardless of which channel of
distribution the company uses. Some marketers benefit from extensive distribution
channels, as their products are impulse items, last minute decision items, or cater to
consumer habits. For marketers of these items, it is important for them to be available
when the consumers’ desires strike.
Con: The consumer buying process, the consumer “value proposition,” changes and
reflects shifting priorities based on the individual needs and wants of the consumer at the
time of purchase. For key products or services, consumers require, and even demand,
different levels of service, attention, or “exclusivity” in the purchase. These consumers’
needs can and are met by different channels of distribution and are influenced by what
channel or channels of distribution the producer uses; how well trained and motivated the
channel is; and how the channel services the customer.
There is no “correct” or “optimum” channel of distribution for all products. As products flow
through a life cycle, older channels will evaporate and newer ones will develop. As
consumer attitudes, positions, and usages of the products change, the consumers will
navigate to differing channels. A product sold at one time through exclusive dealerships,
at the beginning of its life cycle, may now be sold through mass-merchants or discounters
at the end of its product life cycle.
Marketing Excellence: AMAZON. COM
1) Why has Amazon.com succeeded online when so many other companies have
failed?
Suggested Answer: One key to Amazon.com’s success in all these different
ventures is its willingness to invest in the latest Internet technology to make
shopping online faster, easier, and more personally rewarding for its customers
and third-party merchants.
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Amazon.com has established itself as an electronic marketplace by enabling
merchants of all kinds to sell items on the site useful information and more
choices Amazon.com has diversified its product lines into DVDs, music CDs,
computer software, video games, electronics, apparel, furniture, food, toys, and
more Amazon.com introduced Amazon MP3, which competes directly with
Apple’s iTunes and has participation from all the major music labels.
2) Will the Kindle revolutionize the book industry? Why or why not?
Suggested Answer: Student’s answers will vary—Apple fans will disagree stating
that the iPad will overtake the Kindle in sales and usage in a few years.
Traditionalists will hold that the “paper” book still has a loyal following.
3) What’s next for Amazon.com? Is cloud computing the right direction for the
company? Where else can it grow?
Suggested Answer: Student answers will be mostly speculative in nature but one
area that could be addressed is the merger / assimilation of M-commerce,
Amazon.com, and E-commerce so that the consumer would be able to “buy”
whatever they’d like, whenever they’d like, from wherever they’re at!
Marketing Excellence: COSTCO
1) What is unique about Costco’s channel management process? What components
can other retailers borrow or implement?
Suggested Answer: Costco buys its merchandise directly from the manufacturer.
Products are shipped directly to Costco warehouses or to a depot, which
reallocates the shipments to Costco warehouses within 24 hours.
This process eliminates several steps such as using a distributor and other
intermediaries, eliminating costs associated with storage, additional freight, and
handling.
At the warehouse, shipments are often taken directly to the floor, unwrapped, and
left on the pallet, ready to sell. Most of the products sold in Costco are staples but
there are special items that are offered only temporarily—“treasure hunt” items.
The average store is 143,000 square feet with floor plans designed to optimize
selling space, the handling of merchandise, and the control of inventory. Decor is
simple: concrete floors, barebones signage, and product displays that consist of
pallets right off the truck. Central skylights and day lighting controls monitor
energy usage, and Costco also saves by not supplying its own shopping bags.
Instead, consumers use leftover boxes and crates stacked near cash registers to
carry home their purchases.
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Costco accepts only debit cards, cash, checks, and American Express—no
credit cards.
Costco’s success has come from focusing on a handful of business practices: sell
a limited number of items, keep costs down, rely on high volume, pay workers
well, require consumers to buy memberships, and target upscale consumers and
business owners.
2) Where can Costco improve? Should it offer more products or advertise more? Why or
why not?
Suggested Answer: Student answers will vary but students should evaluate the
success of Costco to date in executing their marketing strategy—“to continually
provide our members with quality goods and services at the lowest possible
prices” with the challenges of diversification, merger, or expansion that would
inhibit their abilities to meet their promises.
MARKETING DISCUSSION
Think of your favorite retailers. How have the retailers integrated channel systems? How
would you like to see channels integrated? Do you use multiple channels from the
retailers? Why?
Student answers will differ depending upon their favorite retailers. However, all answers
should include the definition of channel integration:
Customers expect channel integration characterized by the following features:
1. The ability to order a product online and pick it up at a convenient retail location.
2. The ability to return an online ordered product to a nearby store of the retailer.
3. The right to receive discounts based on total online and off-line purchases
DETAILED CHAPTER OUTLINE
Successful value creation needs successful value delivery. Holistic marketers are
increasingly taking a value network view of their businesses. Instead of limiting their
focus to their immediate suppliers, distributors, and customers, they are examining
the whole supply chain that links raw materials, components, and manufactured
goods and shows how they move toward the final consumers. Companies are
looking at the suppliers’ suppliers upstream and at the distributors’ customers
downstream. They are looking at customer segments and considering a wide range
of different possible means to sell, distribute, and service their offerings. Companies
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today must build and manage a continuously evolving and increasingly complex
channel system and value network.
MARKETING CHANNELS AND VALUE NETWORKS
Most producers do not sell their goods directly to the final users; between them
stands a set of intermediaries performing a variety of functions.
A) These intermediaries constitute a marketing channel (also called a trade channel
or distribution channel).
B) Marketing channels are sets of interdependent organizations involved in the
process of making a product or service available for use or consumption.
C) Some intermediaries buy, take title to, and resell the merchandise; they are called
merchants.
D) Others search for customers and may negotiate on the producer’s behalf but do
not take title to the goods; they are called agents.
E) Still others assist in the distribution process but neither takes title to goods nor
negotiates purchases or sales; they are called facilitators.
The Importance of Channels
A marketing channel system is the particular set of marketing channels employed by
a firm.
A) Decisions about the marketing channel system are among the most critical facing
management.
B) In the United States, channel members collectively earn margins that account for
30 to 50 percent of the ultimate selling price.
C) Marketing channels also represent a substantial opportunity cost.
1) Converting potential buyers into profitable orders is one of the chief roles of
marketing channels.
2) Marketing channels must not just serve markets, they must also make
markets.
D) The channels chosen affect all other marketing decisions:
1) The company’s pricing depends on whether it uses mass-merchandisers or
high-quality boutiques.
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2) The firm’s sales force and advertising decisions depend on how much training
and motivation dealers need.
E) In addition, channel decisions involve relatively long-term commitments to other
firms as well as a set of policies and procedures.
F) In managing its intermediaries, the firm must decide how much effort to devote to
push versus pull marketing.
1) A push strategy involves the manufacturer using its sales force and trade
promotion money to induce intermediaries to carry, promote, and sell the
product to end user.
a. Push strategy is appropriate where there is low brand loyalty in a category,
brand choice is made in the stores, the product is an impulse item, and
product benefits are well understood.
