Principles of Marketing (Australian 7th Edition 2017) by Gary Armstrong, Stewart Adam, Sara Denize, Michael Volkov, Philip Kotler (z-lib.org)
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principles of marketing 7e Armstrong Adam Denize Volkov Kotler Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e principles of marketing 7e Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Dedication From Gary Armstrong To my family – Kathy, KC, Keri, Mandy and Matt From Stewart Adam To my family – Maureen, Vanessa, Melissa, Michael, and my daughter-in-law, Yolanda From Sara Denize To my husband Leo, my children Pieter, Wendy and Julie, and all the wonderful little people in my life, Adele, Remy, James, Alicia, Jaz and Luca – with love From Michael Volkov To my family who are my inspiration, my guiding lights and loves – my wife Arabella, my girls Emma, Sarah and Cordelia, and my parents Lola and Boris. Thank you all for everything! From Philip Kotler To my wife Nancy, my daughters Amy, Melissa and Jessica, and my sons-in-law, Joel, Steve and Dan – with love Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e principles of marketing 7e Armstrong Adam Denize Volkov Kotler Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018 Pearson Australia 707 Collins Street Melbourne, VIC 3008 www.pearson.com.au Authorised adaptation from the United States edition, entitled MARKETING: AN INTRODUCTION, 13th edition, ISBN: 013414953X by ARMSTRONG, GARY; KOTLER, PHILIP, published by Pearson Education, Inc, Copyright 2017. All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage retrieval system, without permission from Pearson Education, Inc. Seventh adaptation edition published by Pearson Australia Group Pty Ltd., Copyright © 2018. The Copyright Act 1968 of Australia allows a maximum of one chapter or 10% of this book, whichever is the greater, to be copied by any educational institution for its educational purposes provided that that educational institution (or the body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act. For details of the CAL licence for educational institutions contact: Copyright Agency Limited, telephone: (02) 9394 7600, email: info@copyright.com.au All rights reserved. Except under the conditions described in the Copyright Act 1968 of Australia and subsequent amendments, no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. Senior Portfolio Manager: Elise Stone Development Editor: Anna Carter Project Manager: Anubhuti Harsh Production Manager: Abhishek Agarwal, iEnergizer/Aptara®, Ltd. Product Manager: Erin Nixon Content Developer: Katherine Horsey Rights and Permissions Editor: Lisa Woodland Lead Editor/Copy Editor: Helen Eastwood Proofreader: iEnergizer/Aptara®, Ltd. Indexer: iEnergizer/Aptara®, Ltd. Cover and internal design by Pier Vido Design Concept map illustrations: Bruce Rankin Cover illustration © Diana Johanna Velasquez/123RF Typeset by iEnergizer/Aptara®, Ltd. Printed in Malaysia 1 2 3 4 5 21 20 19 18 17 National Library of Australia Cataloguing-in-Publication entry Creator: Armstrong, Gary (Gary M.), author. Title: Principles of marketing / Gary Armstrong, Stewart Adam, Sara Denize, Michael Volkov, Philip Kotler. Edition: 7th edition. ISBN: 9781488611841 (paperback) ISBN: 9781488611865 (eBook) Notes: Includes index. Subjects:Marketing—Textbooks. Marketing—Management—Textbooks. Customer relations—Management— Textbook. Other Creators/Contributors: Adam, Stewart, author. Denize, Sara M. (Sara Marion), author. Volkov, Michael, author. Kotler, Philip, author. Every effort has been made to trace and acknowledge copyright. However, should any infringement have occurred, the publishers tender their apologies and invite copyright owners to contact them. Pearson Australia Group Pty Ltd ABN 40 004 245 943 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e v Brief contents Prefacexiv About the authors xxii Part 1Defining marketing and the marketing process 1 Marketing: Creating and capturing customer value 2Company and marketing strategy: Partnering to build customer engagement, value and relationships Part 2 Understanding the marketplace and consumers 3 The marketplace and customers: Analysing the environment 4 Marketing analytics: Gaining customer insights 5 Buyer behaviour: Understanding consumer and business buyers Part 3Designing a customer-driven strategy and mix 6 Customer-driven marketing strategy: Creating value for target customers 7 Products, services and brands: Offering customer value 8 New products: Developing and managing innovation 9 Pricing: Capturing customer value 10 Placement: Customer value fulfilment 11 Communicating customer value: Advertising and public relations 12 Personal selling and sales promotion: Creating value in relationships 13 Direct and digital marketing: Interactivity and fulfilment Part 4 Extending marketing 14 Sustainable marketing: Social responsibility, ethics and legal compliance 1 2 36 65 66 96 130 167 168 198 230 256 290 340 374 404 439 440 Appendix 1 Case studies 471 Appendix 2 The marketing plan: An introduction 484 Appendix 3 Marketing analytics spotlights 492 Appendix 4 Careers in marketing 516 Glossary522 Index534 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e vi Contents Prefacexiv A valuable learning package xix Resources for educators and students xxi About the authors xxii The development story xxv Part 1Defining marketing and the marketing process 1 Chapter 1 Marketing: Creating and capturing customer value Learning Objectives Concept map What is marketing? 