TARUN DEWAN
Marketing: Just the Basics
ã : Tarun Dewan
Contents
PREFACE
PART1:THEBASICS
1.INTRODUCTION
7
8
9
Origins
Utility and Marketing
The Central Idea in Marketing
What do Marketers Do?
9
14
15
17
The Black Box
Consumer Characteristics
Consumer Decision Process
Organisational Buyer Behaviour
Is That All ?
24
25
28
30
31
Resource Based Perspective
Positioning Perspective
Configurational Perspective
SWOT Analysis
33
34
37
37
Who are our Competitors
How is our Competition Structured
40
41
Segmentation
Targeting
Positioning
Tools
Factor Analysis
Cluster Analysis
Discriminant Analysis
Perceptual Maps
Summary
44
45
46
47
49
49
49
50
53
2.THECONSUMER
3.THECOMPANY
4.THECOMPETITION
5.STPANDMARKETINGRESEARCH
6.PRODUCT
22
33
40
44
55
Types of Products
Consumer Goods
Industrial Goods
Durable and Non-Durable goods
New Products
The Product Life Cycle
Diffusion of Innovation
56
56
57
57
57
60
61
Cost-Plus Pricing
Breakeven Analysis
Value Based Pricing
Competition Based Pricing
Conclusion
65
70
71
74
75
Channels
Functions
Control
Conclusion
77
78
80
81
What’s “Promotion”
Integrated Marketing Communications (IMC)
5 M’s
Mission
Money
Message
Media
Measurement
Conclusion
83
84
85
85
86
86
87
90
90
7.PRICE
8.PLACE
9.PROMOTION
65
77
83
Preface
This book is of use to the Marketing student who does not wish to read
through multiple examples and stories, but prefers a concise reference for
basic concepts.
TD
Toronto
The Basics
1
Chapter
1. Introduction
What is the “story” behind the “Fine art of Storytelling “?
W
e have all heard, countless times, the phrase "Marketing is
Everywhere", or "Marketing is all around us!". Perhaps we
have also had an uncle point out that "Half the world lives by
selling something and the other half by buying it." So what is
the omnipresent beast? Where did it come from? Did it originate in a
primordial big bang or did it evolve through successive Darwinian
mutations? Is it true (as my father maintains to this day) that Marketing is
"...the fine art of Storytelling”? The answers to these (and other –
including the title!) questions lie within the pages of this book. Hopefully
this journey will be a pleasant and worthwhile one
Origins
Marketing is about buying and selling - and buying and selling are as old
as the end of "Barter". Barter had the inconvenience of requiring a
"double coincidence of wants. (If Jim had an extra copy of "Titanic", but
needed "Kill Bill", he needed to find someone who not only had a spare
copy of "Kill Bill", but also needed "Titanic"). What was required was
something that could be used to “store” value – Jim could then exchange
Titanic with the first person who came along and wanted it for a “credit”;
and then whenever he found someone willing to part with Kill Bill he
9
could transfer the stored value. Using "credits" (or Money!) to trade marks
the origins of Marketing. We can look back quite far into history thanks to
Herodotus (the "Father of History" - his notes are the oldest record of
events in his past). He wrote about the Lydians (who lived about 3000
years ago in modern day Turkey) as being the first people he knew of to
use gold and silver coins. Ok. So there is now trade and hence marketing
(people grow/build things others need, set prices, go to a “market”, shout
out their wares). What do people think about it?
Aristotle (around 2400 years ago) thought (essentially) that marketers were
useless parasites. We still hear echoes of this thought today when people
speak of pushy salespersons, telemarketers and large advertising budgets
that translate into higher costs for consumers.
Thankfully (for readers of this book) this view may not be without a
counter point. Plato, for example, had a more constructive view of things.
If we put his ideas into contemporary terminology, he proposed that with
division of labour came a separation between producer and consumer.
Also, it turned out that some people were better at bridging this gap Marketing Intermediaries!
Lets now skip forward almost a thousand years to about the 13th century.
St. Thomas Aquinas (a Dominican monk) wrote mainly about church
related issues like social policy and philosophy. Views about marketing
cropped up in his writing, though, and it turns out that his thoughts
anticipated our version of the Utilities of Marketing. (Marketing: What is
it good for?) We'll talk more about these utilities of marketing, but for
now suffice to say that these are the value provided by marketing.
We make another jump - this time to the early 20th century when
marketing role in creating utility and providing satisfaction begins to be
better understood. Robert Bartels (History of Marketing Thought) places
the first use of the term "Marketing" to "about 1910". Finally in about the
1950's the concept of Marketing Management evolved - again more on
that later.
Many textbooks speak of the evolution of marketing from the 50's
onwards in terms of the "Production Era" ("if we build it they will come",
"a good product will sell itself" - companies don't have to do anything as
long as they can build a good product), the "Sales Era" ("Sell what we
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have". Creative advertising and selling will overcome consumers
resistance and convince them to buy) "Marketing Era" ("The consumer is
king! Find a need and fill it." "Whatever the consumer wants, we do.")
and the "Relationship Era" (our customers are our best assets - build a
relationship with the customer.). Now it is important to note that these
'eras' may not have occurred exactly in that order, or even successively. In
fact you will find that these situations may all still be found today - with
some companies adopting one or the other! We are at the point now that
we recognize that the most money is made when both the company and
the customers are happy.
Marketing thought has formalized some basic principles. Most of these
are key building blocks. This book is mostly about understanding the
"basics". These "basics" are things that endure - they will keep you from
making "basic" mistakes. Surprisingly these mistakes occur very
frequently - the "Dot Com Bust" is an example of poor attention to the
"basics". The focus (for many) in the heady days of the Internet boom a
few years ago was not satisfying consumer needs, but "what are the cool
things we can do with this new technology". This abandonment of a
marketing basic (marketing is driven by consumer needs), led to trouble
for the entire industry. Those who do not learn from history are doomed to
repeat it. Hopefully, by the end of this book you will know enough about
marketing to avoid basic errors!
So what is this subject we are talking about? The American Marketing
Association in 1937 defined Marketing as follows:
Definition: Marketing (AMA 1937)
Marketing is the business activities involved in the flow of
goods and services from production to consumption
This definition focusses on the ‘Place” or distribution function of
Marketing and not much else. Things did evolve over the years, though.
11
In 1985, the AMA agreed on the following definition of marketing:
Definition: Marketing (AMA 1985)
Marketing is the process of planning and executing the
conception, pricing, promotion, and distribution of ideas,
goods, and services to create exchanges that satisfy individual
and organizational objectives
This is quite a powerful definition, and could potentially answer most of
the questions we posed earlier as well as hold the key to many of the
“basic” mistakes we warned against.
First, this definition highlights the 4 P’s – Product, Price, Place and
Promotion. (Distribution is referred to as “Place”; otherwise it would be
the 3 Ps and a D!). These are the 4 decision variables, or controllables
available to the Marketing manager. Marketing decisions and plans are
choices involving the 4 Ps.
Second, this definition explicitly categorizes Marketing as a “process”
(something ongoing and continuous) rather than as a task.
Third, this definition lists the elements of exchange. These could be
physical products like cars, soap or milk (goods), or things other people do
for us like bring food to our table, provide legal/medical expert advice, or
help while looking for the best MP3 player (services), or an abstract
concept like a different way of doing things or quitting smoking/drinking
and driving etc. (ideas)
Fourth, this definition emphasizes that a Marketing exchange must be a
win-win. Both the parties involved (consumer and producer) must get
something out of it. Taking without giving something of value in return is
not Marketing.
Good Marketers are those who understand all elements of this definition
well – and perhaps the most important element of this definition is the
fourth one – there must be something of “value” for all participants in a
Marketing exchange.
12
In September 2004, the AMA agreed on a new and updated definition of
Marketing.
Definition: Marketing (AMA 2004)
Marketing is an organizational function and a set of processes
for creating, communicating and delivering value to customers
and for managing customer relationships in ways that benefit
the organization and its stakeholders.
As you can see, the basic elements of the definition remain the same.
Marketing is not just an organizational function (something that a
“Marketing department” might do in a firm), but more than that – it is a
“set of processes”. The newer definition continues to explicitly recognize
that “benefit” to the organization and its stakeholders comes from
“delivering value” to customers. What is new in the definition is the
explicit recognition of “customer relationships” i.e. the concept that
marketers do not simply engage in one-off transactions, but look at the
longer term and at building ongoing relationships.
Most recently, in July 2013, the AMA agreed on the current definition of
Marketing.
Definition: Marketing (AMA 2013)
Marketing is the activity, set of institutions, and processes for
creating communicating, delivering, and exchanging offerings
that have value for customers, clients, partners, and society at
large.
Once again, the basic elements continue to be the same and value to the
society has been added.
So, by definition, Marketing as activity must create value. What is the
value that Marketing provides? We will use the economic term “Utility”
(value from satisfying a need).
13
Utility and Marketing
The Four Utilities provided by Marketing
Utility is anything of value. The following are the four utilities provided by
marketing:
1. Form – the physical attributes of a product. It is the substance
of the product itself. Form utility comes from both Marketing
and Production areas. The marketing area provides the
framework for what the production people are going to build.
Form involves the product design and packaging that helps us
to make a final decision on purchasing the item. It tells us the
answer for whether we should manufacture only black cars or
other colors such as blue or green.
2. Time – The utility of having access to the product at the right
time – Marketing activities include: warehousing, inventory
planning, and delivery – all of which impact when we get the
product to the customers and the availability of the items.
3. Place - this involves getting the product from the dealership to
the consumer’s house. This can involve distribution or store
location.
4. Possession – This involves the consumer actually owning the
product. It is the utility created in owning a car after purchase
(getting your name registered on the title), or when grocery
products are bagged and handed to the customer/you.
14
Form
Product Design,
Packaging
Possession
Transactions,
Transfer of
Ownership
Utility
Place
Distribution, Store
Location
Time
Inventory Mgmt,
Warehouses,
Delivery
FIGURE 1.1 Utility and Marketing Actions
The Central Idea in Marketing
Marketing is driven by the satisfaction of Consumer Needs
A lot of what we do as marketers (some would argue, “all” that we do as
marketers…) is centered on the consumer.
15
Product
Price
Consumer Place
Competitive Forces
Social and Legal Forces
Economic Forces
Promotion
Technological Forces
FIGURE 1.2 The Central Idea in Marketing
This is quite appropriate as the money flows from the consumer to the
producer. Even if we “follow the money”, the focus of our attention needs
to be firmly centered on the consumer. More “basic” mistakes occur due
to a lack of understanding of this simple idea than any other Marketing
concept.
Very simply, Marketers have just two basic tasks: To discover consumer
needs and to satisfy them.
16
Marketers First Task
Discover Consumer Needs
Marketers Second Task
Satisfy Consumer Needs
Everything that we as Marketers do involves the first or second task in one
way or the other. In fact, if an activity does not involve the first or second
task, it is generally not a marketing activity.
The satisfying of consumers needs is done through appropriate choices
involving the Marketing Mix (the 4 P’s).
What do Marketers Do?
Marketing is not just the 4 P’s
We all know that Marketing is not just Sales. Marketing is the process of
determining customer wants and then developing a product to satisfy that
need and still yield a satisfactory product. This is, as we have seen a
Customer-Centric approach. Selling, on the other hand, is producing a
product and then trying to persuade customers to purchase it. This is a
Product-centric approach.
Marketers need to understand Market
Orientation (putting the needs and wants of the target market first and then
deciding a cost effective approach to providing the product/service).