2) A pull strategy involves the manufacturer using advertising and promotion to
induce consumers to ask intermediaries for the product, thus inducing the
intermediaries to order it.
a. Pull strategy is appropriate when there is high brand loyalty and high
involvement in the category, when people perceive differences between
brands, and when people choose the brand before they go to the store.
Hybrid Channels and Multichannel Marketing
Today’s successful companies are also multiplying the number of “go-to-market” or
hybrid channels in any one market area.
Hybrid channels or multichannel marketing occurs when a single firm uses two or
more marketing channels to reach customer segments.
A) Companies that manage hybrid channels must make sure these channels work
well together and match each target customer’s preferred ways of doing business.
B) Customers expect channel integration, characterized by the following features:
1) order a product online and pick it up at a convenient retail location
2) to return an online ordered product to a nearby store of the retailer.
3) receive discounts based on total online and off-line purchases.
Value Networks
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A supply chain view of a firm sees markets as destination points and amounts to a
linear view of the flow. The company should first think of the target market, and then
design the supply chain backward from that point.
A) This view has been called demand chain planning.
B) An even broader view sees a company at the center of a value network—a
system of partnerships and alliances that a firm creates to source, augment, and
deliver its offerings.
C) A value network includes a firm’s suppliers, its suppliers’ suppliers, its immediate
customers, and their end customers.
D) A company needs to orchestrate these parties to enable it to deliver superior
value to the target market.
E) Demand chain planning yields several insights:
1) The company can estimate whether more money is made upstream or
downstream.
2) The company is more aware of disturbances anywhere in the supply chain
that might cause costs, prices, or supplies to change suddenly.
3) Companies can go online with their business partners to carry on faster and
more accurate communications, transactions, and payments to reduce costs,
speed up information, and increase accuracy.
F) Managing this value network has required companies to make increasing
investments in information technology (IT) and software.
G) Marketers have traditionally focused on the side of the value network that looks
toward the customer. In the future, they will increasingly participate in, influence
their companies’ upstream activities, and become network managers.
THE ROLE OF MARKETING CHANNELS
Why would a producer delegate some of the selling jobs to intermediaries,
relinquishing control over how and to whom the products are sold?
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Through their contacts, experience, specialization, and scale of operation,
intermediaries make goods widely available and accessible to target markets, usually
offering the firm more effectiveness and efficiency than it can achieve on its own.
A) Many producers lack the financial resources to carry out direct marketing.
Channel Functions and Flows
A marketing channel performs the work of moving goods from producers to
consumers. It overcomes the time, place, and possession gaps that separate goods
and services from those who need and want them.
A) Members of the marketing channel perform a number of key functions.
B) Some functions constitute a forward flow of activity from the company to the
customer.
C) Other functions constitute a backward flow from customers to the company.
D) Still others occur in both directions.
A manufacturer selling a physical product and services might require three
channels:
1) A sales channel
2) A delivery channel
3) A service channel
E) The question is not whether various channel functions need to be performed but
rather, who is to perform them.
F) All channel functions have three things in common:
1) They use up scarce resources.
2) They can often be performed better though specialization.
3) They can be shifted among channel members.
Channel Levels
The producer and the final consumer are part of every channel.
A) A zero-level channel (also called a direct-marketing channel) consists of a
manufacturer selling directly to the final consumer.
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B) A one-level channel contains one selling intermediary such as a retailer.
C) A two-level channel contains two intermediaries—a wholesaler and a retailer.
D) A three-level channel contains wholesalers, jobbers, and retailers.
Channels normally describe a forward movement of products from source to user.
A) One can also talk about reverse-flow channels.
B) Reverse-flow channels are important in the following cases:
1)
2)
3)
4)
To reuse products or containers
To refurbish products for resale
To recycle products
To dispose of products and packaging
C) Several intermediaries play a role in reverse-flow channels.
Service Sector Channels
As Internet and other technologies advance, service industries are operating through
new channels.
A) Marketing channels also keep changing in “person” marketing.
CHANNEL-DESIGN DECISIONS
To design a marketing channel system, marketers analyze customer needs,
establishing channel objectives, identifying major channel alternatives, and
evaluating major channel alternatives.
Analyzing Customers’ Desired Service Output Levels
Consumers may choose the channels they prefer based on price, product assortment,
and convenience, as well as their own shopping goals (economic, social, or
experiential).
Even the same consumer may choose different channels for different functions in a
purchase.
Some consumers are willing to “trade up” or “trade down.”
Channels produce five service outputs:
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1)
2)
3)
4)
5)
Lot size
Waiting and delivery time
Spatial convenience
Product variety
Service backup
The marketing-channel designer knows that providing greater service outputs means
increased channel costs and higher prices for customers.
Establishing Objectives and Constraints
Marketers should state their channel objectives in terms of targeted service output
levels.
A) Channel institutions should arrange their functional tasks to minimize total
channel costs and still provide desired levels of service outputs.
B) Planners can identify several market segments that want different service levels.
C) Channel objectives vary with product characteristics.
D) Marketers must adapt their channel objectives to the larger environment.
E) Channel design must take into account the strengths and weaknesses of different
types of intermediaries.
F) In entering new markets, firms often closely observe what other firms are doing.
Identifying and Evaluating Major Channel Alternatives
Each channel has unique strengths as well as weaknesses. A channel alternative is
described by three elements:
1) The types of available business intermediaries.
2) The number of intermediaries needed.
3) The terms and responsibilities of each channel member.
Types of Intermediaries
A firm needs to identify the types of intermediaries available to carry on its channel
work.
A) Companies should search for innovative marketing channels.
B) Sometimes a company chooses an unconventional channel because of the
difficulty, cost, or ineffectiveness of working with the dominant channel. The
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advantage is that the company will encounter less competition during the initial
move into this channel.
Number of Intermediaries
Three strategies based on the number of intermediaries are exclusive distribution,
selective distribution, and intensive distribution.
A) Exclusive distribution means severely limiting the number of intermediaries.
1) It is used when the producer wants to maintain control over the service level
and outputs offered by the resellers.
2) Often it involves exclusive dealing arrangements.
3) Exclusive deals between suppliers and retailers are becoming a mainstay for
specialists looking for an edge in the business world.
B) Selective distribution involves the use of more than a few, but less than all, of the
intermediaries who are willing to carry a particular product.
C) Intensive distribution consists of the manufacturer placing goods or services in as
many outlets as possible.
D) Manufacturers are constantly tempted to move from exclusive or selective
distribution to intensive distribution to increase coverage and sales.
Terms and Responsibilities of Channel Members
Each channel member must be treated respectfully and given the opportunity to be
profitable.
A) The main elements in the “trade-relations mix” are:
1)
2)
3)
4)
Price policy
Conditions of sale
Distributors’ territorial rights
Mutual services and responsibilities
Evaluating the Major Alternatives
Each channel alternative needs to be evaluated against economic, control, and
adaptive
criteria.
Economic Criteria
A) Each channel will produce a different level of sales and costs.
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B) Firms will try to align customers and channels to maximize demand at the lowest
overall cost.
C) Sellers try to replace high-cost channels with low-cost channels as long as the
value added per sale is sufficient.