2 2 3 Marketing defined 4 4 The marketing process 4 Understanding the marketplace and customer needs Customer needs, wants and demands 5 5 Market offerings: Goods, services and experiences6 Customer value and satisfaction 7 Exchanges, transactions and relationships8 Markets8 Designing a customer-driven marketing strategy Selecting customers to serve 9 9 Choosing a value proposition 10 Marketing management orientations 11 Preparing an integrated marketing plan and program 13 Engaging customers and managing customer relationships Customer relationship management 15 15 Engaging customers 16 Consumer-generated marketing 17 Partner relationship management 18 Capturing value from customers Creating customer loyalty and retention 18 18 Growing share of customer 19 Building customer equity 20 Building the right relationship with the right customers 20 The changing marketing landscape The digital age: Online, mobile and social media marketing 21 The challenging world economy 23 Measuring marketing’s contribution to organisational performance 24 Marketing in Action 1.1 Are marketers really that ‘lousy at selling marketing’? The growth of not-for-profit marketing 25 26 21 Rapid globalisation 26 Sustainable marketing: The call for more environmental and social responsibility 28 So, what is marketing? Pulling it all together 28 Student Learning Centre • Reviewing the learning objectives • Discussion questions • Critical thinking exercises • Navigating the key terms • Mini cases 1.1 Digital technologies in marketing 1.2 Customer-driven marketing strategy 1.3 Marketing analytics at work 1.4 Ethical reflection • References 31 32 32 32 33 33 33 34 34 34 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Contents Part 2Understanding the Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships Learning Objectives Concept map 36 36 37 Company-wide strategic planning: Defining marketing’s role Defining a market-oriented mission 38 38 Setting company objectives and goals marketplace and consumers 65 39 Chapter 3 The marketplace and customers: Analysing the environment Learning Objectives Concept map 66 66 67 The marketing environment 68 The company’s microenvironment The company 68 68 Marketing in Action 2.1 Strategic planning involves having the right people 40 Marketing intermediaries Designing the business portfolio Analysing the current business portfolio 41 42 Competitors70 Developing strategies for growth and downsizing44 Customers71 Suppliers69 Planning marketing: Partnering to build customer relationships 45 Partnering with other company departments 45 Partnering with others in the marketing system46 Marketing strategy and the marketing mix Customer value-driven marketing strategy 47 48 Developing an integrated marketing mix 50 Managing the marketing effort Marketing analysis 51 51 Marketing planning 53 Marketing implementation 54 Marketing department organisation 54 Marketing control 55 Measuring and managing return on marketing investment 56 Student Learning Centre •Reviewing the learning objectives • Discussion questions • Critical thinking exercises •Navigating the key terms •Mini cases 2.1Marketing strategy 2.2 Customer focus 2.3Marketing analytics at work 2.4Ethical reflection •References 59 59 60 60 60 60 61 61 62 62 69 Publics70 The company’s macroenvironment Demographic environment 72 72 Economic environment 79 Natural environment 80 Technological environment 83 Political and social environment 83 Marketing in Action 3.1 The quite real virtual experience Cultural environment 84 87 Responding to the marketing environment 90 Student Learning Centre •Reviewing the learning objectives • Discussion questions • Critical thinking exercises •Navigating the key terms •Mini cases 3.1Microeconomic environment 3.2Technological environment 3.3Marketing analytics at work 3.4Ethical reflection •References 91 91 92 92 92 92 93 93 94 94 Chapter 4 Marketing analytics: Gaining customer insights Learning Objectives Concept map 96 96 97 Marketing information and customer insights 98 Marketing information and today’s ‘big data’ 98 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e vii viii Contents Marketing analytics 99 Model of consumer behaviour 132 Managing marketing information 99 Characteristics affecting consumer behaviour 133 Marketing in Action 4.1 Netflix streams success with big data and marketing analytics 100 Assessing marketing information needs 102 Developing marketing information Internal data 103 103 Competitive marketing intelligence 104 Marketing research 105 Defining the problem and research objectives106 Developing the research plan 106 Primary data collection 109 Implementing the research plan 118 Interpreting and reporting the findings 118 Analysing and using marketing information 119 Customer relationship management 119 Distributing and using marketing information120 Other marketing information considerations121 Marketing research in small businesses and not-for-profit organisations 121 International marketing research 121 Public policy and ethics in marketing research123 Student Learning Centre •Reviewing the learning objectives • Discussion questions • Critical thinking exercises •Navigating the key terms •Mini cases 4.1Gathering data 4.2 Customer insights 4.3Marketing analytics at work 4.4Ethical reflection •References 125 126 126 126 126 126 127 127 128 128 Chapter 5 Buyer behaviour: Understanding consumer and business buyers Learning Objectives Concept map 130 130 131 Consumer markets and consumer buyer behaviour 132 Marketing in Action 5.1 Consumer behaviour: A whole life story 139 The buyer decision process Stages in the buyer decision process 145 145 The buyer decision process