The school of Marketing Management thought views Marketing mostly as
involving tactical and strategic decisions involving the 4 Ps. This school
does follow the Central Idea concept and links coordinated marketing
activities and a customer orientation directly to customer satisfaction and
from there to organizational success. If we add a couple of more things to
this concept, we can get a very good idea of What Marketers Do.
17
3 C’s
STP
Customer
Competition
Company
Segmentation
Targeting
Positioning
4P’s
Product
Place
Price
Promotion
FIGURE 1.3 What do Marketer’s Do?
This book is structured around Figure 1.3. The 3C- STP – 4P framework
offers a much broader strategic understanding of Marketing than the
classical Marketing Management school of thought that focuses just on the
4P’s. This represents key parts of Figure 1.2 that Marketers incorporate
into practice. A Marketing manager may, usefully, begin with an analysis
of the 3Cs and in the process understand the marketing problem well.
During the Segmentation, Targeting and Positioning phase, the manager
decides what subset of the entire population she will address, and finally
with the 4P’s she will have a solution for the problem. I advocate this
framework for addressing most Marketing problems.
Marketing as a field borrows from many disciplines. The two major
influences on Marketing are Economics and Psychology. A lot of things
you will see in this book can be traced to one or the other of these.
The field of marketing also has substantial rules and process involved in
order to be effective. There is a distinct system behind marketing: rules
18
behind pricing, rules behind designing a better product; rules behind
promotion, rules the govern channels, and rules about how to distribute
products. It should also be noted that both profit and not-for-profit
businesses need effective and targeted marketing activities to achieve
success.
Marketing means adopting a customer focus for the organization, which
means keeping the customer's needs in mind at all times. This may not
result in making immediate sales, but will ultimately increase longevity
and profitability of the relationships the company has with its customers.
Remember that in order to be successfully customer-centric, one must
always keep in mind what the customer's requirements are.
Anyone doubting the importance of marketing should think about this:
marketing is the ONLY revenue-producing activity for a firm. Other
departments, like finance for example, may play with money but they are
not generating any money for the company directly. The only way money
is coming into the business is through marketing activities. Marketing is
therefore everywhere and it is valuable to understand why advertisements
have certain messages. Marketing helps to communicate product attributes
and benefits to consumers to allow consumers to make informed choices.
For example, marketing helps you when:
you buy a pair of shoes by informing yourself of the various options you
have, as well as emphasizing styles, colours, prices etc.
you apply for a job by getting to know what a company is 'all about' - do
you want to work with this firm?
you open a new bank account by targeting specific accounts to your
particular needs (through demographic/psychographic analysis)
when you watch TV: if you understand how marketing works, you have
a better appreciation for the types of ads you see on TV, and why those
particular ads are out there.
The confusion with marketing often arises from the different perspectives
that marketers and customers may have. For all of of us, our experiences
as customers are a really big part of our "take" on Marketing. As students
(and practitioners) of Marketing, however, the perspective is different. We
have to take off our "customer" hat to appreciate the Marketing Managers
19
viewpoint. Our experiences as customers do help even when we have the
Marketer's hat on as a guide to what customers think, but we have to force
ourselves to remember that there are many, many different kinds of
customers out there and generalizing from our own experience may often
not be appropriate
Marketing is everywhere, and we hope that by the end of this book, you
will have a good handle on the Basics of Marketing. The object here is not
to make you a Marketing expert (that would several books and several
courses !) , but to introduce you to the field and provide you with a good
enough road map that helps you avoid some major pitfalls. Happy Trails!
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NOTES
21
2
Chapter
2. The Consumer
Understanding the focus of our attention.
W
hy do wish to understand consumers ? As we have seen in
Chapter 1, the center of attention for Marketers is the
consumer. If an element is so important for our field, we had
better spend some time on it!
Consumer Behaviour "is the study of human consumption, which entails
the acquisition, usage, and disposition of goods, services, events, and
ideas." Consumer behaviour focuses on the satisfaction of goals, desires,
and needs of the consumer.
The study of consumer behaviour should not be overlooked because it is
this area of study that allows marketers to be better prepared to fulfill the
needs and wants of consumers. If marketers can understand consumer
behaviour, they can answer questions like these:
How does the consumer come to a purchase decision?
Is it random or is there a process?
22
What motivates and makes consumers happy/upset?
How can you fulfill their needs?
Many people look at consumer behaviour as a way to manipulate
various consumers. This field of study is not about manipulation!! It is
about understanding consumer needs well enough to be able to answer
them.
On a more practical front, here are some implications for the 4 P’s:
•
•
•
•
Product
o What products do consumers use now?
o What benefits do consumers want from this product?
Promotion
o What promotion appeal would influence consumers to purchase
and use our product?
o What advertising claims would be more effective for our
product?
o We will talk about different types of appeals, and the
circumstances under which they work.
Pricing
o How important is price to consumers in various target product?
o What effects will a price change have on purchase behaviour?
o As marketers we could figure out price just by observing
consumers
o If we change price, we could figure out consumers’ sensitivity
to price
o If demand drops, should we increase the price?
Place (distribution)
o Where do consumers buy this product?
(For example: Majority of consumers buy milk more at
grocery stores, than at convenience stores )
o Would a different distribution system change consumers’
purchasing behaviour?
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The Black Box
The key to understanding consumers is first recognizing our limitations.
We are attempting not only to understand what goes on in one person’s
mind (a huge, complicated, and as yet mostly unsolved task) but also how
different things go on in different people’s minds (so even if you know
what one person is thinking, you may not know anything about what
thousands of other people are thinking). I like to think of this problem as a
“Black Box” problem. (Figure 2.1)
INPUTS
(Controllable)
4P’s
Product
Place
Price
Promotion
Customer’s
Black Box
OUTPUTS
Decisions
Uncontrollable
Influences
Product Choice
Brand Choice
Store choice
Purchase Timing
Purchase Amount
Mood/Attitude
Psychological/Personal
Social/Cultural
FIGURE 2.1 The Consumer’s Black Box
Since, we do not yet possess the tools to get inside a consumer’s head, we
have to make do with the best we can do. This involves looking at the
24
relationship between Inputs and Outputs in figure 2.1 and based on that
inferring what is going on in the Customer’s Black box. To make our life
more exciting, it is not even as “simple” as that – There are many
influences on the consumer unrelated to our “Marketing” inputs. Things
like the consumer’s mood, his/her friends and a host of other influences
that we (as marketers) have no control over – and that we cannot even
observe in most cases !
We will look at the effect of the 4P’s on the consumer’s decision later on
in the book. This chapter will look at the Uncontrollable (from the
Marketing Managers point of view) Influences.
There are two aspects to this:
1.
What are the Characteristics of the consumer and what are
their building blocks
2.
What are the processes going on in the consumer’s minds,
or what is the Consumer Decision Process
Consumer Characteristics
Consumer characteristics are what make up the individual consumer.
These can be classified into Cultural, Social, Personal and
Psychological influences.
Culture is made up of values and forms of expression. Social influences
include reference groups, family members, role models etc. A person’s
age, income, location etc. (“Demographics”) are also generally linked to
different types of behaviour. Note how we word this: Cultural and social
forces influence the consumer. However, where a person lives or her age
may not necessarily influence her choices in a causal manner, but we may
be able to discover correlations with behaviour. For example, the demand
for retirement communities does go up with age and the “warmth” of the
location !
On the Psychological front, there are many influences on the consumer
that are of interest to marketers. The questions we ask are: What motivates
people to behave a particular way ? (to buy/not buy, to look for cheaper
25
prices, to prefer certain stores etc.). An important model about motivation
is “Maslow’s Hierarchy of needs:
Self
Actualization
Esteem Needs
Social Needs
Safety/Security Needs
Physiological Needs
FIGURE 2.2 Maslow’s Hierarchy of Needs
The idea here is that there is a “hierarchy of needs that people are
motivated to satisfy. Some needs come before others and must be satisfied
before motivation to satisfy a “higher” need kicks in. I like to think of a
caveman in pre-historic times as a story to help understand the Hierarchy
of needs. Our ancient homo-sapien wakes up in the morning and his first
thought is for his basic (physiological) needs. He does his morning thing
and then hunts for food and water. After much exertion (the hunger
clearly motivates him to give his best), he brings down his prey and
proceeds to fill his belly. (Step 1 !). As he lays happily on his rock, full
and satiated, with his basic needs met for the present, his thoughts turn to
the next day – It would be nice to have food for tomorrow as well ! – and
to make sure the hyenas don’t make off with the remainder of the kill. He
promptly gets up and with more exertion (motivated no doubt, by the
thought of his hungry stomach the following day) he drags the rest of the
26
meat into his cave to protect it. It might pass through his mind, that the
local lions might be hungry as well.
Let us imagine our hairy friend a few weeks later. He has found a big
dead mammoth and has managed to store all the meat in his cave. He has
also figured out that if he lights a fire outside his cave, the lions and hyenas
can’t get to him or his stock of food. (step 2 !) Now when he lounges
around in front of his cave, he doesn’t have to worry about his next meal,
or his safety. He now wishes he could share his wonderful story of the
ingenious way he dragged the mammoth’s meat back to his cave with
someone. Not seeing anyone close by, he is again motivated to wander the
woods searching for others like him – He is getting to be quite the social
animal ! (Step 3). If we return to him many moons later, we find him
seated around a fire with a bunch of Neanderthals having a whale of a
time. But amidst all the happy grunting, his brow furrows (more than it
usually does) as he tries to get the rest of his buddies to think really, really
well of him. Our caveman, it turns out needs the respect of his friends!
(Step 4). When (and if) he becomes “chief”, he is held in high regard by
the others and now he occupies himself with weight issues like the
meaning of life and fulfillment. He is up to Step 5 !
You can see how at each stage our protagonist was motivated by a
particular type of need, once that need was satisfied, he became motivated
by a higher level need.
There are three more “basic” ideas of human behaviour we need to keep in
mind as marketers:
1. Perception.
The Sensation à Attention à Interpretation model underlies
perception. It is important to remember that Interpretation (which often
differs among consumers) is key to perception.
2. Psychological Learning
The model here is:
Stimuli à Response à Reinforcement à Response
This model is also called Operant Conditioning.
27
3. Persuasion
We can influence attitudes through the use of marketing inputs
Marketing
Inputs
Process
Results
Source
Message
Recipient
Media
Attention
Comprehension
Acceptance
Retention
Belief Change
Attitude Change
Behaviour Change
FIGURE 2.3 Persuasion
Consumer Decision Process
The second part of understanding consumers is trying to get a handle on
the “process” of decision making. It is generally agreed that the consumer
decision process can be divided into 5 stages:
1. Problem Recognition
This is the recognition of an unsatisfied need or want. “Needs” are basic
forces that motivate a person to something, while “Wants” are
manifestation of needs or objects that will satisfy needs. (I may need a car,
but want a Ferrari!). Both can be triggered by internal stimuli (like
hunger) or external stimuli (like a nice display in a store, an ad or the smell
of fresh baked bread in a bakery). Involvement will influence the
likelihood of internal and external triggers. Further, the motivation (the
drive that stimulates or generates behaviour) could be Utilitarian
(Rational) or Ego-expressive (Emotional).
2. Information Search
28
Once an unfulfilled need or want has been identified, the consumer looks
(both in her memory and externally) for information to help in the decision
process. Often the information search does not involve all possible ways
of fulfilling the need, but a much smaller set of options, which is often
different for each consumer. To explain this better, we can use the
following three “sets”:
Total Set:
The set of all alternative available to the
consumer
Awareness Set:
The subset of options the consumer is
aware of
Consideration Set:
The even smaller subset of options the
consumer seriously considers.