Control and Adaptive Criteria
Using a sales agency poses a control problem.
To develop a channel, members must make some degree of commitment to each
other for a specified period of time
A) Yet these commitments invariably lead to a decrease in the producer’s ability to
respond to a changing marketplace.
B) In rapidly, changing, volatile, or uncertain product markets, the producer needs
channel structures and policies that provide high adaptability.
CHANNEL-MANAGEMENT DECISIONS
After a company has chosen a channel system, it must select, train, motivate, and
evaluate individual intermediaries for each channel. It must also modify channel
design and arrangements over time.
Selecting Channel Members
To customers, the channels are the company. Companies need to select their
channel members carefully.
A) To facilitate channel member selection, producers should determine what
characteristics distinguish better intermediaries.
B) They should evaluate the:
1)
2)
3)
4)
5)
6)
Number of years in business
Other lines carried
Growth and profit records
Financial strength
Cooperativeness
Service reputation
C) If the intermediaries are sales agents, producers should evaluate the:
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1) Number and character of other lines carried.
2) Size and quality of the sales force.
D) If the intermediaries are department stores that want exclusive distribution, the
producer should evaluate:
1) Locations
2) Future growth potential
3) Type of clientele
Training and Motivating Channel Members
A company needs to determine intermediaries’ needs and construct a channel
positioning such that its channel offering is tailored to provide superior value to these
intermediaries.
A) Stimulating channel members to top performance starts with understanding their
needs and wants.
B) The company should provide training programs and market research programs to
improve intermediaries’ performance.
C) The company must constantly communicate its view that the intermediaries are
partners in a joint effort to satisfy end users of the product.
Channel Power
Producers vary greatly in skill in managing distributors.
Channel power can be defined as the ability to alter channel member’s behavior.
Manufacturers can draw on the following types of power to elicit cooperation:
1)
2)
3)
4)
5)
Coercive power
Reward power
Legitimate power
Expert power
Referent power
Coercive and reward power are objectively observable.
Legitimate, expert, and referent power are more subjective and dependent on the
ability and willingness of parties to recognize them.
Most producers see gaining intermediaries cooperation as a huge challenge.
Companies that are more sophisticated try to forge a long-term partnership with
distributors.
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Channel Partnerships
More sophisticated companies try to forge a long-term partnership with distributors.
The manufacturer clearly communicates what it wants from its distributors in the way
of market coverage, inventory levels, marketing development, account solicitation,
technical advice and services, and marketing information and may introduce a
compensation plan for adhering to the policies.
To streamline the supply chain and cut costs, many manufacturers and retailers have
adopted efficient consumer response practices (ECR) to organize their relationships
in three areas:
1) demand side management or collaborative practices
2) supply side management to optimize supply
3) enablers and integrators, to support joint activities that reduce operational
problems
Evaluating Channel Members
Producers must periodically evaluate intermediaries’ performance against such
standards as sales quota attainment, average inventory levels, customer delivery
times, treatment of damaged and lost goods, and cooperation in promotional and
training programs.
A) Under performers need to be counseled, retrained, motivated, or terminated
Modifying Channel Design and Arrangements
No channel strategy remains effective over the whole product life cycle. In
competitive markets with low entry barriers the optimal structure will inevitably
change over time. The change could mean adding or dropping individual market
channels or channel members or developing a totally new way to sell goods.
Channel Evolution
A new firm typically starts as a local operation selling in a fairly circumscribed market,
using a few existing intermediaries.
Identifying the best channels might not be a problem; the problem is often to
convince the available intermediaries to handle the firm’s line.
If the firm is successful, it might branch into new markets with different channels. In
smaller markets, the firm might sell directly to retailers; in larger markets, through
distributors.
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In rural areas, it might work with general-goods merchants; in urban areas, with
limited-line merchants. It might grant exclusive franchises or sell through all willing
outlets.
Channel Modification Decisions
A producer must periodically review and modify its channel design and arrangements.
The distribution channel may not work as planned, consumer buying patterns change,
the market expands, new competition arises, innovative distribution channels emerge,
and the product moves into later stages in the product life cycle.
Adding or dropping individual channel members requires an incremental analysis.
Increasingly detailed customer databases and sophisticated analysis tools can
provide guidance into those decisions.
Global Channel Considerations
International markets pose distinct challenges, including variations in customers’
shopping habits, but create opportunities at the same time.
The first step in global channel planning, as is often the case in marketing, is to get
close to customers.
A good retail strategy that offers customers a positive shopping experience and
unique value, if properly adapted, is likely to find success in more than one market.
CHANNEL INTEGRATION AND SYSTEMS
Distribution channels don’t stand still. New wholesaling and retailing institutions
emerge, and new channel systems evolve.
Vertical Marketing Systems
A conventional marketing system comprises an independent producer, wholesaler(s),
and retailer(s).
A) A vertical marketing system (VMS), by contrast, comprises the producer,
wholesaler(s), and retailer(s) acting as a unified system.
1) One channel member, the channel captain, owns the others, franchises them,
or has so much power that they all cooperate.
B) VMSs arose as a result of strong channel members’ attempts to control channel
behavior and eliminate the conflict that results when independent members
pursue their own objectives.
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C) VMSs achieve economies through:
1) Size
2) Bargaining power
3) The elimination of duplicated services
D) There are three types of VMS:
1) Corporate
2) Administered
3) Contractual
Corporate VMS
A) A corporate VMS combines successive stages of production and distribution
under single ownership.
Administered VMS
A) An administered VMS coordinates successive stages of production and
distribution through the size and power of one of the members.
B) Manufacturers of a dominant brand are able to secure strong trade cooperation
and support from resellers.
C) The most advanced supply-distributor arrangement for administered VMS
involves distribution programming that can be defined as building a planned,
professionally managed, vertical marketing system that meets the needs of both
manufacturer and distributors.
D) The manufacturer establishes a department within the company called distributorrelations planning.
1) Its job is to identify distributor needs and build up merchandising programs to
help each distributor operate as efficiently as possible.
Marketing Insight: Channel Stewards Take Charge
The definition of channel stewards: the ability of a given participant in the distribution
channel to create a go-to-market strategy that simultaneously addresses customers’
best interests and drives profits for all partners.
Contractual VMS
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A contractual VMS consists of independent firms at different levels of production and
distribution integrating their programs on a contractual basis to obtain more
economies or sales impact than they could achieve alone.
A) Contractual VMSs now constitute one of the most significant developments in the
economy.
B) There are three types:
1) Wholesaler-sponsored voluntary chains
2) Retailer cooperatives
3) Franchise organizations
C) The traditional system is the manufacturer-sponsored retailer franchise.
D) Another is the manufacturer-sponsored wholesaler franchise.
E) A new system is the service-firm-sponsored retailer franchise.
The New Competition in Retailing
The new competition in retailing is no longer between independent business units but
between whole systems of centrally programmed networks (corporate, administered,
and contractual) competing against one another to achieve the best cost economies
and customer response.