for new products Stages in the adoption process 148 148 Individual differences in innovativeness149 Influence of product characteristics on rate of adoption Business markets and business buyer behaviour Business markets 149 150 151 Business buyer behaviour 153 The business buying process 156 E-procurement: Buying on the internet 159 Business-to-business digital and social media marketing 160 Student Learning Centre •Reviewing the learning objectives • Discussion questions • Critical thinking exercises •Navigating the key terms •Mini cases 5.1 Consumer behaviour 5.2 Business buyer behaviour 5.3 Marketing analytics at work 5.4 Ethical reflection •References 161 161 162 162 163 163 163 163 164 164 Part 3 Designing a customer- driven strategy and mix 167 Chapter 6 Customer-driven marketing strategy: Creating value for target customers Learning Objectives Concept map 168 168 169 Customer-driven marketing strategy 170 Market segmentation Segmenting consumer markets 171 171 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Contents Marketing in Action 6.1 ALDI: Offering a ‘same-for-less’ value proposition Segmenting business markets 174 178 Segmenting international markets 179 Requirements for effective segmentation 179 Market targeting Evaluating market segments 180 180 Selecting target market segments 181 Socially responsible target marketing 185 Differentiation and positioning Positioning maps 186 186 Choosing a differentiation and positioning strategy 187 Communicating and delivering the chosen position 192 Student Learning Centre •Reviewing the learning objectives • Discussion questions • Critical thinking exercises •Navigating the key terms •Mini cases 6.1 Target marketing 6.2 Differentiation 6.3 Marketing analytics at work 6.4 Ethical reflection •References What is a product? Products, services and experiences 193 193 194 194 194 194 195 196 196 197 Branding strategy: Building strong brands 218 Brand equity 218 Building strong brands 220 Managing brands 224 Student Learning Centre •Reviewing the learning objectives • Discussion questions • Critical thinking exercises •Navigating the key terms •Mini cases 7.1 Industrial products 7.2 Packaging 7.3 Marketing analytics at work 7.4 Ethical reflection •References 225 226 226 226 227 227 227 227 228 228 Chapter 8 New products: Developing and managing innovation Learning Objectives Concept map 230 230 231 New-product development strategy 232 The new-product development process Idea generation 232 232 235 198 198 199 Marketing strategy development 236 Business analysis 237 Product development 237 200 200 Test marketing 238 202 Services marketing Nature and characteristics of a service 216 Concept development and testing Product and service classifications Product mix decisions 215 Managing service differentiation 234 201 Marketing in Action 7.1 Headspace and the unsought product Product line decisions The service–profit chain Idea screening Levels of products and services Product and service decisions Individual product and service decisions 214 Chapter 7 Products, services and brands: Offering customer value Learning Objectives Concept map Marketing strategies for service firms 205 205 206 211 212 213 213 Commercialisation238 Managing new-product development 239 Customer-centred new-product development239 Team-based new-product development 240 Systematic new-product development 240 Product life-cycle strategies 241 Marketing in Action 8.1 Mattel: Managing the fun and games Introduction stage 242 244 Growth stage Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 245 ix x Contents Maturity stage 245 Decline stage 246 Additional product and service considerations Product decisions and social responsibility 247 247 International product and services marketing248 Student Learning Centre •Reviewing the learning objectives • Discussion questions • Critical thinking exercises •Navigating the key terms •Mini cases 8.1 Innovation 8.2 New-product development 8.3 Marketing analytics at work 8.4 Ethical reflection •References 251 251 252 252 252 252 253 253 253 254 Price-adjustment strategies Discount and allowance pricing Segmented pricing 272 Psychological pricing 273 Marketing in Action 9.1 Pricing cues are customer clues Promotional pricing 276 Dynamic and online pricing 277 International pricing 278 Price changes Initiating price changes 279 279 Responding to price changes 282 282 Pricing across channel levels 283 261 Competition-based pricing 263 264 Chapter 10 256 256 257 What is a price? 258 Major pricing strategies Customer value-based pricing 258 259 Other internal and external considerations affecting price decisions Overall marketing strategy, objectives and mix 264 Organisational considerations 265 The market and demand 265 The economy 267 Other external factors 268 New-product pricing strategies Market-skimming pricing Market-penetration pricing Product-mix pricing strategies Product-line pricing 268 269 269 270 270 Optional-product pricing 270 Captive-product pricing 270 By-product pricing 271 Product-bundle pricing 271 281 Public policy and pricing Pricing within channel levels Cost-based pricing Pricing: Capturing customer value Learning Objectives Concept map 274 275 Geographical pricing Student Learning Centre •Reviewing the learning objectives • Discussion questions • Critical thinking exercises •Navigating the key terms •Mini cases 9.1 Online price tracking 9.2 Rebates under the microscope 9.3 Marketing analytics at work 9.4 Ethical reflection •References Chapter 9 271 272 285 286 286 286 287 287 287 287 288 289 Placement: Customer value fulfilment Learning