The average size of consideration sets is about 6 – 7.
There are, of course, times when the consumer may not go through the full
decision process and may make an “Impulse” Buy. This is a purchase
with little or no advance planning. To put this in perspective, it is known
that only about 31 % of grocery shoppers use shopping lists ! As
marketers, stores try to induce impulse buying with in-store displays, lossleader items (i.e. items priced very low) placed for store traffic, or sample
food in the store.
3. Alternative Evaluation
As we shall see in Chapter 4, in the minds of consumers, products are
“bundles of attributes”. Each attribute (a particular part of the product that
satisfies something for the consumer) of the product has it’s own benefit.
The consumer compares different alternatives either based on prior
attitudes stored in memory, simple heuristics (thumb rules like variety
seeking, habit, dissonance reduction etc) or more complex decision rules
that may involve tradeoffs of different attributes.
4. Purchase Decision
In the end the final decision is based on the information search and
alternative evaluation. However, situational issues are important – the
display of a particular type of Orange Juice may result in a purchase. As
29
marketers we try and figure out the patterns of behaviour – “Overall, what
will the average consumer (or most consumers) do when we change one or
more of the 4 Ps?”
5. Post Purchase Behaviour
The transaction and the process does not end with a purchase. There are
“after-effects”. The consequences of satisfaction are Repeat purchase and
word of mouth communication. Dissatisfaction would not be good for the
company. On average a dissatisfied consumer spreads bad word of mouth
to 11 others. It is also 5 times more expensive, on average, to get a new
customer than it is to keep an existing one. Post purchase evaluation is
generally based on expectations and performance. If the product
performs better than expectations, we get a satisfied consumer, and if not,
a dissatisfied one. “Post purchase Dissonance” is the term used to
describe the state of anxiety or tension caused by the difficulty of choosing
from among several alternatives. (“Did I do the right thing ? Did I get a
good deal? Should I have waited ? Did I get ripped off ?). No decision is
perfect, so some dissonance is always to be expected. As marketers we try
and reduce dissonance as much as we can. Dissonance increases with the
dollar value of the purchase, the similarity between selected items and
rejected items and the relative importance of the decision. To reduce
dissonance, consumers avoid information favourable to the unselected
alternative and seek information favourable to the selected alternative. To
reduce post purchase dissonance, companies reassure buyers through
advertising and personal selling, provide return policies, and provide post
purchase service and support. The idea is to make the consumer feel good
about the choice they have made.
Consumers may not always follow the exact decision process outlined
above. In many cases some steps are skipped (for example with lowinvolvement products). However, breaking up the process into the 5
stages helps us as marketers focus on the appropriate action required to
satisfy the consumer’s needs.
Organisational Buyer Behaviour
So far we have talked about the individual consumer. When our customer
is a business/company instead of an individual consumer, things are a little
different. The organization is still composed of individuals, but they act
30
together based on some norms.
A company buyer may have
reporting/justification issues to deal with, or internal company priorities to
keep track of. The interplay of these elements makes organizational buyer
behaviour just a little bit more complex. So long as we keep this in mind,
we can fruitfully apply the basic principles of marketing in a “B2B”
context as well, quite effectively.
Is That All ?
This is not even close to being all about Consumer Behaviour. This is a
field that spans hundreds of articles, books and other scholarly work every
year. Even for this book, however, we are not done. We will have
consumer behaviour discussions in the chapters on Price, Product and
Promotion. It makes more sense to deal with behaviour issues related to
price in the chapter on price and the issues related to Promotion in the
promotion chapter. This way it will be easier to link the understanding of
consumer behaviour directly with the Marketing implication. The
behaviour issues we have discussed in this chapter are “broad” items that
apply to all areas of marketing!
31
NOTES
32
3
Chapter
3. The Company
Who are we ?
A
ccording to Day and Wensley (“Handbook of Marketing”), three
theories of the firm are of particular use in understanding the
nature of the company and the marketing area. These are:
1. Resource Based Perspective
2. Positioning Perspective
3. Configuration Perspective
Resource Based Perspective
This theory argues that companies seek sustainable competitive
advantages. These are a “bundle” of resources available to the company
that may be better or worse than competitors. Resources can be divided,
broadly into Assets and Capabilities.
Assets include not only capital items like factories and production
equipment, but also advantages like brand equity, relationships, consumer
lists etc.
33
Capabilities are the “complex bundles of skills and accumulated
knowledge exercised through organizational processes that enable firms to
coordinate activities and carry on learning how to perform these activities
better.” (Day and Wensley, Handbook of Marketing). Capabilities are not
just about skills and technical expertise that the company’s employees
have, it is also about the processes within the company that keep track of
an effectively store and use these skills. When the whole is greater than the
sum of it’s parts, it is generally due to good managerial systems and norms
in the company.
Positioning Perspective
This perspective is best understood in terms of the 3-4-5 framework.
Each element of this framework provides a way of positioning or
classifying a company (or a part of it). It is useful to understand where a
company stands, because depending on how where we fit in this
classification scheme, a different strategy might be called for.
This involves the following:
3 Generic Strategies
Michael Porter identified the three generic strategies that companies might
position themselves as:
Focus:
The company chooses to find a niche and focuses
on it
Cost:
The company chooses to compete on costs and
strives to achieve efficiencies on this dimension
Differentiation:
The company uses differentiation as a competitive
tool. (we are better, safer, smaller, quicker etc.).
This sets the company’s positioning against
competitors.
34
4 Contexts
Question Marks
Market Growth Rate
High
The Boston Consulting group Growth share identifies four contexts into
which individual business units may be classified based on industry
attractiveness (Market Growth Rate – how much potential the industry
has) and how well we are doing in relation to our competition (Relative
Market Share). Each business unit is represented on this grid. The size of
each unit represents the volume of business associated with it.
Stars
Dogs
Low
Cash Cows
Low
Relative Market Share
High
FIGURE 3.1 The Boston Consulting Group (BCG)
Growth-Share Matrix
The 4 "contexts" are the four ways one can classify individual business
units (products), i.e. Question Marks, Stars, Dogs and Cash Cows, based
on the Market Growth rate and Relative Market Share.
35
So, a product that has a high market share (for "our" brand) in a market
that is stagnant or declining, is a "Cash Cow" - such a product would
probably no require excessive promotional spending (because it's future is
not particularly good even though the present is pretty profitable), and
would be a good candidate for "harvesting" (getting as much profit out of
it as possible before it declines).
"Dogs" are products that are not doing well (low market share) in poor
markets. The products probably need to be divested (discontinued!).
"Stars" are products that are doing well in good markets. They generally
require lots of attention, but are good for profits. Eventually (because of
the Product Life Cycle) stars become cash cows.
"Question Marks" are just that - they may become stars or dogs
5 Forces of Industry Attractiveness
Michael Porter (him again !) has identified Five Forces which determine
industry attractiveness. Both Buyer and Supplier power make an industry
less attractive from the perspective of the company, because it means the
company itself has lesser “power” vis-à-vis it’s external contacts. Industry
competitors determine how much competition the company has to deal
with and the threat of new entrants (or, barriers to entry) determine how
easy it is for new competitors to emerge. It is also important to keep track
of not only competition within the industry the company operates, but also
keep track of other products which may be substitutes for ours.
(Remember the focus on “Consumer Needs” instead of on products ? –
this implies that all other products which satisfy the consumer need that we
are targeting are our competition).
36
Threat of
New Entrants
Buyer
Power
Supplier
Power
Industry
Attractiveness
Industry
Competitors
Threat of
Substitutes
FIGURE 3.2 Michael Porter’s 5-Forces of Industry
Attractiveness
Configurational Perspective
This perspective deals with the internal organization of the company and
it’s boundaries (i.e. the nature of it’s links with other entities). The way a
company is structured (both internally and externally is an important
determinant of what it can and cannot do. For example “make or buy”
decisions are generally determined by the cost of doing something within
the company or outsourcing.
SWOT Analysis
SWOT Analysis (Strengths – Weaknesses – Opportunities – Threats) is a
very simple, but powerful tool for collecting information on the company
and summarizing the classification approaches of the 3-4-5 framework.
37
Internal
External
+
Strengths
Opportunities
-
Weaknesses
Threats
Items (“facts”) are classified along the Positive (“Good for us”) and
Negative (“Bad for us”) dimension as well as along the Internal
(“Controllable”) and External (“Uncontrollable”) dimension. It is easy
then to see not only the internal issues of the 3 generic strategies or the 4
contexts (BCG) , but also the external issues of the 5 forces (Porter).
The most important contribution of SWOT analysis is that it helps
managers to sift through all the information available (generally the
information and data available for decision making is far in excess of what
is actually required) and pick the relevant items. SWOT analysis helps
managers weed out the irrelevant “facts” (pieces of information that don’t
affect the decision making) and focus in on the key issues. The
classification into Internal/External and +/- helps keep track of what type
of action is required in each instance. Strengths are generally things that
the company can highlight and build on, as well as use as competitive
advantages or selling tools. Weaknesses need to be either improved, or
ways must be found that help overcome them. Opportunities need to be
taken advantage of and threats must be watched out for.
These techniques help us understand the Company related issues that we
need to keep track of in developing Marketing plans.
38
NOTES
39
4
Chapter
4. The Competition
What are we up against ?
N
o matter how well we analyse ourselves and our consumers, we
will generally, not get our marketing right unless we take into
account how our competition is structured and how their actions
impact us.
There are two main issues of concern here:
1. What is our Market ? (Who are our Competitors) and
2. How is our Market structured? (How is our competition organized)
Who are our Competitors
One has to be careful in defining “our market” – Shocker (Marketing
Handbook) says that a Market can be defined in terms of a product by
“..identifying the set of ‘product’ alternatives or competitors which are
sufficiently consequential to a firm that they need monitoring. For many
applications a “Product-Market” can be thought of as the totality of
product alternatives that could be actively considered for purchase or use
by at least some minimal percentage of people for whom such purchase or
40
use is relevant.” The definition of a Product-Market is critical because
when we try to get measures of competitive intensity, the results could
vary greatly depending on the particular set of products we have classified
as “our market”. So, Coke might view just Pepsi as a competitor, but it
may be argued that Coke’s competitors also include all other “pop” drinks,
not just colas. In fact, there is also an argument for treating all grocery
store beverages as competitors for Coke. Clearly in each case, Coke’s
market share would be different as would our inferences on intensity of
competition.
Defining a ‘market’ through a product has pitfalls. Theodore Levitt
(“Marketing Myopia”, Harvard Business Review) argued many years ago
that it is better to define a Market by the “Needs” served. This makes sure
that marketers do not get “short-sighted” (myopic) and complacent about
their competition. In the example of Coke, above, it makes sense, then to
consider Coke’s competition to be all ‘soft’ beverages. It is important to
not only focus on current competitors but also “potential” competitors
(those whose products might be able to satisfy the same consumer needs as
our product
In the STP chapter, later in this book we will see some “spatial” models of
representing competition (Perceptual Maps). These models are built based
on attribute differences, and since they are generated using needs based
data, are quite a good tool for representing “our market”.