Horizontal Marketing Systems
Another channel development is the horizontal marketing system, in which two or
more unrelated companies put together resources or programs to exploit an
emerging marketing opportunity.
Integrating Multi-Channel Marketing Systems
Most companies have adopted multichannel marketing.
A) Multi-channel marketing occurs when a single firm uses two or more marketing
channels to reach one or more customer segments.
B) An integrated marketing channel system is one in which the strategies and tactics
of selling through one channel reflect the strategies and tactics of selling through
other channels.
C) By adding more channels, companies can gain three important benefits:
1) Increased market coverage
2) Lower channel cost
3) More customized selling
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D) The gains from adding new channels come at a price:
1) New channels typically introduce conflict and control problems.
2) Two or more channels may end up competing for the same customers.
3) The new channel may be more independent and make cooperation more
difficult.
E) Companies need to think through their channel architecture. They must
determine which channels should perform which functions.
F) Companies should use different sales channels for different-sized business
customers.
G) Multichannel marketers also need to decide how much of their product to offer in
each of the channels.
CONFLICT, COOPERATION, AND COMPETITION
Channel conflict is generated when one channel member’s actions prevents the
channel from achieving its goal.
Channel coordination occurs when channel members are brought together to
advance the goals of the channel, as opposed to their own potentially incompatible
goals.
Types of Conflict and Competition
A) Horizontal channel conflict involves conflict between members at the same level
within the channel.
B) Vertical channel conflict means conflict between different levels within the same
channel.
C) Multi-channel conflict exists when the manufacturer has established two or more
channels that sell to the same market.
1) Multi-channel conflict is likely to be especially intense when the members of
one channel get a lower price (based on larger volume purchases) or work
with a lower margin.
Causes of Channel Conflict
A)
B)
C)
D)
goal incompatibility
unclear roles and rights
differences in perception
intermediary’s dependence on the manufacturer
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Managing Channel Conflict
Some channel conflict can be constructive and lead to better adaptation to a
changing environment, but too much is dysfunctional. The challenge is not to
eliminate conflict but to manage it better.
There are several mechanisms for effective conflict management.
1)
2)
3)
4)
5)
6)
7)
8)
Strategic justification
Dual compensation
Superordinate goals
Employee exchange
Joint membership
Co-option
Diplomacy, mediation, and arbitration
Legal recourse
Dilution and Cannibalization
Marketers must also be careful not to dilute their brands through inappropriate
channels, particularly luxury brands whose images often rest on exclusivity and
personalized service.
Legal and Ethical Issues in Channel Relations
Companies are legally free to develop whatever channel arrangements suit them. In
fact, the law seeks to prevent companies from using exclusionary tactics that might
keep competitors from using a channel.
A) Many producers like to develop exclusive channels for their products.
1) When the seller requires that these dealers not handle competitors’ products,
this is called exclusive distribution.
2) Exclusive distribution is legal as long as they do not substantially lessen
competition or tend to create a monopoly, and as long as both parties enter
into the agreement voluntarily.
3) Exclusive distribution often includes exclusive territorial agreements.
a. The producer may agree not to sell to other dealers in a given area.
b. The buyer may agree to sell only in its own territory.
(i) This second practice has become a major legal issue.
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B) Producers of a strong brand sometimes sell it to dealers only if they will take
some or all of the rest of the line.
1) This practice is called full-line forcing.
C) Such tying agreements are not necessarily illegal, but they do violate U.S. law if
they tend to lessen competition substantially.
D) Producers are free to select their dealers, but their right to terminate dealers is
somewhat restricted.
1) Producers can drop dealers for “cause” but they cannot drop dealers if the
dealer refuses to cooperate in doubtful legal arrangements.
E-COMMERCE MARKETING PRACTICES
E-commerce uses a Web site to transact or facilitate the sale of products and
services online. Online retail sales have exploded in recent years, and it is easy to
see why. Online retailers can predictably provide convenient, informative, and
personalized experiences for vastly different types of consumers and businesses.
We can distinguish between pure-click companies and brick-and-click companies.
Pure-Click Companies
There are several kinds of pure-click companies:
1)
2)
3)
4)
5)
6)
Search engines
Internet Service Providers (ISPs)
Commerce sites
Transaction sites
Content sites
Enabler sites
E-COMMERCE SUCCESS FACTORS
Companies must set up and operate their e-commerce Web sites carefully. Customer
service is critical.
Online shoppers may select an item for purchase but fail to complete the
transaction—one estimate of the conversion rate of Internet shoppers in March 2008
was only about 35%.
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A) Consumer surveys suggest that most significant inhibitors of online shopping are
the absence of:
1) Pleasurable experiences
2) Social interaction
3) Personal consultation
B2B E-COMMERCE
Although business-to-consumer (B2C) Web sites have attracted much attention in
the media, even more activity is being conducted on business-to-business (B2B)
sites, which are changing the supplier-customer relationship in profound ways.
In the past, buyers exerted a lot of effort to gather information about worldwide
suppliers. B2B sites make markets more efficient, giving buyers easy access to a
great deal of information from:
(1)
(2)
(3)
(4)
supplier Web sites;
infomediaries, third parties that add value by aggregating information about
alternatives;
market makers, third parties that link buyers and sellers; and
customer communities, where buyers can swap stories about suppliers’
products and services.
Firms are using B2B auction sites, spot exchanges, online product catalogs, barter
sites, and other online resources to obtain better prices.
Brick-and-Click Companies
Although many brick-and-mortar companies may have initially debated whether to
add an online e-commerce channel for fear of channel conflict with their off-line
retailers, agents, or their own stores, most eventually added the Internet as a
distribution channel after seeing how much business was generated online.
A) Adding an e-commerce channel creates the threat of a backlash from retailers,
brokers, agents, or other intermediaries.
B) The question is how to sell both through intermediaries and online.
C) There are at least three strategies for trying to gain acceptance from
intermediaries:
1) Offer different brands or products on the Internet.
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2) Offer the off-line partners higher commissions to cushion the negative impact
on sales.
3) Take orders on the Web site but have retailers deliver and collect payment.
D) Some pure or predominately online companies have invested in brick-and-mortar
sites.
E) Ultimately, companies may need to decide whether to drop some or all of their
retailers and go direct.
M-COMMERCE MARKETING PRACTICES
The widespread penetration of cell phones and smart phones—there are currently
more mobile phones than personal computers in the world—allows people to connect
to the Internet and place online orders on the move.
Many see a big future in what is now called m-commerce (m for mobile). The
existence of mobile channels and media can keep consumers connected and
interacting with a brand throughout their day-to-day lives.
GPS-type features can help identify shopping or purchase opportunities for
consumers for their favorite brands.
In some countries, m-commerce already has a strong foothold. Millions of Japanese
teenagers carry DoCoMo phones available from NTT (Nippon Telephone and
Telegraph). They can also use their phones to order goods. Each month, the
subscriber receives a bill from NTT listing the monthly subscriber fee, the usage fee,
and the cost of all the transactions. Bills can be paid at the nearest 7-11 store.