Objectives Concept map 290 290 291 Supply chains and the value delivery network Supply chain goals 292 295 Major supply chain functions The nature of marketing channels and value creation How marketing channels add value 297 300 301 Number of channel levels 302 Channels in the service sector 304 Channel behaviour and organisation Channel behaviour Channel organisation 304 304 305 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Contents Marketing in Action 10.1 Multichannel services marketing 310 Channel design and management decisions 311 Analysing consumer needs 312 Advertising Setting advertising objectives 350 351 Setting the advertising budget 353 Developing advertising strategy 354 Setting channel objectives 312 Identifying major channel alternatives 312 Evaluating advertising effectiveness and return on advertising investment 363 Evaluating the major alternatives 313 Other advertising considerations 364 Channel management decisions 313 Retailing 314 Retailing: Connecting brands with consumers314 Types of retailers 314 Retailer marketing decisions 321 Wholesaling Types of wholesalers 327 327 Wholesaler marketing decisions 330 Wholesaling trends and developments 331 Student Learning Centre •Reviewing the learning objectives • Discussion questions • Critical thinking exercises •Navigating the key terms •Mini cases 10.1 Corporate VMN 10.2Multichannel distribution networks 10.3Marketing analytics at work 10.4Ethical reflection •References 333 334 334 335 335 335 336 337 338 338 Chapter 11 The main public relations tools 340 340 341 The promotion mix 342 Integrated marketing communications 342 The new marketing communications model342 The need for integrated marketing communications345 Marketing in Action 11.1 It’s content marketing, not advertising 346 Shaping the overall promotion mix The nature of each promotion tool 347 348 349 366 366 367 Student Learning Centre •Reviewing the learning objectives 369 • Discussion questions 369 • Critical thinking exercises 370 •Navigating the key terms 370 •Mini cases 371 11.1 Integrated marketing communication371 11.2 Public relations 371 11.3 Marketing analytics at work 372 11.4 Ethical reflection 372 •References 372 Chapter 12 Personal selling and sales promotion: Creating value in relationships 374 Learning Objectives 374 375 Concept map Personal selling The nature of personal selling The role of the salesforce Communicating customer value: Advertising and public relations Learning Objectives Concept map Promotion mix strategies Public relations The role and impact of public relations 376 376 377 Managing the salesforce 378 Designing salesforce strategy and structure 378 Recruiting and selecting salespeople 382 Training salespeople 383 Compensating salespeople 384 Supervising and motivating salespeople 384 Evaluating salespeople and salesforce performance387 The personal selling process 387 Marketing in Action 12.1 Social selling: Who needs salespeople? Steps in the selling process 388 389 Personal selling and managing customer relationships Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 392 xi xii Contents Sales promotion Rapid growth of sales promotion 392 393 Customer-to-customer interaction 420 Customer-to-company interaction 421 Sales promotion objectives 393 Fulfilment response 421 Major sales promotion tools 394 Customer database use in direct and digital marketing Customer database defined 422 422 Developing the sales promotion program397 Student Learning Centre •Reviewing the learning objectives • Discussion questions • Critical thinking exercises •Navigating the key terms •Mini cases 12.1 Supervising salespeople 12.2 Sales promotion 12.3 Marketing analytics at work 12.4 Ethical reflection •References 399 400 400 401 401 401 401 402 402 403 Chapter 13 404 404 405 The direct and digital marketing model Direct and digital marketing 406 406 Benefits of direct and digital marketing to buyers and sellers 408 Direct marketing Direct print and reproduction 409 409 409 Telemarketing409 Kiosks and electronic dispensing Digital marketing Interacting in digital marketing Search-engine optimised websites Marketing in Action 13.1 Search engine marketing: Three reasons why search engines exist Search engine marketing Online advertising Evaluating direct and digital marketing results Evaluating direct and digital marketing Evaluating online marketing 426 426 427 Evaluating customer database performance429 Public policy issues in direct and digital marketing Irritation, unfairness, deception and fraud 430 430 Privacy431 Direct and digital marketing: Interactivity and fulfilment Learning Objectives Concept map Direct-response television and radio Database use in direct and digital marketing423 410 411 411 411 413 415 416 Email417 Social media marketing 418 Other forms of online interaction 419 Interactivity 420 Student Learning Centre •Reviewing the learning objectives • Discussion questions • Critical thinking exercises •Navigating the key terms •Mini cases 13.1 Location-based marketing 13.2 Direct and digital marketing 13.3 Marketing analytics at work 13.4 Ethical reflection •References 433 434 434 435 435 435 436 436 437 437 Part 4 Extending marketing 439 Chapter 14 Sustainable marketing: Social responsibility, ethics and legal compliance Learning Objectives Concept map 440 440 441 Sustainable marketing 442 Social criticisms of marketing 443 Marketing’s impact on individual customers443 Marketing’s impact on society as a whole 446 Marketing’s impact on other businesses448 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Contents Consumer actions to promote sustainable