Measuring inter-product competition, then becomes about either a) Cross –
Elasticity (the effect of changes in a competitors marketing actions on our
market performance) or b) Substitutability (“if customers regard the
products as interchangeable for some relevant purpose(s)”)
How is our Competition Structured
We can look at this from the industry perspective. Economic theory
presents us with 4 main types of industry structures based on differing
competitive characteristics. The four classifications differ on two
dimensions : 1. The number of Sellers and 2. The degree of product
differentiation (how different the products are).
Monopoly is the structure that exists when there is just one main
producer/seller of a particular product or service. (at least in some area).
41
The product is clearly unique and cannot be substituted. Mostly, because
of monopoly power, marketing effort is minimal.
Oligopoly is the structure where there are only a few main large
competitors who produce similar products. Marketing effort consists
mostly of trying to find attributes along which each competitor can attempt
to seek a leadership position.
Monopolistic Competition is the structure where many competitors exist,
but they are able to differentiate their products . Marketing effort is
directed at differentiation and finding market segments which are not
served by competitors.
Pure Competition is an idealized structure that involves a large number of
producers/sellers with the same, undifferentiated product or service. In
market structures that approach pure competition, there may not be any
competition on the product (same), price (same) or even promotion
(nothing distinctive to communicate). Mostly, place (distribution)
becomes important.
Knowing the Market we are operating in and it’s structure is vital in
creating the right Marketing mix (4 Ps) as we shall see in the next few
chapters !
42
NOTES
43
5
Chapter
5. STP and Marketing Research
Dealing with Differences
W
e know that consumers come in all different shapes and sizes.
Everyone is different. However we also know that many
consumers share similar needs.
STP (Segmentation,
Targeting and Positioning) is the process of looking for and
finding these “groups” (or segments) of consumers and designing
marketing strategies to take advantage of this grouping
Segmentation
Different Customers want different things (product), are able to pay
different prices, have different information sources (promotion) and buy at
different places (geographic, demographic). Essentially, these are the 4
P’s. Marketers must try to understand their consumer.
However, developing a different marketing program for each customer is
extremely expensive. Segmentation allows a marketer to identify and
group people that behave similarly. An example of this is the Internet.
Certain on-line companies have tailored or personalized their website to
individual users. Finally, marketers can then position their products to fit
their target market segment.
44
Definition: Segmentation:
Segmentation is the process of dividing the total heterogeneous
market for a product or service into several segments, each of
which tends to be homogeneous in some significant aspects.
Example - Air Travel - One company serving many segments
Business/Executive: Inflexible; price insensitive. Small number of people,
but travel often.
Leisure Traveler/Student: Flexible; very price sensitive (other methods of
travel--e.g., bus, car, train--are feasible; travel may not be essential). Very
large segment.
Comfort Travelers: Comfort (e.g., space, food) important; willing to pay.
Small segment.
Requirements for effective segmentation
Profitability must be sustainable over time. Measurability with accessible
data is very important. The segment must be accessible through existing
distribution, advertising, etc. For the ODI case analysis there should have
been a section in the report on the different ways to communicate (trade
magazines) with the selected target market.
More requirements for effective segmentation
Good segments are also Homogenous (similar needs and desires within
segments) and mutually exclusive (different needs and desires among
segments). The essence of segmentation is that there are differences
across but similarities within different groups of consumers.
Targeting
Once we have identified groups of consumers with similar needs, we need
to choose, which of these we will target.
45
Factors that need to be considered when selecting Target Markets (Big
Picture):
•
Target segments should be compatible with the organization’s
goals and image
•
The market opportunity represented by the segment must
match the company’s resources
•
The segment must represent an opportunity to generate enough
sales to generate a profit
•
The company should select target segments where it can enjoy
a competitive advantage
Positioning
Positioning relates to the use of various marketing techniques and
marketing-mix variables to create the image or perception that will best fit
with what the company wishes to be known for.
According to Lillien and Rangaswamy (Marketing Engineering),
“Positioning involves designing an offering so that the target segment
members perceive it in a distinct and valued way relative to competitors.” (
There are three main ways to position a product: (again according to
Lillien and Rangaswamy):
1.
2.
3.
Unique (“Only product/service with ---”)
Difference
(“More than twice the [feature] vs.
[competitor]”)
Similarities
(“Same functionality as [competitor];
lower price”)
This is closely related to establishing a Brand. Positioning may be done
on Attributes (low price, safer car, bigger screen etc.), Benefit (better for
your skin, saves money etc.), Usage Situations, or Product Class.
46
Tools
There are four main tools we use for STP.
Factor Analysis
Cluster Analysis
Discriminant Analysis
Perceptual Maps.
We are now in the realm of Marketing Research. Any activity that
involves, collecting, analyzing or interpreting market information is
Marketing Research. One of the most common methods of collecting
information is to ask what they feel/think/believe about something and
what/when they will do something about it. (The other main way of
collecting information is to observe what people actually do) Often the
amount of information that is collected or available may be huge.
Let us use the example of Digital Cameras.
Here are some questions we may ask potential consumers:
On a scale of 1- 7 (1 Not important, 7: Very important), please rate how
important each of the following attributes are in your decision to buy a
digital camera:
1. Size
2. Mega pixels
3. Optical Zoom
4. Digital Zoom
5. Movie Clip capability
6. LCD size
7. Weight (including batteries)
8. Bundled software
9. Image Stabilisation
10. White Balance override
11. Manual Focus
12. Storage media type
13. Price
47
We will also ask potential consumers how they rate the following brands
(again on a 7 point scale; 1: Poor, 7: Excellent) on each of the above
attributes: Canon, Nikon, Minolta
Here is a sample data we might collect from this exercise. Each number in
a cell represents the average from all the respondents:
Attribute
Attribute
Importance
1. Size
2. Mega pixels
3. Optical Zoom
4. Digital Zoom
5. Movie Clip capability
6. LCD size
7. Weight (incl. batteries)
8. Bundled software
9. Image Stabilisation
10. White Balance
11. Manual Focus
12. Storage Media type
13. Price
4
6
4
3
7
5
5
2
1
1
3
4
7
Ratings
Canon
Nikon
Minolta
6
6
4
5
6
2
6
6
3
4
7
6
4
5
6
5
5
3
4
5
2
2
2
4
3
5
4
4
6
5
4
6
4
3
5
1
5
2
3
As you can surmise, there is a table like the one above for every
respondent. Different respondents will have different responses to both the
Attribute Importance question, but also the Brand Rating question.
So, what can we do with this information we have collected ?
Let’s see how we can use the Market Research tools we mentioned earlier
with the data we have collected.
48
Factor Analysis
It turns out that all the 13 attributes listed above are not necessary to
analyse digital cameras. Factor Analysis is a mathematical technique that
looks at all the responses from all the respondents and finds that most
respondents who think that (for example) White Balance is an important
attribute also think that Image Stabilisation is important. What this means
is that we can use fewer attributes to describe digital cameras. (We can
“merge” some of the attributes – White Balance and Image Stabilisation
can be merged into an attribute called “Professional Features” – In fact,
factor analysis may reveal that Manual Focus and Storage Media Type can
also be merged into the “Professional Features” attribute). The purpose of
Factor Analysis is data reduction. We can proceed with much fewer
attributes. (If you look at websites which rate and compare digital
cameras, you will find upwards of 30 attributes that are used – Factor
analysis would be a very useful tool to reduce the attributes to a more
manageable number without losing important information.
Cluster Analysis
We will also find that there are patterns among the responses of different
groups of consumers. We might find that there is a group of consumers
that rates Mega pixels and Professional features very highly, but rate LCD
size and price low. (these could be professional photographers who need
the best equipment and may not be too price sensitive). We might also
discover another group that rates size and price very highly, but not any of
the other attributes. (these could be people who are not technically
advanced, but want a simple small camera). Cluster Analysis is the
mathematical tool that looks for and finds these groups of respondents.
Cluster Analysis is thus the tool used for Segmentation. Note also, that we
are segmenting consumers based on “Needs Variables” (i.e. attributes of
the product, or items that represent the needs of the consumers). These
variables are called “Bases variables”. We are not segmenting consumers
based on their income, or age etc.
Discriminant Analysis
The next issue is identifying these groups. We want to link these
groupings to something observable (like age, income, magazines read etc.)
These are called “descriptor variables” and are used to identify and target
49
(reach) different segments of consumers. The mathematical technique that
lets us link groupings of consumers with descriptor variables is called
Discriminant Analysis. We might, thus, discover that of the two groups
we identified through cluster analysis, the first is composed mostly of
people in the age group of 35 – 55 with an income of between $70,000 to
$90,000 and the second group is mostly people in the age group of 15 – 40
with an income range of $50,000 to $70,000. We may also discover that
the first group watches mostly the news on TV, but the second group
watches mostly reality shows. This would help us a great deal in terms of
being able to target ads for the first group during news shows, and for the
second group during reality shows. As you may have guessed, if we used a
survey to collect data on our respondents earlier, we would also have
needed to ask them the appropriate questions about their gender, income,
magazine preference, age, address etc.
Perceptual Maps
Based on the data we have collected in our digital camera example, we can
get an idea of what our average consumer thinks of us. This is the
Position we occupy in the consumer’s mind. It may not necessarily be
what we want it to be, or even what we think it should be. For example,
we might produce a really safe car (based on our tests), but consumers
may think of it as “unsafe” if there are negative news stories about it.
Perceptual Maps represent the information we have gathered in a visual
manner to make it easier to interpret. A “Snake Plot” is the simple,
traditional way to “see” the differences (in the average consumer’s mind)
among the three brands of digital cameras.
1
1.
Size
2.
Mega pixels
3.
Optical Zoom
4.
Digital Zoom
2
50
3
4
5
6
7
5. Movie Clip capability
6.
LCD size
7. Weight (incl. batteries)
8. Bundled software
9. Image Stabilisation
10. White Balance
11. Manual Focus
12. Storage Media type
13. Price
= Canon
= Nikon
= Minolta
FIGURE 5.1 Snake Plot
This information can be further simplified (as we did in Factor Analysis)
and reduced to two main dimensions as in Perceptual Map. Figure 3.2
represents the simplification of several dimensions into two dimensions:
Simple – Advanced and Low price – High Price. The lines with arrows
(“vectors”) represent each attribute. The attributes that have a higher
correlation with each other are “closer” (i.e. more consumers think alike on
them). The length of the lines represent the importance of the attribute in
the consumer’s mind.
51
Advanced
Manual Focus Image Stabilisation
Mega pixels
White Balance
Software
Low Price
High Price
Price
Optical
Zoom
Digital Zoom
LCD Size
Simple
FIGURE 5.2 Perceptual Map with attributes
Now that we have seen how to “condense” several attributes into two main
attributes, we can see what the consumers think of the three digital camera
brands in a way that is easy to understand and interpret. (Figure 3.3) (Please
note that this example is constructed with “made up data” and is not truly representative
of the digital camera marketplace)
52
Advanced
Canon
Minolta
Low Price
High Price
Nikon
Simple
FIGURE 5.3 Perceptual Map with Digital Camera Brands
We can now visualize our brand’s positioning relative to other brands. We
can find “empty” areas of the map to target, and we can see what parts of
the map have more intense competition (and potentially avoid them).
Summary
So, we use Factor Analysis to reduce data to a manageable size. Then we
use Cluster Analysis to Segment consumers. Next, we use Discriminant
Analysis to identify and hence Target consumers, and finally we use
Perceptual Maps to help Position our product offering – and that’s STP !
53
NOTES
54
6
Chapter
6. Product
What do we have to offer ?
W
hat is a Product ? The Marketing definition in Chapter 1
provides a simple answer: A product is a good service or idea.