In the United States, mobile marketing is becoming more prevalent and taking all
forms.
Retailers such as Amazon, CVS, and Sears have launched m-commerce sites that
allow consumers to buy books, medicine, and even lawn mowers from their smart
phones. The travel industry has used m-commerce to target businesspeople who
need to book air or hotel reservations while on the move.
Mobile marketing can have influence inside the store too. Consumers increasingly
are using a cell phone to text a friend or relative about a product while shopping.
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CHAPTER 16: MANAGING RETAILING, WHOLESALING,
AND LOGISTICS
LEARNING OBJECTIVES
1.
2.
3.
4.
What major types of marketing intermediaries occupy this sector?
What marketing decisions do these marketing intermediaries make?
What are the major trends with marketing intermediaries?
What does the future hold for private label brands?
SUMMARY
1. Retailing includes all the activities involved in selling goods or services directly to final
consumers for personal, nonbusiness use. Retailers can be understood in terms of
store retailing, nonstore retailing, and retail organizations.
2. Like products, retail-store types pass through stages of growth and decline. As
existing stores offer more services to remain competitive, costs and prices go up,
which opens the door to new retail forms that offer a mix of merchandise and services
at lower prices. The major types of retail stores are specialty stores; department
stores; supermarkets; convenience stores; discount stores; off-price retailers (factory
outlets, independent off-price retailers, and warehouse clubs); superstores
(combination stores and supermarkets), and catalog showrooms.
3. Although most goods and services are sold through stores, nonstore retailing has
been growing. The major types of nonstore retailing are direct selling (one-to-one
selling, one-to-many-party selling, and multilevel network marketing); direct marketing
(which includes e-commerce and Internet retailing); automatic vending; and buying
services.
4. Although many retail stores are independently owned, an increasing number are
falling under some form of corporate retailing. Retail organizations achieve many
economies of scale, such as greater purchasing power, wider brand recognition, and
better-trained employees. The major types of corporate retailing are corporate chain
stores, voluntary chains, retailer cooperatives, consumer cooperatives, franchise
organizations, and merchandising conglomerates.
5. The retail environment has changed considerably in recent years, as new retail forms
have emerged, intertype and store-based vs. non-store-based competition has
increased, the rise of giant retailers has been matched by the decline of middlemarket retailers, investment in technology and global expansion has grown, and
shopper marketing inside stores has become a priority.
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6. Like all marketers, retailers must prepare marketing plans that include decisions on
target markets, product assortment and procurement, services and store atmosphere,
store activities and experiences, communications, and location.
7. Wholesaling includes all the activities involved in selling goods or services to those
who buy for resale or business use. Wholesalers can perform functions better and
more cost-effectively than the manufacturer can. These functions include selling and
promoting, buying and assortment building, bulk breaking, warehousing,
transportation, financing, risk bearing, dissemination of market information, and
provision of management services and consulting.
8. There are four types of wholesalers: merchant wholesalers; brokers and agents;
manufacturers’ and retailers’ sales branches, sales offices, and purchasing offices;
and miscellaneous wholesalers such as agricultural assemblers and auction
companies.
9. Like retailers, wholesalers must decide on target markets, product assortment and
services, price, promotion, and place. The most successful wholesalers are those
who adapt their services to meet suppliers’ and target customers’ needs.
10. Producers of physical products and services must decide on market logistics—the
best way to store and move goods and services to market destinations; to coordinate
the activities of suppliers, purchasing agents, manufacturers, marketers, channel
members, and customers. Major gains in logistical efficiency have come from
advances in information technology.
OPENING THOUGHT
Most students are familiar with the retailer in which they have bought products. What
is not so obvious to the students is that retailers, wholesalers, and distributors pass
through stages of growth and decline. Students, for the most part, will be familiar with
some of the retailer concepts described in the chapter, but not all. Second, non-store
retailing may not be a familiar concept to some students. Others might have some
familiarity with non-store retailing as in summer or part-time jobs at the mall.
The increasing “power” of retailers, especially mega-retailers, on their manufacturers
and the channels of distribution will not be evident to the students. Wholesalers and
distributors are generally “unseen” by the public and thus the students will probably
not have any previous information about how these channels work or even that they
existed. Guest speakers from the wholesaling or distribution industry can give
insights to the students about the services they perform and the “value” that they add
to the end consumer.
Students will be familiar with such industries as trucking and logistics firms but not
about inventory management or control. The instructor is encouraged to spend some
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additional class time on the concepts of the market-logistic formula, order costs, setup costs, processing costs, and inventory carrying costs. Accounting and financial
textbooks would be a good source of additional information and explanations of how
these costs affect the overall corporation.
MARKETING DEBATE
Should National-Brand Manufacturers Also Supply Private Label Brands?
One controversial move by some marketers of major brands is to supply private label
makers. For example, Ralston-Purina, Borden, ConAgra, and Heinz have all admitted to
supplying products—sometimes lower in quality—to be used for private labels. Other
marketers, however, criticize this “if you can’t beat them, join them” strategy, maintaining
that these actions, if revealed, may create confusion or even reinforce a perception by
consumers that all brands in a category are essentially the same.
Take a position: Manufacturers should feel free to sell private labels as a source of
revenue versus national manufacturers should never get involved with private labels.
Pro: Let us begin by defining buyers: Buyers buy products or use services to meet a
particular need or want. Buyers of or for private label products do not act any differently
than consumers of individual products in their buying processes. Manufacturers
negatively impacted by the surge of private label products, actually made changes in
consumer buying patterns ignored or missed by the national brands, have the fiduciary
responsibility to their firms to maximize sales wherever possible. The opportunities to
produce private label products may be and often is the salvation of the branded firm in
offset production capacity and cash flow.
The major issue here is that the national branded firm did not anticipate the changes in
consumers buying patterns in time to produce a national “flanker” brand to meet these
consumer buying pattern changes. In the production and distribution of private labeled
products, there is enough differentiation available to distinguish national brands from
private label brands in quality, variety, size, packaging costs, and others that the
consumer should not be confused or perceive that all brands in a category are essentially
the same.
Con: Branded products are the lifeblood of the firm. In fact, branded products contribute
to the company’s overall financial health by commanding a premium to stock prices due
to consumer loyalty and familiarity with the brands. When a manufacturer partakes on the
path of producing private labeled products, for short-term gains, they begin the
degradation of their branded products. If manufacturers feel the pressures of lost sales—
lost market shares to the private labeled products—the solution would be to undergo the
development of “superior branded products” offering the consumer increased value,
convenience, convenient packaging, and more to increase the loyalty and value of their
branded products to the consumer. The manufacturer always has the “option” of
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introducing “flanker” brands to compete against private labels thereby maintaining
production capacities and cash flows.
Marketing Excellence: ZARA
1) Would Zara’s model work for other retailers? Why or why not?
Suggested Answer: As the article says, the key to the company’s success comes
from having complete control over all the parts of its business—design,
production, distribution, and retailing. No other retailer can claim to have total
control over all aspects of its business, unless they start a business from scratch.