marketing 449 Consumerism449 Environmentalism450 Public actions to regulate marketing 453 Business actions towards sustainable marketing Sustainable marketing principles 453 453 Appendix 1 Marketing in Action 14.1 Peoples Coffee: Making a difference, one cup at a time 456 The role of ethics in marketing Marketing ethics 457 457 The sustainable company Legal compliance in marketing Putting a compliance program in place Case studies 460 460 Appendix 4 Coverage of a legal compliance program 462 467 467 471 The marketing plan: An introduction 484 Appendix 3 461 468 468 468 468 468 469 469 470 Appendix 2 460 Legal education Student Learning Centre •Reviewing the learning objectives • Discussion questions • Critical thinking exercises •Navigating the key terms •Mini cases 14.1 Consumerism 14.2 Role of ethics in marketing 14.3 Marketing analytics at work 14.4 Ethical reflection •References Marketing analytics spotlights Careers in marketing 492 516 Glossary522 Index534 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e xiii Preface Welcome to your Principles of Marketing package The seventh edition of Principles of Marketing makes the road to learning and teaching marketing more effective, understandable and enjoyable than ever. Its approach is designed for you the reader, and strikes a careful balance between depth of coverage and ease of learning. The seventh edition’s learning design – with revised integrative concept maps at the start of each chapter – enhances student understanding. Principles of Marketing ensures you will come to class well prepared and leave with a richer understanding of basic marketing concepts, strategies and practices. The marketing journey: Creating and capturing customer value Top marketers all share a common goal: to put the consumer at the heart of marketing. Today’s marketing is all about creating customer value and building profitable customer relationships. It starts with understanding consumer needs, wants and demands, deciding which target markets the organisation can serve best, and developing a compelling value proposition by which the organisation can attract, keep and grow targeted consumers. If the organisation does these things well, it will reap the rewards in terms of market share, profits and customer equity. In this seventh edition of Principles of Marketing, you will see how customer value – creating it and capturing it – drives every good marketing strategy. Updated in the seventh edition This seventh edition of Principles of Marketing has been thoroughly revised to reflect the major trends and forces that marketing must take into account in this era of customer value and relationships. Here are just some of the main changes you will find in this edition: • The seventh edition builds on our learning design. The book’s more active and integrative presentation includes in-chapter learning enhancements that guide you along the road to learning marketing. The chapter-opening layout provides a concept map that graphically previews and positions each chapter and its key concepts, providing you with a visual guide to more easily navigate the chapter. End-of-chapter features summarise important concepts and highlight important themes, such as marketing and the economy, technology, ethics and marketing financial analysis. Critical thinking exercises and mini cases provide opportunities for you to practise marketing skills. In all, the new design enhances student understanding and facilitates learning. • Throughout the seventh edition, you will find important coverage of the rapidly changing nature of customer relationships with companies and brands. Today’s marketers aim to create deeper consumer involvement and a sense of community surrounding a brand – to make the brand a meaningful part of consumers’ conversations and their lives. New relationship-building tools include everything from websites, blogs, in-person events and video sharing, to online communities and social networks such as Facebook, YouTube, Twitter and LinkedIn, or the organisation’s own social networking sites. • Every chapter shows how companies are marketing in local and international economies that sometimes are quite turbulent. Starting with sections on adding customer value in each chapter, and Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Preface • • • • • • • • continuing with discussions and examples integrated throughout the text, the seventh edition shows how, now more than ever, marketers must focus on creating customer value and sharpening their value propositions to serve the needs of today’s more frugal consumers. Increasingly, marketing is taking the form of two-way conversations between consumers and brands. The seventh edition contains material on the exciting trend towards content marketing and consumer-generated marketing, by which marketers invite consumers to play a more active role in providing customer insights that shape new products and marketing communication among other developments. This can be seen in Chapters 11 and 13 in particular. This edition provides new and expanded discussions of new marketing technologies, from the use of social media (Chapter 13) to radio-frequency identification (RFID) (Chapter 10), and the use of various digital tools and technologies discussed throughout the book but particularly in Chapters 1, 5, 11 and 13. In line with the book’s emphasis on measuring and managing return on marketing, discussion on marketing analytics is threaded throughout the book. Appendix 3 ‘Marketing analytics spotlights’ provides in-depth analysis and discussion, supported