If we expand this idea we can say that a Product is a good,
service or idea consisting of a bundle of tangible and
intangible attributes that satisfies consumers’ needs and is received (by
consumers) in exchange for money or some other unit of value.
This idea is a little different from what people have thought of in terms of
“Product” in the past. (a Product hasn’t always been thought of as being a
service or idea). The product is, in essence, anything of value that can be
exchanged for a price. This is another example of the centrality of the
exchange concept to Marketing. Thus, for a product to be a product in the
marketing sense, there has to be a form of exchange. Products also
incorporate both tangible (physical) and intangible (perceived, felt,
experienced) attributes. Products embody, not just the physical or
measurable characteristics of an item, but also how consumers ‘feel’ about
it. We’ll talk more about this perception/feeling issue when we discuss
branding.
55
Types of Products
It is useful to classify products into different types. The two main
classifications are Consumer vs. Industrial goods and Durable vs. Nondurable goods.
Consumer Goods
Consumer goods are goods purchased by the ultimate consumer (i.e. user).
These can be further classified as follows:
Convenience Goods
These are goods that are purchased frequently and involve minimal
shopping effort. (E.g. Milk, chewing gum, pop etc.). These goods are
generally inexpensive and can be bought at many different types of stores.
Consumers in this category are not particularly brand loyal, will accept
substitutes and are often price conscious. Marketers focus on building
awareness of their brands, and recognize that easy availability is very
important in determining sales.
Shopping Goods
Shopping goods are more expensive than convenience goods and require
effort deliberation and thought before purchase decision are made. These
goods are purchased infrequently, and can be bought only at particular
types of stores. Consumers generally go through all five stages of the
consumer decision process when buying these goods. They are often high
involvement items like cars, or electronics and consumers are brand
conscious.
Marketers focus on differentiating their brands from
competitors.
Specialty Goods
Specialty goods are usually very expensive and can only be purchased at a
very limited number of stores. (e.g. Mont Blanc pens, Harley Davidson
Motorcycles, Vintage cars). Availability is not important here, but rather
exclusiveness is sought after. Marketers stress the uniqueness and status
of their brand.
56
Unsought Goods
These goods are not characterized by price or availability. They are
generally purchased very infrequently. Consumers generally do not go
looking for these products. (e.g. Life insurance, Education Bonds, Antismoking aids etc.). Marketers emphasize awareness, because it is the key
to educating the consumer to buy their product.
Industrial Goods
Industrial goods are not purchased by the ultimate consumer, but by other
producers who then manufacture consumer goods (or other industrial
products). These goods assist in providing products for resale and are
bought by companies to be put into production to be used in the
manufacturing other goods. The sale of industrial goods is the result of
derived demand. The demand for these products comes from the demand
for the final consumer good. The demand for bicycle wheels is derived
from the demand for bicycles.
Durable and Non-Durable goods
Durable goods last over an extended period and are therefore purchased
only infrequently (like cars, laptop computers, washing machines etc.).
Non-Durables (or “consumables”) (e.g.: batteries, cereal, pencils) are used
up in one or a few uses and must be purchased again and again. Printers
and printer cartridges are also good examples of Durable and Non-Durable
goods. This classification is important because it indicates to the marketer
the behaviour of consumers for the two types of goods. In one case,
consumers have to be encouraged to repeatedly keep buying the
consumable, and in the other the message must reach the consumer mostly
at the point in time when the consumer is considering buying a durable
item.
New Products
Launching a new product is one of the most important and riskiest things
that a company does. By some estimates 80 % of new products fail. From
a business perspective this sounds pretty grim considering that new
product launches cost several hundred million dollars. What can
marketers (and they are the ones ultimately responsible for new product
57
introductions) do about this ? Can the failure rate be reduced ? Let’s see
why new products fail. New products typically fail due to some (or all) of
the following reasons:
•
Poor Concept (No one wants it ! It doesn’t satisfy any consumer
needs)
•
Inadequate selection and targeting. (The wrong consumers are
being targeted)
•
Inadequate differentiation (The new product is perceived as very
similar to existing products and doesn’t provide any reason for
consumers to switch)
•
Marketing Mix Issues:
§
Poor Execution
§
Poor Quality
§
Bad Timing (too early, too little, too late)
§
No access to buyers (distribution weakness)
From the perspective of this book, these seem to be fairly obvious, “basic”
and avoidable errors. We have highlighted the primacy of consumer’s
needs, so the new product would be expected (in the hands of a competent
marketer) to satisfy some consumer needs. We would also expect (given a
basic understanding of STP) that a new product would go through
sufficient research to find and target appropriate consumer segments, as
well as be launched in an area of the market that differentiates it from
competitors. As we will see in succeeding chapters, there are some simple
ideas to be kept in mind to ensure good execution on the 4 Ps. Please do
remember, however, that this book just presents the basics; there are a host
of details that need to be worked out when making real life decisions that
we don’t go into.
We can go back once again to the Marketing concept of satisfying
consumer needs to look for ways of making sure that the new product does
not fail. There are many techniques and processes that different
58
companies use for new product development. Most of them involve
creative ways of keeping track of new opportunities, and some process for
idea generation (both from consumers and employees) and screening, as
well as development. In terms of opportunities, a firm has four main
options (Figure 6.1)
Existing
Products
New
Products
Existing
Markets
Market
Penetration
Product
Development
New
Markets
Market
Development
Diversification
FIGURE 6.1 Options for Expansion
A key element of the new product development process is the tradeoffs
amongst attributes. If we ascertain the consumers’ ideal products, we
would find that there are many attributes that consumers want more and
more of. (for example: Price. All consumers would prefer price to be as
low as possible). The ideal product thus, would be mostly something very
impractical. However, if we provide consumers with tradeoffs possibilities
(e.g.: You can have a larger TV, but you have to pay more, or you can
have a larger room in a hotel, but it won’t have free internet), we can get a
much more useful picture of what attribute levels the new product should
have. Conjoint Analysis is a technique that elicits this trade-off
information from consumers. It involves having consumers make choices
between alternative combinations of different attribute levels. This lets us
figure out, for example, how much consumers are willing to pay for extra
cheese on pizza, or what they are willing to give up for a cheaper printer.
59
The Product Life Cycle
Sales
This is a key concept in understanding products. Every product has a life
cycle from “birth” to “death”. Figure 6.2 shows the general shape of Sales
over time for any product.
Introduction
Growth
Growth
Decline
Time
FIGURE 6.2: Product Life Cycle
Individual products may have variations on the shape of the Product Life
Cycle (PLC). Fads (products that quickly become popular, but then just as
quickly fade away) have a very narrow peak. Some products have life
cycles that are done in a few weeks or a few months. Others (e.g.
Ketchup) have product life cycles that can last several decades
During the Introduction stage, the product has just been introduced into
the market and customers are not quite familiar with the product yet. Due
mostly to start up costs, Research and Development costs that go into
every new product, the company is generally losing money in this stage.
60
There is usually not much competition and the company focuses on
building awareness.
The Growth phase marks the point where sales begin to “take off”. This
generally happens once a threshold of awareness is crossed. There is, by
this time, more competition and the company must continue to inform
potential customers about their competitive advantages.
Sales of the product eventually begin to peak and level off. This is the
Maturity stage. The company’s profits also peak around this time. The
company now focuses on defending it’s market share and reminding
consumers of the value of the product and it’s differentiation from
competition.
Eventually, the sales of the product begin to drop in the Decline stage and
the profits for the firm fall as well. At the decline stage, the firm will
generally “Harvest” the product and eventually delete it from their product
line (stop manufacturing it).
Diffusion of Innovation
The shape of the PLC is linked to how quickly a new product or idea
(innovation) spreads (diffuses) amongst the population. Figure 6.3
illustrates a typical curve representing the adoption of a new product. The
figure shows the different categories of consumers who adopt the new
product at different speeds. Innovators are motivated by being pioneers
and buying the “latest and greatest” product. This really small group is
more inclined to pay a higher price for the new product. They are often
referred to as being at the “bleeding edge”. Innovators have a high
tolerance or risk. The Early Adopters are a slightly larger group who also
value trying something new, but are not as informed about new products
as Innovators. As you can see from Figure 6.3, Early Adopters are still
well ahead of the curve. Marketers have realized that a skimming (high)
pricing strategy works well for both these groups because of their
willingness to pay higher prices. A skimming price strategy has the
advantage of recouping costs quicker, but it does slow the diffusion
process. The Majority of consumes buy the new product when there are
enough others who have already tried it and the “bugs” have been
discovered and fixed. This group has an average tolerance of risk and is
generally price sensitive. Finally the Late Adopters (sometimes referred
61
% Adoption
to as Laggards) are the last segment of the market to adopt the new
product. This group is extremely risk-averse and want a competitive price.
Majority
Time
Innovators
Late Adopters
Early Adopters
FIGURE 6.3: Diffusion of Innovation and different
categories of Adopters
Certain characteristics of an innovation may serve to improve or detract
from its chances of adoption by consumers (and the time frame over which
adoption takes place). These are:
•
It’s perceived complexity. (the more complex the product is
viewed as, the slower consumers adopt)
•
It’s compatibility in use with present behaviour patterns and
complementary products. (A product that is more similar in use to
existing behaviour, the faster it will spread)
62
•
The ease with which it’s features (and especially it’s benefits) can
be observed and communicated. (the easier this is, the easier it is
for word of mouth to occur and spread the message – and the
adoption – faster)
•
The degree of risk – physical, financial and social – attached to
adoption of the innovation in preference to existing products or
procedures (the higher the perceived risk of buying the new
product, the bigger the barrier to quick adoption. For example the
higher the price, the slower the adoption curve)
•
The extent to which the innovation can be tried on a limited basis
before being adopted on a large scale, permanent basis. (Easy trial
reduces the risk of buying something new and hence helps faster
adoption)
Diffusion is different from person to person depending on his/her
definition of perceived risk. Faster diffusion occurs if the marketer can
communicate benefits that are of value to the consumer.
The final thing to keep in mind is that typically consumers go through the
following stages in the adoption process:
Awareness –> Knowledge -> Evaluation –> Trial -> Adoption
Each of these stages has it’s own “Diffusion Curve” and it is important to
remember that each curve influences the succeeding ones. So, if the
spread of awareness is slow, the other parts are automatically slowed down
and the final adoption is also slow.
63
NOTES
64
7
Chapter
7. Price
What do we want in return for our offering ?
P
rice is the value exchanged by the consumer for a product. This is
often (but not always) a monetary value. From the perspective of
the firm, Price is a key decision variable because it determines the
inflow of revenue.
There are three main approaches to setting price, each corresponding to
one of the 3C’s from Chapter 1.
Cost-Plus Pricing
(Company)
Competitive Parity Pricing
(Competition)
Value Based Pricing
(Customer)
Let us look at each in turn:
Cost-Plus Pricing
To begin this section we need to remind ourselves of some basic concepts
from Economics. The “Demand Curve” describes the relationship
between price and the quantity demanded (or, the number of units
65
consumers will buy at that price). In keeping with the idea that if price
increases, fewer units will be bought, the demand curve is generally
downward sloping. Figure 7.1 shows a simplified demand curve. (It is
simplified because it is assumed that there is a linear – the simplest
mathematical form – relationship between quantity demanded and price.)