2) How is Zara going to expand successfully all over the world with the same level of
speed and instant fashion?
Suggested Answer: The key to their success as they expand has to be in logistics,
manufacturing, and distribution efficiencies and effectiveness. As the article
states, “50% of its production facilities nearby is key to the success.” So as Zara
expands, it must locate its production facilities “nearby” its stores for the model to
succeed.
Marketing Excellence: BEST BUY
1) What are the keys to Best Buy’s success? What are the risks going forward?
Suggested Answer: Some of the “keys to success” are its low-pressure sales
tactics, its focus on customer service, its extensive marketing research campaign
that identified key market shopper segments, called Customer-Centricity.
2) How else can Best Buy compete against new competitors like Walmart and online
companies?
Suggested Answer: To compete effectively, Best Buy must increase its
concentration on its Customer-Centricity strategy and continue to implement store
design, layouts, and merchandising to maximize customer experience and
expectations. Secondly, Best Buy must concentrate on logistical and distribution
efficiencies to lower overall product and distribution costs and pass those cost
savings onto the consumer in terms of lower prices and /or better product
warranties.
MARKETING DISCUSSION
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None provided.
DETAILED CHAPTER OUTLINE
In the previous chapter, we examined marketing intermediaries from the viewpoint of
manufacturers who wanted to build and manage marketing channels. In this chapter,
we view these intermediaries—retailers, wholesalers, and logistical organizations—
as requiring and forging their own marketing strategies. Intermediaries also strive for
marketing excellence and can reap the benefits like any other company.
The more successful intermediaries use strategic planning, advance information
systems, and sophisticated marketing tools. They segment their markets, improve
their market targeting and positioning, and aggressively pursue market expansion
and diversification strategies.
RETAILING
Retailing includes all the activities involved in selling goods or services directly to
final consumers for personal, nonbusiness use.
1. A retailer or retail store is any business enterprise whose sales volume comes
primarily from retailing.
2. Any organization selling to the final consumer—no matter how or where they are
sold is doing retailing.
Types of Retailers
Consumers today can shop for goods and services at store retailers, nonstore
retailers, and retail organizations.
Store Retailers
Perhaps the best known type of store retailers is the department store.
The most important types of major store retailers are:
1. Specialty store: Narrow product line. The Limited, The Body Shop.
2. Department store: Several product lines. JCPenney, Bloomingdale’s.
3. Supermarket: Large, low-cost, low-margin, high-volume, self-service store
designed to meet total needs for food and household products. Kroger, Safeway.
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4. Convenience store: Small store in residential area, often open 24/7, limited line of
high-turnover convenience products plus takeout. 7-Eleven, Circle K.
5. Drug store: Prescription and pharmacies, health and beauty aids, other personal
care, small durable, miscellaneous items. CVS, Walgreens.
6. Discount store: Standard or specialty merchandise; low-price, low-margin, highvolume stores. Walmart, Kmart.
7. Extreme value or hard-discount store: A more restricted merchandise mix than
discount stores but at even lower prices. Aldi, Lidi, Dollar General, Family Dollar.
8. Off-price retailer: Leftover goods, overruns, irregular merchandise sold at less
than retail. Factory outlets; independent off-price retailers such as TJ Maxx;
warehouse clubs such as Costco.
9. Superstore: Huge selling space, routinely purchased food and household items,
plus services (laundry, shoe repair, dry cleaning, check cashing). Category killer
(deep assortment in one category) such as Staples; combination store such as
Jewel-Osco; hypermarket (huge stores that combine supermarket, discount, and
warehouse retailing) such as Carrefour in France and Meijer’s in the Netherlands.
10. Catalog showroom
Retailers can position themselves as offering one of four levels of service:
1)
2)
3)
4)
Self-service
Self-selection
Limited service
Full service
Nonstore retailing
Although the overwhelming bulk of goods and services—97%—is sold through stores,
nonstore retailing has been growing much faster than store retailing. Nonstore
retailing falls into four major categories:
1.
2.
3.
4.
Direct selling
Direct Marketing (which includes telemarketing and Internet selling)
Automatic vending
Buying service
Corporate Retailing and Franchising
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Although many retail stores are independently owned, an increasing number are part
of some form of corporate retailing.
These organizations achieve economies of scale, greater purchasing power, wider
brand recognition, and better-trained employees than independent stores can usually
gain alone.
The major types of corporate retailing:
1)
2)
3)
4)
5)
corporate chain stores,
voluntary chains,
retailer and consumer cooperatives,
franchises, and
merchandising conglomerates.
The New Retail Environment
With the onset of the recession in 2008, many retailers had to fundamentally
reassess virtually everything they did. Some adopted a cautious, defensive response,
cutting stock levels, slowing expansion, and discounting deeply. Others were more
creative about managing inventory, adjusting product lines, and carefully avoiding
over-promoting.
Here are some of the other retail developments that are changing the way
consumers buy and manufacturers and retailers sell:
A) New retail form and combinations
To better satisfy customers’ need for convenience, a variety of new retail forms
have emerged. Bookstores feature coffee shops. Gas stations include food stores.
Loblaw’s Supermarkets have fitness clubs.
B) Growth of intertype of competition
Department stores can’t worry just about other department stores—discount
chains such as Walmart and Tesco are expanding into product areas such as
clothing, health, beauty, and electrical appliances. Different types of stores—
discount stores, catalog showrooms, department stores—all compete for the
same consumers by carrying the same type of merchandise.
C) Competition between store-based and non-store based retailing
Consumers now receive sales offers through direct-mail letters and catalogs,
television, cell phones, and the Internet. The non-store-based retailers making
these offers are taking business away from store-based retailers. Store-based
retailers have responded by increasing their Web presence and finding different
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ways to sell online, including through their own Web sites, as well as creating
more involving and engaging experiences in their stores.
D) Growth of giant retailers
Through their superior information systems, logistical systems, and buying power,
giant retailers such as Walmart are able to deliver good service and immense
volumes of product to masses of consumers at appealing prices.
E) Decline of middle market retailers
We can characterize the retail market today as hourglass or dog-bone shaped:
Growth seems to be centered at the top (with luxury offerings from retailers such
as Nordstrom and Neiman Marcus) and at the bottom (with discount pricing from
retailers such as Target and Walmart). As discount retailers improve their quality
and image, consumers have been willing to trade down.
F) Growth investment in technology
Almost all retailers now use technology to produce better forecasts, control
inventory costs, and order electronically from suppliers. Technology is also
affecting what happens inside the store. In-store programming on plasma TVs
can run continual demonstrations or promotional messages.
G) Global profile of major retailers
Retailers with unique formats and strong brand positioning are increasingly
appearing in other countries. U.S. retailers such as The Limited and The GAP
have become globally prominent.
H) Growth of Shopper Marketing Growth of Shpper Markleting
Buoyed by research suggesting that as much as 70% to 80% of purchase
decisions are made inside the retail store, firms are increasingly recognizing the
importance of influencing consumers at the point-of-purchase.