by relevant case studies, to encourage students to apply analytical thinking to relevant concepts in related chapters. The mini cases at the end of each chapter provide further opportunities to practise using marketing analytics. The topic of marketing strategy in Chapter 2 is linked with a sample marketing plan presented in Appendix 2. The marketing plan is set in the exciting and continually developing market of the tablet PC – a market that is highly relevant to today’s connected consumers. The seventh edition provides refreshed and expanded coverage of the explosive developments in integrated marketing communications and direct and digital marketing. It discusses how marketers are incorporating a host of new digital and direct marketing approaches in order to build and create more targeted, personal and interactive customer relationships. No other marketing textbook provides more current or encompassing coverage of these exciting developments. The end-of-chapter discussion questions, critical thinking exercises and mini cases have been updated and are linked to the chapter learning objectives and AACSB General Skill Area requirements. Key terms are highlighted in the discussion throughout, presented as margin definitions alongside the in-text references and compiled in an updated, page-referenced list at the end of each chapter and in the comprehensive glossary at the end of the book. One of the four mini cases presented at the end of each chapter invites the reader to consider the role of ethics in the marketing context and the question: ‘What would I do …?’. Five major customer value and engagement themes The seventh edition of Principles of Marketing builds on five major customer value and engagement themes, as described below. 1 Creating value for customers in order to capture value from customers in return. Today’s marketers must be effective at creating customer value, engaging customers and managing customer relationships. Outstanding marketing companies understand the marketplace and customer needs, design value-creating marketing strategies, develop integrated marketing programs that engage customers and deliver value and satisfaction, and build strong customer relationships and brand community. In return, they capture value from customers in the form of sales, profits and customer equity. This innovative customer value and engagement framework is introduced at the start of Chapter 1 in a five-step marketing process model, which details how marketing creates customer value and captures value in return. The framework is carefully developed in the first two chapters and then fully integrated throughout the remainder of the book. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e xv xvi Preface 2 Customer engagement and today’s digital and social media. New digital and social media have taken today’s marketing by storm, dramatically changing how companies and brands engage consumers and how consumers connect and influence each other’s brand behaviours. The seventh edition thoroughly explores the contemporary concept of customer engagement marketing and the exciting new digital and social media technologies that help brands to engage customers more deeply and interactively. Discussion of the topic begins in Chapter 1 (see, in particular, the sections ‘Customer engagement and today’s digital and social media’ and ‘The digital age: Online, mobile and social media marketing’) and carries through to a refreshed Chapter 13 ‘Direct and digital marketing: Interactivity and fulfilment’, which summarises the latest developments in digital engagement and relationship-building tools. In all chapters in between, you will find revised and expanded coverage of the exploding use of digital and social media tools to create customer engagement and build brand community. 3 Building and managing strong, value-creating brands. Well-positioned brands with strong brand equity provide the basis upon which to build both customer value and profitable customer relationships. Today’s marketers must position their brands powerfully and manage them well to create valued brand experiences. The seventh edition provides a deep focus on brands, anchored by a Chapter 7 section, ‘Branding strategy: Building strong brands’. 4 Measuring and managing return on marketing. Especially in uneven economic times, marketing managers must ensure their marketing dollars are being well spent. In the past, many marketers spent freely on big, expensive marketing programs, often without considering carefully the financial returns on their spending. But all that has changed rapidly. ‘Marketing accountability’ – measuring and managing marketing return on investment – has now become an important part of strategic marketing decision making. This emphasis on marketing accountability is addressed throughout the seventh edition and particularly in Chapter 2, in Appendix 3 ‘Marketing analytics spotlights’ and in the end-of-chapter ‘Marketing analytics in action’ mini cases. 