Total Revenue
60
40
P*
Price
20
Demand Curve
0
0
10
20
Q* 30
40
50
60
-20
-40
Marginal Revenue
-60
Quantity
FIGURE 7.1: Demand Curve
In this case, the relationship can also be represented by the equation:
Q = 50 - P
(7.1)
This is a scenario where, when the Price is $1, 49 units of the good are
purchased/sold. When the Price is $ 48, 2 units are demanded etc. Table
7.1 lists the various combinations. The revenue that the firm generates is
the price it charges times the quantity demanded (or the quantity sold – for
simplicity we will assume these are the same). In equation form:
66
TR = P.Q
(7.2)
Table 7.1 also shows the Total Revenue (TR) for our example.
Price
50
49
48
47
46
45
44
43
42
41
40
39
38
37
36
35
34
33
32
31
30
29
28
27
26
Quantity
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Total
Revenue
0
49
96
141
184
225
264
301
336
369
400
429
456
481
504
525
544
561
576
589
600
609
616
621
624
Marginal
Revenue
50
48
46
44
42
40
38
36
34
32
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
25
25
625
0
Price
24
23
22
21
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
Quantity
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
Total
Revenue
624
621
616
609
600
589
576
561
544
525
504
481
456
429
400
369
336
301
264
225
184
141
96
49
0
TABLE 7.1: Demand Curve Example
If you look at Figure 7.1 (or Table 7.1), you can see that as the price drops,
the quantity demanded increases and the Total Revenue increases as well.
However, a point is reached where the price is low enough that even
67
Marginal
Revenue
-2
-4
-6
-8
-10
-12
-14
-16
-18
-20
-22
-24
-26
-28
-30
-32
-34
-36
-38
-40
-42
-44
-46
-48
-50
though the quantity demanded keeps increasing, the Total Revenue starts
to drop. On inspection, you can see that Total Revenue is highest when
P*= 25 and Q* = 25. This is the Optimal Point to price at.
Table 7.1 also shows something called Marginal Revenue. Marginal
Revenue (MR) is the additional revenue from increasing the quantity sold
by 1 unit. In equation form:
d
TR
dQ
d
Þ MR =
PQ
dQ
d
Þ MR =
(50 - Q )Q
dQ
Þ MR = 50 - 2Q
MR =
(7.3)
(7.4)
You can see (from either Figure 7.1 or Table 7.1) that the optimal price we
found earlier corresponds to the point where MR = 0. This just means that
we can keep lowering the price and increasing quantity demanded till there
is no additional revenue from selling more.
So far so good. But we have not considered Costs. It does cost the
company to produce the product and get it to the consumer. Costs can be
broken up into Fixed Costs (i.e. the costs that are independent of the
number of units produced) and Variable Costs (costs that increase with
the number of units produced – In general, if you can break up a cost into a
per-unit charge for marketing purposes, you can treat it as a variable cost).
As with Revenue, we can describe the concept of Marginal Cost as the
cost of producing one additional unit. In our example, we had obtained the
optimal price without looking at cost. Now let us add Marginal Cost to the
mix (Figure 7.2). The Marginal cost curve is generally either flat or
downward sloping. A downward sloping Marginal Cost curve simply
reflects the learning curve and economies of scale. As the firm produces
more and more units, it gets better at doing so and can produce more
efficiently (cheaper). Also, sometimes producing a larger quantity can be
cheaper per unit. For this example, let us assume that:
MC = 30 - Q
(7.5)
68
60
Price
40
Demand Curve
P*
Marginal Cost
20
Marginal Revenue
0
0
10
20
Q*
30
40
50
60
Quantity
FIGURE 7.2: Demand Curve with Marginal Cost
In Figure 7.2, the area between the Marginal Cost cure and the Marginal
Revenue curve represents the “gain” from producing an additional unit.
Clearly, we should increase the quantity upto the point where MR=MC.
Beyond (to the right) of this point, the cost of producing the next unit is
higher than the revenue we would generate from it, so it is not worthwhile.
This gives us a better idea of the optimal price to charge. From the figure,
we can see that that the point where MR = MC corresponds to P* = 30 and
Q* = 20. We can also see this in equation form below:
MR = MC
Þ 50 - 2Q = 30 - Q
Þ Q* = 20
Þ P* = 50 - Q = 30
(From Equation 7.4 and 7.5)
69
(7.6)
Breakeven Analysis
So far, we have taken into account the demand curve as well as the
marginal cost of producing the product. Let us now look at the optimal
price from the point of view of Profit. This will include consideration of
Variable Costs as well as Fixed Costs.
The analysis is quite simple, yet incredibly powerful (Figure 7.3 illustrates
the Breakeven Point graphically).
Higher
Total Revenue Curve
Total Revenue and Cost
Profit Area
Total Cost Curve
Break-Even Point
Loss Area
Total Variable Costs
Total Fixed Costs
0
Units of Production (Quantity)
More
FIGURE 7.3: Breakeven Analysis
In terms of equations:
Profit = P = Total Revenue – Total Cost
Total Revenue = Price x Quantity
70
(7.7)
And,
Total Cost = Fixed Cost + (Unit Variable Cost x Quantity)
So, Equation 7.7 becomes:
P = P.Q - ( FC + Q.VC )
(7.8)
Þ P = Q( P - VC ) - FC
This is where the concept of Breakeven point comes in. The Breakeven
point is the Quantity we need to produce to just recover our costs. It is the
quantity below which we make a loss and above which we make a profit.
So, to obtain the Breakeven Point (BEP), we need to find the Quantity that
leads to a zero profit : (Q* = BEP)
P=0
Þ Q * ( P - VC ) - FC = 0
Þ Q * ( P - VC ) = FC
Þ Q* =
(7.9)
FC
( P - VC )
Equation 7.9 is the Breakeven Point Equation and shows that the BEP is
the quantity at which the Fixed Costs are covered by the “Contribution”
(P-VC).
You will notice that we need to know the price before we can calculate the
Breakeven Point. So, how does this help us determine price ? The power
of Breakeven Analysis is that we can calculate the BEP for many different
levels of price and potentially many different cost scenarios as well, to see
the effect of price levels on profitability. In conclusion, Breakeven
Analysis provides us with a simple tool to incorporate costs (both variable
and fixed) into the pricing decisions and let’s us evaluate many different
scenarios to pick the best one.
Value Based Pricing
Value based or Demand based pricing looks at the Price decision not from
the internal perspective of how to recover costs, but from the point of view
71
that the purpose of price is to capture the perceived value of the product in
the minds of the consumer.
At one level, this can be characterized as charging “what the market will
bear” (what the market is willing to pay) and at another level it can be seen
as focusing on the value we are offering the consumers. (something we
have recommended throughout this book).
The basis for this approach to pricing is to use the customers’ perception of
value, rather than the company’s cost. Once we determine the price we
wish to charge, we can work backwards to create the appropriate cost
structure.
To better understand value based pricing we will have to switch our focus
from economic theory to more behavioural characterizations. One
example of this switch is the difference between Reservation Price and
Reference Price.
Reservation Price is an economic term that is defined as the highest price
a consumer is willing to pay. In light of the fairly standard Rational Utility
Assumption of economics (i.e. that consumers on average behave
rationally and will choose options that objectively maximize their benefit).
Reservation price is the same as the customer’s perception of the value of
the product. In other words, the customer will not pay more for a product
than what she perceives to be it’s value/benefit to her.
Reference Price on the other hand is a more behavioural concept and the
literature offers several ways to define it. It can be thought of as either one
or a combination of the following:
•
•
•
•
•
•
•
Fair Price
Frequently Charged Price
Last Price Paid
Price of Brand usually bought
Average price for similar products
Expected future price
Typical discounted price
Another important idea that can be better understood by looking at the
behavioural aspect of things is Price Sensitivity. (like the economic
72
concept of Price Elasticity). The availability of alternatives, perceived
substitutes, reference points, switching costs etc. all contribute to the level
of price sensitivity. Sometimes, consumers may perceive higher prices to
be a signal of quality and therefore would not be very price sensitive.
Overall, we know that the economic assumption of the rational consumer
is not true all the time. Often we see others (and sometimes ourselves) do
things that may not be completely rational. For example people tend to
buy more when an item is “on Sale” regardless of whether the item is
actually any cheaper or not. More people will also buy a product for (say)
$49.99 than will buy the product at $50.00, even though (rationally) there
is only a negligible 1 cent difference.
Daniel Kahneman and Amos Tversky studied some of the breakdowns of
rational behaviour and proposed “Prospect Theory” to account for some of
the deviations. Their work has had such a profound impact on Economic
theory that in 2002, Daniel Kahneman won the Nobel Prize in Economics
for “bridging economics and psychology”. (Amos Tversky passed away in
19996 and the Nobel committee does not award prizes posthumously).
Prospect theory says that consumer response to gains vs. losses is
asymmetric. This means that consumers value gains and losses
differently. In fact it turns out that “losses loom larger than gains”. A
classic example to illustrate this idea is the following scenario: Say
someone told you that you had won $10,000. You would be pretty happy.
(You have a gain and value it). Now suppose that this was a mistake and
you are told that you really did not win (this is the “loss”). Since you are
now exactly where you were to begin with, (you haven’t gained anything
or lost anything overall) you should be just as content as you were before
this whole thing began. Or at least that is what a “Rational” person would
feel. However, the “let down” from “not winning” the money is bigger
than the “boost” from winning it and you end up less happy than you were
to begin with !
An important component of prospect theory is that we evaluate losses and
gains relative to a (subjective) reference point. (so something that is a large
gain to one person may be a small gain to another. This “framing” effect
means that how a particular issue is framed or presented can determine
how it is viewed. A store advertising a new brand by placing it right next
to a very expensive brand can better convince customers that the new
73
brand is a good value than by placing it right next to a low price
alternative.
This also explains the “On Sale” phenomenon. The price we pay for a
product is a “loss” from the consumers perspective. However, if we
present a $80 watch as a $100 watch at a 20 % discount, consumers will be
attracted by the seeming “gain”. Marketers should also try and frame
purchases (i.e. the price paid) as gains denied rather than losses. Further,
the marginal utility of gains is decreasing, which means that (for example)
$10 is worth more to the person with nothing in their pocket than the
person with $1000 in their pocket. This further implies that two distinct
gains of $10 will perceived as better than a one time gain of $20.
If you have seen Ron Popeuil sell knife sets on TV, you will see him
separating gains as well: “You can have 2 knives for three easy payments
of $13.33”, he says. “But wait ! There’s more !! I will give you 3 knives
for the same three easy payments of $13.33 !”. “But wait ! There’s more
!! I will give you 2 more knives – so 5 knives for the same three easy
payments of $13.33 !”… and so on till he is selling you 21 (!) knives all
for “three easy payments of $13.33 !”
Two losses, on the other hand are worse than one combined loss. So as a
marketer, it is better to raise your price in one big jump, rather than
gradually, in many steps.
The lesson from all this is that perceptions of price often don’t follow strict
economic models of utility. Knowing how his works can help marketers
understand consumer reactions to price and set prices effectively.
Competition Based Pricing
Pricing in the face of competition is like a “game”. (hence the term “Game
Theory” for the field of study that looks at competitive strategy and won
John Nash the Nobel prize in economics in 1994). Often someone wins
and someone loses. (typically the item being won or lost is market share).
If you lower your price, competitors are likely to lower their prices as well.
This can lead to price wars which are typically bad for both participants
and generally worse for the company with the higher market share.
Strategically, when fixing price you do need to anticipate competitor
response and account for it.