Marketing Decisions
With this new retail environment as a backdrop, we will examine retailers’ marketing
decisions in the areas of target market, product assortment and procurement,
services and store atmosphere, price, communication, and location.
Target Market
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Until the target market is defined and profiled, the retailer cannot make consistent
decisions on product assortment, store décor, advertising messages and media,
price, and service levels.
Mistakes in choosing or switching target markets can be costly.
To better hit their targets, retailers are slicing the market into finer and finer segments
and introducing new lines of stores to provide a more relevant set of offerings to
exploit niche markets.
Channels
Based on a target market analysis and other considerations we reviewed in Chapter
15, retailers must decide which channels to employ to reach their customers.
Increasingly, the answer is multiple channels.
Product Assortment
The retailer’s product assortment must match the target market’s shopping
expectations in breadth and depth.
A) The real challenge begins after defining the store’s product assortment, and that
is to develop a product-differentiation strategy. Here are some possibilities:
1)
2)
3)
4)
5)
6)
7)
Feature exclusive national brands that are not available at competing retailers.
Feature mostly private branded merchandise.
Feature blockbuster distinctive merchandise events.
Feature surprise or ever-changing merchandise.
Feature the latest or newest merchandise first.
Offer merchandise customizing services.
Offer a highly targeted assortment.
B) Merchandise may vary by geographical market.
Procurement
The retailer must establish merchandise sources, policies, and practices.
A) In the corporate headquarters, specialist buyers (sometimes called merchandise
managers) are responsible for developing brand assortments and listening to
salespersons’ presentations.
B) Retailers are rapidly improving their skills in demand forecasting, merchandising
selection, stock control, space allocation, and display.
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C) Some stores are experimenting with radio frequency identification systems and
electronic readers and use them to monitor inventory and track goods in real time.
D) Stores are using direct product profitability (DPP) to measure a product’s
handling costs (receiving, moving to storage, paperwork, selecting, checking,
loading, and space cost) from the time it reaches the warehouse until a customer
buys it in the retail store.
Prices
A) Prices are a key positioning factor and must be decided in relation to the target
market.
B) Most retailers will put low prices on some items to serve as traffic builders or loss
leaders or to signal their pricing policies.
Services
A) Retailers must decide on the services mix to offer customers:
a) Pre-purchase services
b) Post-purchase services
c) Ancillary services
B) Retailers also need to consider differentiating based on unerringly reliable
customer service.
Retailers are rediscovering the usefulness of customer service as a point of
differentiation.
C) Whatever retailers do to enhance customer service, they will have to keep
women in mind. Approximately 85 percent of everything sold in this country is
either bought or influenced by a woman.
Breakthrough Marketing: Target
Details how, Target, with enhancement of its product selection, cachet, and
innovation in its merchandising model, has been able to achieve financial success.
Store Atmosphere
A) Atmosphere is another element in the store’s arsenal. Every store has a “look” or
“feel” that is influenced by colors, layout, smell, and music.
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Marketing Memo: Helping stores to sell
Lists the advice by Paco Underhill to keep shoppers spending: attract shoppers and
keep them in the store; honor the “transition zone”; don’t make them hunt” make
merchandise available within reach; men don’t ask questions; women need space;
make checkout easy.
Store Activities and Experiences
The growth of e-commerce has forced traditional brick-and-mortar retailers to
respond.
A) In addition to the natural advantages over e-commerce:
1) Products that consumers can actually see, touch, and test
2) Real-life customer service
3) No delivery lag time
B) They also provide a shopping experience as a strong differentiator
C) Real-life retailers are developing new services and promotions:
1)
2)
3)
4)
Calling each customer a “guest”
Provide a place for people to congregate
Creating in-store entertainment
Creating “showcase” stores
D) Super-regional malls are anchoring themselves with unique and interesting shops,
rather than the brand-name department stores and national retailers of old.
1) They want to become “destination retail” locations.
Communications
Retailers use a wide range of communication tools to generate traffic and purchases.
A) Each retailer must use communications that support and reinforce its image
positioning.
Location Decisions
Retailers are accustomed to saying that the three keys to success are “location,
location, and location.”
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A) Retailers can locate their stores in the:
1)
2)
3)
4)
5)
6)
Central business district
Regional shopping centers
Community shopping centers
Strip malls (shopping strips)
A location within a larger store
Stand alone stores
B) In view of the relationship between high traffic and high rents, retailers must
decide on the most advantageous locations for their outlets.
PRIVATE LABELS
A private label (also called reseller, store, house, or distributor brands) is one
retailers and wholesalers develop.
A) In the United States, one out of every four items sold is a private labeled item.
B) Some experts believe that 50 percent is the natural limit for carrying private
brands because:
1) Consumers prefer certain national brands.
2) Many product categories are not feasible or attractive on a private-brand
basis.
Role of Private labels
Why do intermediaries bother to sponsor their own brands?
A) They are more profitable than national brands.
B) Retailers develop exclusive store brands to differentiate themselves from
competitors.
C) Generics are unbranded, plainly packaged, less expensive versions of common
products.
1) They offer standard or lower quality at a price that may be as much as 20 to
40 percent lower than nationally advertised brands.
2) As well as 10 to 20 percent lower than private label brands.
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3) The lower price of generics is made possible by lower-quality ingredients,
lower-cost labeling and packaging, and minimal advertising.
The Private-Label Success Factors
In the confrontation between manufacturers’ and private label brands, retailers have
many advantages and increasing market power.
A) Many supermarkets charge a slotting fee for accepting a new brand.
B) Retailers are building better quality into their store brands.
C) The growing power of store brands is not the only factor weakening national
brands:
1) Consumers are more price-sensitive.
2) They are noting the better quality of the private-label brands.
3) Reduction in brand equity caused by reduced advertising by national brand.
4) The endless stream of brand extensions and line extensions has blurred
brand identity and led to a confusing amount of product proliferation.
Marketing Memo: How to compete against store brands
Strategies to compete against store brands: fight selectively; partner effectively;
innovate brilliantly; create winning value propositions.
WHOLESALING
Wholesaling includes all the activities involved in selling goods and services to those
who buy for resale or business use.
A) Wholesaling excludes farmers, manufacturers, and retailers.
Major Wholesaler Types
I.
II.
III.
IV.
V.
VI.
Merchant wholesalers
Full-service wholesalers
Limited-service wholesalers
Brokers and agents
Manufacturers’ and retailers’ branches and offices
Specialized wholesalers
B) Wholesalers (also called distributors) differ from retailers in:
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1) Wholesalers pay less attention to promotion, atmosphere, and location
because they are dealing with business customers.
2) Wholesale transactions are usually larger than retail transactions.
3) Wholesalers cover a larger trade area than retailers.
4) The government deals with wholesalers and retailers differently in terms of
legal regulations and taxes.