5 Sustainable marketing around the globe. As technological developments continue to make the world an increasingly smaller place, marketers must be effective at marketing their brands globally and in sustainable ways. New content throughout the seventh edition emphasises the concepts of global marketing and sustainable marketing – that is, meeting the present needs of consumers and businesses while also preserving or enhancing the ability of future generations to meet their needs. The seventh edition integrates global marketing and sustainability topics throughout the book. An emphasis on real marketing and bringing marketing to life This new edition of Principles of Marketing takes a practical approach to marketing management, providing countless in-depth, real-life examples and stories designed to engage you with marketing concepts and bring modern marketing to life. There is a wealth of chapter-opening, within-chapter and end-of-chapter learning devices that are designed to help you to learn, link and apply major concepts: • Chapter-opening concept maps. Each chapter is introduced with a graphical concept map. These maps are designed to contextualise the main topics that are introduced in the chapter and discussed in detail, and to help the reader navigate each chapter and more easily interconnect the various elements being discussed. • Figures. Throughout each chapter, figures support the text and enhance student learning. • Marketing in action. Each chapter contains one Marketing in action feature that delves into the real marketing practices of large and small companies. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Preface • Reviewing the learning objectives. A summary at the end of each chapter reviews the main chapter concepts and links them to the chapter’s learning objectives. • Discussion questions and critical thinking exercises. At the end of each chapter, issues are raised and scenarios presented to invite discussion and the critical exploration of marketing ideas. • Navigating the key terms. A helpful listing of chapter key terms, in alphabetical order and with page numbers, facilitates easy reference. • Mini cases. Brief sections at the end of each chapter provide four short application cases that facilitate discussion of current issues and company situations. Of the four mini cases for each chapter, one presents ‘Marketing analytics in action’ and one invites ‘Ethical reflection’. • Case studies. Appendix 1 sets out case studies prepared by marketing academics from around Australia and New Zealand, which have multiple applications in the various chapters. A table at the beginning of the appendix outlines how these four case studies link with the content of the chapters. • Marketing plan. Appendix 2 contains a sample marketing plan that demonstrates how to apply important marketing planning concepts. • Marketing analytics spotlights. Appendix 3 sets out marketing analytics spotlights that demonstrate how to apply many of the analytical methods and introduce the financial analysis that helps to guide, assess and support marketing decisions. A ‘Marketing analytics at work’ mini case at the end of each chapter provides opportunity to apply analytical and financial thinking to relevant chapter concepts. • Careers in marketing. Appendix 4 provides an overview of marketing career paths and lays out a process for landing a marketing job that best matches your special skills and interests. More than ever before, the seventh edition of Principles of Marketing provides an effective and enjoyable total package designed to guide you along the road to learning marketing! Learning aids that create value and engagement This book provides a practical, managerial approach to marketing and gives you – the reader – a rich variety of examples and applications to illustrate the main decisions that marketing management face in their efforts to balance the organisation’s objectives and resources against needs and opportunities in the global marketplace. These learning aids are illustrated on the following pages. Learning objectives Each chapter begins with learning objectives that prepare the reader for the chapter material and detail the learning goals. Chapter 8 New products: Developing and managing innovation LO 1 Explain how companies find and develop new-product ideas. (p. 232) Chapter 8 NEW-PRODUCT IDEAS 231 ACQUISITION NEW-PRODUCT DEVELOPMENT PROCESS Customer-centered • Team based • Systematic New products: Developing and managing innovation LO 2 List and define the steps in the new-product development process, and describe the main considerations in managing this process. (pp. 232–41) In Chapter 7, you learned how marketers manage and develop products and brands. In this chapter, we examine two additional product topics: developing new products and managing products through their life cycles. New products are the lifeblood of an organisation. However, new-product development is risky, and Idea generation Idea screening Concept development and testing Marketing strategy development Commercialisation Test marketing Product development Business analysis many new products fail. So, the first part of this chapter lays out a process for developing and introducing successful new products. Marketers want new products to enjoy long and successful lives. In the second part of the chapter, we show that every product passes through several life-cycle stages and that each stage poses new challenges requiring different marketing strategies and tactics. We wrap up our product discussion PRODUCT LIFE CYCLE CHANGES by looking at two additional considerations: social responsibility in product decisions, and international Shaped by ethical and international market considerations product and services marketing. LO 3 For a visual representation of the chapter, please see the concept map on the following page. Learning Objectives Describe the stages of the product life cycle and how marketing strategies change during the product life cycle. (pp. 241–47) Learning Objective 1 Explain how companies find and develop new-product ideas. New-product development strategy p. 232 Learning Objective 2 List and define the steps