74
Conclusion
So, where does all this leave us overall. Cost analysis typically gives us a
“floor” or minimum price we need to charge to meet our costs. Value
analysis gives us a “ceiling” or maximum price our customer will be
willing to pay. Between these two extremes is where (based on
competitive and behavioural considerations) is where we will actually
price our product. (See Fig. 7.4)
$15
SKIMMING
Value to User
(What user would have to pay to get
equal benefits i.e. perfect substitute)
Perceived Value
(Some fraction of actual value to user)
Consumer Surplus
Price
Producer Surplus
PENETRATION
$10
Variable Cost
0
FIGURE 7.4: Price Overview
75
NOTES
76
8
Chapter
8. Place
How do we connect with the consumer ?
P
lace or Distribution, or Distribution Channels or simply Channels
is the third “P”. To illustrate the importance of this part of
Marketing, the “Handbook of Marketing” points out that for many
industries in the US, channel members “collectively earn margins
that account for 3 – 50 % of the ultimate selling price. In contrast,
advertising typically accounts for less than 55-7% of the final price.
Channels
Distribution is how the product gets from the producer to the consumer. A
distribution channel is the set of companies and individuals who
participate in getting the product from the producer to the consumer.
Getting a product to a consumer is important not only (say) geographically
(i.e. having the product available at the local grocery store) but also across
time (tomatoes only ripen in May, but we can usually find them in grocery
stores all year round).
77
Functions
The main function of distribution channels is to provide efficiencies in the
interactions between producers and consumers. There are typically about
50,000 different items sold at the average grocery store. If the
manufacturer of each of those 50,000 items needed to have a way of
accessing the consumer directly, the number of outlets required would be
huge. However, each of those manufacturers deals only with 5 – 10 retail
stores. In turn the grocery stores collect all these different items under one
roof and consumers can also now deal with a few stores instead of 50,000
different manufacturers. Figure 8.1 and Figure 8.2 illustrate this idea of
improved efficiency.
Products
Consumers
FIGURE 8.1: Direct (0-level) Channel with Many
Interactions between Producer and Consumer
78
Distribution Channel members (or intermediaries) also provide the
following functions: Assuming title (ownership) and physical ownership
of products (including storing the products), taking risks by stocking the
product, gathering sorting and delivering the product, providing
information about the product and facilitating purchase including financing
of the product.
Products
Retailers
Wholesaler
Consumers
FIGURE 8.2: 2-Level Channel with Much Fewer
interactions
79
To continue the tomato example, the channel members (wholesalers and
stores) buy the tomatoes from the farmers when the tomatoes ripen. Since
these tomatoes won’t all be sold immediately, the channel members are
assuming the task of storing them till they can be sold, transporting them
to the stores where consumers will buy them, sorting them (making sure
the spoilt ones are taken out), and dealing with the ones left unsold –all of
this while keeping them looking “fresh”.
Wholesalers, retailers, dealers, distributors, brokers, franchises, agents etc.
are all members of the channels of distribution. All channels (i.e. the path
from the producer to the consumer) don’t have the same number or even
levels of members. For example Dell sells it’s computers directly to
consumers and therefore has no intermediaries (no wholesalers/distributors
agents etc.) and has zero levels between the company and the consumer
(like in Figure 8.1). Proctor and Gamble on the other hand, which sells
many brands of consumer goods typically has wholesalers, and retail
stores between itself and the final consumer. (in this example there are 2
levels between the producer and the consumer, making it a 2-level
channel, as in Figure 8.2)
Shorter channels (i.e. channels with fewer levels) occur more when there
are fewer consumers (e.g. business consumers), higher service needs, the
product is complex or perishable and when the producer has the resources
and ability to reach the consumers directly and requires a high degree of
control over the process. Longer Channels are required when the
consumers are highly dispersed, the products are standardized and
inexpensive and the producer does not have expertise in distribution and
the need for control is not high.
Control
A key issue in the discussion on Channels is Control. When the product
goes through a longer channel (i.e. several intermediaries) the company
(producer) has to make sure that the interests of it’s agents (the
intermediaries) are aligned with it’s own. For example, although your
local grocery store carries several brands of cereal, it’s profits don’t
depend on the sale of any one of the brands, but rather on the sale of all the
cereals it carries. This means that the interests of a particular cereal
manufacturer (who just want to maximize the sales of his brand) may not
be aligned with the grocery store’s interests which may lie with increasing
80
the sales of a different brand of cereal that offers a higher margin to the
store. Franchising agreements offer another example of a situation where
the company needs independent agents to reach the customers and has to
give up a certain degree of control. Contracts and monitoring become vital
in this type of structure.
A shorter channel (like Dell’s) offers the company a great degree of
control, but the company needs to make sure that it has the resources and
abilities to effectively get the product to the consumer. The internet offers
many advantages that Dell uses to reach it’s consumers directly.
Conclusion
In conclusion, it is important to remember the functions (utilities) of
intermediaries and the issues that accompany the lack of control and
alignment of incentives. Good decision making on distribution channels
can provide companies with huge competitive advantage and are often a
key determinant of corporate success.
81
NOTES
82
9
Chapter
9. Promotion
What do we say to the consumer?
P
romotion is the last element of the marketing mix. It is a term that
is commonly misused. Promotion includes ALL of the following:
Advertising, Sales Promotion, Personal Selling and Public
Relations. It is important to remember that all these activities are
viewed as not independent, but as strategically integrated.
What’s “Promotion”
Advertising is any paid form of non-personal presentation and promotion
of ideas, goods and services by an identified sponsor. The key here is that
the sponsor is not anonymous and that the advertising is paid for (and not
free)
Sales Promotions are short term incentives to encourage the purchase or
sale of a product or service. Sales promotions are temporary and don’t
last forever.
Personal Selling is an oral presentation in a conversation for the purpose
of making sales. This requires person-to-person contact
83
Public Relations is building good relations with the company’s various
publics by obtaining good publicity and creating a good corporate image
(including heading off unfavourable rumours and events). The key
element is that PR is free.
Direct Marketing is when the company contacts the consumer directly,
for example through the mail, telephone or internet. Direct marketing
offers the chance to implement personalized one-to-one marketing.
Integrated Marketing Communications (IMC)
In the past, experts in separate departments handled separate functions.
However, today this is done differently. IMC involves all elements of the
promotional mix to be strategically integrated. This is good because it
allows for the advertising message to be the same although it may be
distributed through different channels. IMC makes the point that
promotions are about every different way messages are sent by the
company to the consumer. With any communication, the message should
always be consistent. The purpose of IMC is linked to branding.
Branding is the image a consumer has in their mind about a product, and
IMC plays an important part in determining what the consumer thinks
when they see the company’s products.
IMC focuses on managing two dimensions:
Consistency (making sure the message is the same and not conflicting
across different points of contact with the customer)
Complementarity (making sure the different elements of the message
work well with each other – often the strengths inherent in one method of
communicating may counterbalance the disadvantages of another).
The ideal communications program involves picking several among a
large number of media options based on the “fit” with the company’s
target market. The messages should share some core meaning (an
umbrella concept that comes across in all message executions), and should
reflect the core branding strategy.
84
5 M’s
Many marketing texts (including Marketing Management, Phillip Kotler)
use the concept of the 5 M’s to illustrate the “big picture” of Promotion (or
IMC)
Slice of Life
Lifestyle
Fantasy
Mood/Image
Musical
Personality Symbol
Technical expertise
Scientific Evidence
Testimonial Evidence
Mission
•Sales Goals
•Adveritising
Objectives
Inform
Persuade
Remind
5 M’s
Message
Style
Tone
Words
Format
•Message
Generation
•Message
evaluation and
selection
•Message
execution
•Social
responsibility
review
Money
Factors to
Consider:
•Stage in PLC
•Market Share
and consumer
base
•Competition and
Clutter
•Advertising
Frequency
•Product
substitutability
Media
•Reach,
frequency,
impact
•Major media
types
•Specific media
vehicles
•Media timing
•Geographical
media allocation
Desirability
Exclusiveness
Believability
Rational Positioning
Emotional Positioning
Measurement
•Communication
impact
•Sales impact
Share
Share
Share
Share
of
of
of
of
expenditures
voice
mind and heart
market
FIGURE 9.1: The 5 M’s
The elements of IMC strategy can be broken up into the following:
Mission
The mission of the IMC program must be well defined. If we are not clear
about where we are going, we probably won’t get there ! The mission
involves deciding what the objectives are. A Push strategy aimed at
channel members may be used when there is low brand loyalty, and most
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purchase decisions are made in-store or are impulse buys. A Pull strategy
aimed at the final customer is used when there is high brand loyalty, there
is high involvement in the category, and brand purchase decisions are
generally made before the trip to the store. Further, the objectives may be
either to Inform, Persuade or Remind consumers.
Money
Deciding how much to spend on an IMC campaign is vital. Often
companies use percentage of sales and modifications of previous years’
budgets to determine promotion budgets. These may not be the best ways
to determine an optimal budget.
The following factors should be
considered when determining the budget:
• Stage in Product Life Cycle
• Market Share and Consumer base
• Competition and Clutter
• Advertising Frequency
• Product Substitution
Message
The message is the key ingredient of the IMC program. This is what we
wish to convey to our consumer. In general Keeping It Short and Simple
works very well.
Message Generation involves picking and balancing
Desirability, Believability and Exclusiveness of the message
between
Message Evaluation and Selection involves choosing between rational
and emotional positioning strategies. We may use a Cognitive appeal
aimed at the rational side of consumers, or we may use an Affective
appeal aimed at the emotional side of the consumer.
Message Execution involves selecting the Style, Tone, Words and Format
of the message
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Media
Selection of the medium or carrier of the message is almost as important as
the message itself. The determinants of an appropriate medium are Reach,
Frequency, Impact, and Timing. Here is what media buyers mean when
they use these terms: Reach is “the number of different people or
households exposed to an ad. Rating (used only for TV/Radio) is the
percentage of households in a market that are tuned to particular TV or
Radio show. Frequency is the average number of times an individual is
exposed to an advertisement. Gross Rating Points is Reach (expressed as
a percentage of the total market) multiplied by Frequency, and CPM (Cost
per Thousand) is the cost of advertising divided by the number of
thousands of individuals or households who are exposed.
Here are the main media options with advantages and disadvantages of
each:
Television advertising
Advantages
High reach
Some targeting
Low cost per exposure
Auditory & visual
Strong visual impact
Repetition possible
High prestige
Disadvantages
Limited targeting
High total cost
Hard to convey complex info
Short exposure time
Easy to avoid seeing
Perishable message
Some distrust
Clutter
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Radio advertising
Advantages
Local coverage
Some targeting
(geog./station/program)
Low cost
Quick
High frequency
Sound, humor, imagery
Low production costs
Disadvantages
Limited targeting
Local coverage
Auditory only
Clutter
Low attention
Short exposure time
Perishable message
Hard to convey complex info
Little research available
Magazine advertising
Advantages
Good targeting
Quality of color
High info content
Can convey complex info
Longevity of ad
Can be saved
Pass-along readership
Disadvantages
Long lead time for placement
Limited control of placement
Visual only
Visual clutter
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Newspaper advertising
Advantages
Disadvantages
High local coverage
Low cost
Short lead time
Placement in interest
sections
Quick placement &
changes
Reader controls exposure
Can be saved
Can be used for coupons
Limited targeting
Short life
Low attention-getting
Short attention span
No page position control
Poor reproduction
Clutter
Selective reader
exposure
Poor pass-along
Direct mail advertising
Advantages
Disadvantages
Good targeting
Can be personalized
Intense coverage
Speed
Flexible format
High information content
Can be saved
No ad competition
High cost per contact
Poor image
Clutter
May not read
FIGURE 9.1: Advantages and Disadvantages of Media
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Measurement
No campaign can be effective, unless we can figure out a way to judge or
measure effectiveness. This may sound like something Yogi Berra or
Forrest Gump might say, but it is important to set up criteria to test
whether the campaign met the objectives or not. Typically these criteria
involve either the Communication Impact or Sales Impact. The
communication impact is often hard to measure because the items being
measured are just perceptions in the consumer’s mind (like awareness,
interest etc.). Sales can be measured easily but linking it to a particular
campaign can be difficult, because there is often a lag between a message
going out and it’s impact. Further, the impact of most campaigns lingers
for various periods well after the campaign has ended, and this makes it
harder to judge sales impact of a particular campaign.