C) Wholesalers are more efficient in performing the following functions:
1)
2)
3)
4)
5)
6)
7)
8)
9)
Selling and promoting
Buying and assortment building
Bulk breaking
Warehousing
Transportation
Financing
Risk bearing
Market information
Management services and counseling
Trends in Wholesaling
Wholesaler-distributors have faced mounting pressures in recent years from new
sources of competition.
A) One major response has been to increase asset productivity by managing
inventories and receivables better.
B) Each have had to improve their strategic decisions on target markets, product
assortment, and services, price, promotion, and place.
MARKET LOGISTICS
Physical distribution starts at the factory.
Managers choose a set of warehouses (stocking points) and transportation carriers
that will deliver the goods to final destinations in the desired time or at the lowest total
cost.
Physical distribution has now been expanded into the broader concept of supply
chain management (SCM).
A) Supply chain management starts before the physical distribution:
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1) Procuring the right products
2) Converting them efficiently into finished products
3) Dispatching them to their final destinations
B) The supply chain perspective can help a company identify superior suppliers and
distributors and help them improve productivity.
C) Market logistics involves planning the infrastructure to meet demand, then
implementing and controlling the physical flows of materials and final goods from
points of origin to points of use, to meet customer requirements at a profit.
D) Market logistic has four steps:
1) Deciding on the company’s value proposition to its customers
2) Deciding on the best channel design and network strategy for reaching the
customers
3) Developing operational excellence in sales forecasting, warehouse
management, transportation management, and materials management
4) Implementing the solution with the best information systems, equipment,
policies, and procedures
E) Market logistics leads to an examination of the most efficient way to deliver value.
Integrated Logistics Systems
The market logistics task calls for integrated logistics systems (ILS), involving:
A) Materials management
B) Material flow systems
C) Physical distribution abetted by information technology
D) Information systems play a critical role in managing market logistics especially:
E) Market logistics encompass several activities
1)
2)
3)
4)
5)
Sales forecasting
The company schedules distribution, production, and inventory levels
Production plans
Materials to order
Finished goods inventory
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F) The total cost of market logistics can amount to 30 to 40 percent of the product’s
cost.
G) Lower market-logistics cost will permit lower prices.
H) Many firms are embracing lean manufacturing, to produce goods with minimal
waste of time, materials, and money.
Market-Logistics Objectives
Many companies state their market-logistics objective as “getting the right goods to
the right places at the right time for the least cost.” Given that market logistics involve
strong tradeoffs, decisions must be made on a total system basis.
A) Given that market-logistics activities require strong tradeoffs, managers must
make decisions on a total-system basis. The company must research the relative
importance of each of their service outputs.
B) The company must then research the relative importance of these service outputs.
For example, service-repair time is very important to buyers of copying equipment.
Company must consider competitors’ service standards.
C) The company must also consider competitors’ service standards. It will normally
want to match or exceed the competitors’ service level, but the objective is to
maximize profits, not sales. Company ultimately has to establish some promise to
the market.
D) The company ultimately must establish some promise it makes to the market.
E) Given the market-logistic objectives, the company must design a system that will
minimize the cost of achieving these objectives.
F) Each possible market-logistics system will lead to the following costs:
1) M = T+FW+VW+S.
a.
b.
c.
d.
e.
Where M = total market-logistic cost of proposed system.
Where T = total freight cost of proposed system.
Where FW = total fixed warehouse cost of proposed system.
Where VW = total variable warehouse costs (including inventory).
Where S = total cost of lost sales due to average delivery delay under
proposed system.
Market-Logistics Decisions
Four major decisions must be made with regard to market logistics:
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A)
B)
C)
D)
How should orders be handled (order processing)?
Where should stocks be located (warehousing)?
How much stock should be held (inventory)?
How should goods be shipped (transportation)?
Order Processing
Most companies today are trying to shorten the order-to-payment cycle.
A) That is the elapsed time between an order’s receipt, delivery, and payment.
B) The longer this cycle takes the lower the customer’s satisfaction and the lower
the company’s profits.
Warehousing
Every company has to store finished goods until they are sold, because production
and consumption cycles rarely match.
A) The storage function helps smooth discrepancies between production and
quantities desired by the market.
B) The company must decide on the number of inventory stocking locations:
1) More locations means that goods can be delivered to customers more quickly.
2) More locations also means higher warehousing and inventory costs.
C) Storage warehouses store goods for moderate-to-long periods of time.
D) Distribution warehouses receive goods from various company plants and
suppliers and move them out as soon as possible.
E) Automated warehouses employ advanced materials-handling systems under the
control of a central computer.
F) Some warehouses are now taking on activities formerly done in the plant.
Inventory
Salespeople would like their companies to carry enough stock to fill all customer
orders immediately. However, this is not cost-effective.
Inventory cost increases at an accelerating rate as the customer-service level
approaches 100%. Management needs to know how much sales and profits would
increase as a result of carrying larger inventories and promising faster order
fulfillment times, and then make a decision.
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A) Inventory decision making involves knowing when to order and how much to
order.
B) As inventory draws down, management must know at what stock level to place a
new order.
1) This stock level is called the order (reorder) point.
2) The order point should balance the risks of stockout against the costs of
overstock.
3) The company needs to balance order-processing costs and inventorycarrying costs.
4) Order-processing costs for a manufacturer consist of setup costs and running
costs (operating costs when production is running).
C) Order-processing costs must be compared with inventory-carrying costs.
1) The larger the average stock carried, the higher the inventory-carrying costs.
2) Carrying costs include:
D) The optimal order quantity can be determined by observing how order-processing
costs and inventory-carrying costs sum up at different order levels.
E) Companies are reducing their inventory costs by treating inventory items
differently.
1) They are positioning inventory items according to risk and opportunity.
2) They are also keeping slow-moving items in a central location while keeping
faster moving items closer to customers.
F) The ultimate answer to carrying near-zero inventory is to build for order.
Transportation
Transportation choices will affect product pricing, on-time delivery performance, and
the conditions of the goods upon arrival, all of which affects customer satisfaction.
A) Shippers are increasingly combining two or more transportation modes, thanks to
containerization.
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B) Containerization consists of putting the goods in boxes or trailers that are easy to
transfer between two transportation modes.
1)
2)
3)
4)
Piggyback describes the use of rail and trucks.
Fishyback water and trucks.
Trainship water and rail.
Airtruck air and trucks.
C) In deciding on transportation modes, shippers can choose from:
1) Private
2) Contract
3) Common carriers
D) If the shipper owns their own truck or air fleet, the shipper becomes a private
carrier.
E) A contract carrier is an independent organization selling transportation services to
others on a contract basis.
F) A common carrier provides services between predetermined points on a
scheduled basis and is available to all shippers at standard rates.
Organizational Lessons
Market-logistics strategies must be derived from business strategies, rather than
solely from cost considerations.
A) The company should set its logistics goals to match or exceed competitors’
service standards and should involve members of all relevant teams in the
planning process.
B) Today’s stronger demands for logistical support from large customers will
increase suppliers’ costs.
C) Set up differentiated distribution by offering bundled service programs for different
customers.
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