Conclusion
Promotion (or IMC) involves communicating a simple, coordinated
message effectively to consumers.
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NOTES
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A
Appendix
Appendix A: Glossary
Words ! Words ! Words !
Advertising is any non-personal, paid communication by an identified
sponsor.
Advertising medium is the means used to communicate the advertising
message
Asset refers to resources that a company possesses that are capital in
nature (e.g. equipment, buildings), as well as advantages such as brand
equity, relationships and databases of customers.
B2B Marketing is business-to-business marketing or industrial marketing
which refers to exchanges or relationships that take place between two
businesses.
B2C Marketing is business-to-consumer marketing or commercial
marketing which refers to exchanges or relationships that take place
between a business and an end-user (consumer).
Banner ad is a graphic image of an ad that is displayed on a webpage.
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Brand is a name, term, symbol or design which identifies the goods and
services of one seller and distinguishes them from those of its competitors.
Capability is a process that an organization possesses that may provide it
with advantage over its competition. Such process may take the form of a
manufacturing process, scientific methodology or software code.
Collaborative filtering is a technique of grouping buyers with similar
buying intentions, preferences and past purchase behaviour and using this
information to predict future buying behaviour.
Competency is an asset that an organization possesses that may provide it
with advantage over its competition. Such asset may take the form of
skilled staff, capital goods or cash.
Communications Mix is the bevy of promotional strategic options
available to the marketer including advertising, sponsorship, public
relationship, sales promotions and direct marketing.
Competitor is an organization that competes with you for the same
customers with similar products.
Consumer Decision-Making Process is the five-step process of making
decisions: (i) problem recognition, (ii) information search, (iii) alternative
evaluation, (iv) purchase decision and (v) post-purchase behaviour.
Consumer Ethnocentrism is the tendency to believe that it is
inappropriate or immoral to purchase foreign products
Continuous Schedule is an advertising schedule in which the firm ignores
seasonality considerations and schedules ads continuously throughout the
year.
Convenience Good is a low-priced, well-known product that a consumer
purchases with full knowledge, minimum effort and frequently.
Cookies are computer files that are downloaded onto the consumer’s
computer that enables the firm to identify consumers that return to the
website.
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Corporate Social Responsibility is the principle that firms operate within
a societal framework, and not in isolation, and have an obligation to make
a positive contribution to society.
Cost per Thousand (CPM) is a metric quoted by the media provider.
CPM is the cost of reaching 1,000 individuals with a message in a specific
medium.
Culture s the underlying framework of values, attitudes, rules, institutions
and beliefs that guide the actions of a group of people and which is passed
down from generation to generation.
Cultural Ethnocentrism is the belief that one’s own culture or ethnic
grouping is superior or better than that of others.
Disintermediation is the process by which one or more channel members
is eliminated from the distribution channel.
Economies of Scope is the overall reduction in per unit production cost as
a result of spreading fixed costs over a larger number of product lines.
Economic Integration involves the formation of transnational trade
groups to promote free trade and investment
Entry Mode is any institutional arrangement used by a firm to gain access
to a foreign market.
Ethnocentric pricing is a policy in which the firm sets one worldwide
price for the product and this price applies to all foreign markets in which
the firm participates.
Ethics is the system of moral principles and values that guide the actions
of an individual or group of individuals.
Experience curve is the relationship between cost per unit and cumulative
output.
Family Life Cycle is the stages of life that people go through (i.e.
bachelor, early married, married with young children, married with older
dependent children, empty nest, sole survivor). The modern family life
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cycle includes divorces, second marriages, same-sex marriages, step-kids,
etc.
Flighting Schedule is advertising in which the firm alternates between
periods of advertising and periods in which no advertisements are run.
Form Utility refers to the physical attributes of a product that meet
consumers’ needs.
Frequency is the number of times, within a given period of time, the
target population is exposed to the company’s advertising message.
Geocentric pricing is a policy in which the firm sets one worldwide price
that applies to the product regardless of the country market in which it is
sold.
Globalization is the growing integration of the world’s economies and
institutions.
Globalization of Production is the dispersal of production activities to
countries around the world driven by low wages and other cost
considerations.
Globalization of Markets is the convergence of buyer preferences for
products and brands.
Global marketing strategy is the standardization of the firm’s marketing
activities in those country markets that are culturally similar but
customization in those markets that are different.
The Gross Rating Point (GRP) is a metric that combines reach and
frequency. It is calculated by multiplying reach, expressed as a percentage
of the market, by frequency.
Implied demand uncertainty is the portion of total demand that the
supply chain is responsible for providing.
Individualization is the ability of the firm to tailor its interactions with its
customers.
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Institutional advertising is advertising that is geared to building the
firm’s goodwill in the marketplace among consumers, shareholders,
regulators and other stakeholders.
Interactive marketing is the two-way electronic interaction between a
buyer and a seller that takes place in an online environment in which the
buyer has the ability to control the quantity and type of information she
receives
Interactivity is the ability of the firm to have a two-way dialogue with its
customers.
Internationalization is the process by which firms commit to foreign
markets.
International marketing strategy is an extension of the firm’s domestic
(home country) marketing strategy to a foreign market.
Interstitials are ads that appears on the screen while a webpage is being
loaded.
Leading market is a market in which consumers are sophisticated in their
tastes and demanding in terms of their quality requirements.
Licensing is the practice by which a firm grants to another firm the right to
use a trade mark, patent or other form of intellectual capital for a fee or
royalty payment.
Localization involves changes that are made to a product in order for that
product to function in a foreign market.
Logistics is all activities that are involved in physically getting the right
product to the right place at the right time at the lowest cost possible.
Logistics management is the organization of the activities and
information involved with the physical movement of products to the final
consumer.
Macro-segmentation is the grouping countries that are similar according
to specific and meaningful dimensions.
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Marketing is the process of planning and executing the conception,
pricing, promotion, and distribution of ideas, goods and services to create
exchanges that satisfy individual and organizational objectives (AMA,
1986).
Marketspace is the virtual world where the interaction between buyer and
seller is mediated by a computer.
Maslow’s Hierarchy of Needs is a well know theory that ranks
consumers’ needs from physiological to safety/security to social to esteem
and finally self-actualization.
Menu costs are the costs of changing prices once posted.
Monopolistic competition is a market structure where many competitors
exist, but they are able to differentiate their products.
Monopoly is a market structure where there is just one main
producer/seller of a particular product or service (at least in some area).
Multi-domestic marketing strategy is an approach to marketing in which
the firm has a unique strategy for each foreign market.
Oligopoly is a market structure where there are only a few main large
competitors who product similar products.
Parallel distribution is the distribution of genuine products by
unauthorized intermediaries
PEST is an acronym often used to describe the external analysis of a
marketing environment. It represents the Political, Economic, Social and
Technological factors that should be considered in a scan on the external
environment.
Personal selling is the two-way flow of communication between a
company representative and a prospect which is designed to influence the
prospective buyer’s purchase decision.
Place utility refers to the process of getting the product from the
dealership to the consumer’s house.
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Possession utility refers to the consumer’s actual ownership of the
product.
Price discrimination is the practice of charging different prices for the
same or a similar product,
Product advertising is advertising that is focused on communicating the
benefits of a company’s products or services.
Publicity is a promotional technique in which the firm uses non-paid, nonpersonal, media messages to communicate information about the firm and
its products.
Public relations (PR) is communication which seeks to influence the
image and perception of the firm and its products among its various
stakeholder groups.
Pulse schedule is an advertising schedule in which the firm runs ads
continuously throughout the year but this is punctuated by periods of
increased advertising activity.
Polycentric pricing is a pricing policy in which prices in each country
market are set independently of head-office constraints.
Positioning is the process of positioning your product versus the
competition in the minds of consumers in your target market(s).
Product adaptation involves changes that are made to a product in order
for that product to appeal to the tastes and preferences of the target market
Product Adoption Curve is the general way by which a product is
diffused into the market, first to the innovators, then to the early adopters,
the majority and finally to the late adopters (or laggards).
Product Life Cycle is the general shape of sales of a given product over
time from introduction to growth to maturity and to decline.
Protectionism involves policy measures taken by a country to shield or
protect its domestic industries from direct international competition.
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Pure Competition is a market structure that involves a large number of
producers/sellers with the same undifferentiated product or service.
Quota is a quantitative restriction on the volume of a product that can
enter or leave a country.
Rating represents the percentage of households in a market area that is
tuned in to a specific broadcast.
Reach is the number of individuals and households that have the potential
to be exposed to the firm’s ads over a specified period of time.
Relationship Marketing is 1:1 marketing, where advances in technology
have enabled organizations to have relationships with each customer
through internet communication, database management and reward
programs.
Responsiveness is the ability of the supply chain to meet short delivery
lead times, handle significant volumes if required, handle a wide variety of
products if desired by consumers, meet high service levels; handle
uncertain demand and deliver innovative product.
Retailing involves all activities involved in selling goods and services
directly to consumers.
Rich Media refers to ads which incorporate animation, sound, video or
interactivity.
Sales promotion refers to any limited time, value adding offer by a firm
designed to generate an immediate sales response or accelerate a sales
response.
Sales management is the process of planning, executing, evaluating and
refining the firm’s personal selling activities.
Scrambled merchandising is the strategy of retailers carrying a range of
unrelated product lines.
Segmentation is the process of dividing the total heterogeneous market
for a product into several, mutually exclusive segments, each of which
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tends to be homogeneous in some significant way. The market is
segmented using bases of segmentation (i.e. demographics,
psychographics, etc.).
Shopbots are intelligent agents which search and compare prices on the
Internet.
Shopping Good is a higher-priced good that a consumer purchases
without full knowledge, with considerable effort and rarely.
Social Marketing is the design and implementation of commercial
marketing strategies and tactics to influence the voluntary behaviour to the
betterment of the target market(s) and society.
Specialty Good is a very high priced product that a consumer purchases
with full knowledge, considerable risk and often for image.
Substitute is an organization that competes for the same customers with a
dissimilar product offering. A substitute may also include consumer
alternatives that are not products (i.e. staying home and watching TV
instead of purchasing a ticket to a sporting event).
Supply chain infers all of the firms that are involved in the creation and
delivery of goods and services to final consumers or industrial buyers.
Supply chain management is the organization and integration of
information and activities across firms in a supply chain with the goal of
delivering goods and services to the final consumer and creating customer
value.
Tariff is a tax on imported goods and services.
Targeting is the process of selecting the target markets that will provide
the greatest return on investment.
Tim e utility refers to the utility of having access to the product at the right
time.
Unsought Good is a product that a consumer does not know they want,
such as insurance policies and funerals.
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Utility refers to the value achieved from satisfying a need. The utilities of
form, possession, place and time are achieved by marketing
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