in the new-product development process, and describe the main considerations in managing this process. The new-product development process pp. 232–39 Managing new-product development pp. 239–41 LO 4 Discuss socially responsible product decisions, and international product and services marketing. (pp. 247–50) Learning Objective 3 Describe the stages of the product life cycle and how marketing strategies change during the product life cycle. Product life-cycle strategies pp. 241–47 Learning Objective 4 Discuss socially responsible product decisions, and international product and services marketing. Additional product and service considerations pp. 247–50 M08_ARMS1841_07_SE_C08.indd 231 M08_ARMS1841_07_SE_C08.indd 230 INTRODUCTION GROWTH MATURITY DECLINE •Innovators •Few competitors •Low sales •Negative profit •Early adopters •Growing competition •Rapidly rising sales •Rising profit •Middle majority •Stable competition •Peak sales •High profit •Laggards •Declining competition •Declining sales •Declining profit Basic product Cost–plus pricing Selective distribution Build awareness Sales promotion to entice trial Product extensions Penetration pricing Intensive distribution Build awareness and interest Leverage high demand Diversity brand Price to match competition Intensive distribution Stress brand differences Encourage brandswitching Phase out Cut price Selective distribution Reduce advertising Reduces sales promotion Concept map graphically previews and positions each chapter and its key concepts, providing a visual guide to enable easy navigation of the chapter content. 6/1/17 8:29 PM 6/1/17 8:29 PM Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e xvii Preface 180 Chapter 8 New products: Developing and managing innovation Part 3 Designing a customer-driven strategy and mix month, believed that all salt is the same and wanted to pay the same price, the company would not benefit from segmenting this market. To be useful, market segments must be: • Measurable: The size, purchasing power and profiles of the segments can be measured. Certain segmentation variables are difficult to measure. For example, there are approximately 30.5 million left-handed people in the United States – almost equalling the entire population of Canada. Yet, few products are targeted towards this left-handed segment. The main problem may be that the segment is hard to identify and measure. There are no data on the demographics of lefties, and neither the United States Census Bureau, the Australian Bureau of Statistics nor Statistics New Zealand keep track of left-handedness in their surveys. Private data companies keep reams of statistics on other demographic segments but not on left-handers. • Accessible: The market segments can be effectively reached and served. Suppose a fragrance company finds that heavy users of its brand are single men and women who stay out late and socialise a lot. Unless this group lives or shops at certain places and is exposed to certain media, its members will be difficult to reach. • Substantial: The market segments are large or profitable enough to serve. A segment should be the largest possible homogeneous group worth pursuing with a tailored marketing program. It would not pay, for example, for an automobile manufacturer to develop cars especially for people whose height is greater than two metres. • Differentiable: The segments are conceptually distinguishable and respond differently to different marketing mix elements and programs. If married and unmarried women respond similarly to a sale on perfume, they do not constitute separate segments. • Actionable: Effective programs can be designed for attracting and serving the segments. For example, although one small airline identified seven market segments, its staff was too small to develop separate marketing programs for each segment. Questions ❷ In mid-2016, Niantic launched Pokémon Go and, in doing so, reached out to loyal, older Pokémon players as well as attracting a new, younger ❶ Discuss the options for Mattel in the face of intense competition and market. How could Mattel use the same strategy to rejuvenate its brands? declining sales for its key brands (see Figure 8.2 for hints). The product life-cycle (PLC) concept can describe a product class (petrol-powered automobiles), a product form (SUVs) or a brand (the Toyota Landcruiser). The PLC concept applies differently in each case. Product classes have the longest life cycles – the sales of many product classes stay in the mature stage for a long time. Product forms, in contrast, tend to have the standard PLC shape. Product forms such as dial telephones and VHS tapes passed through a regular history of introduction, rapid growth, maturity and decline. A specific brand’s life cycle can change quickly because of changing competitive attacks and responses. For example, although laundry soaps (product class) and powdered detergents (product form) have enjoyed fairly long life cycles, the life cycles of specific brands have tended to be much shorter. The PLC concept also can be applied to what are known as styles, fashions and fads. Their special life cycles are shown in Figure 8.3. A style is a basic and distinctive mode of expression. For example, styles appear in homes (colonial, ranch, transitional), clothing (formal, casual) and art (realist, surrealist, abstract). Once a style is invented, it may last for generations, passing in and out of vogue. A style has a cycle showing several periods of renewed interest. A fashion is a currently accepted or popular style in a given field. For example, the more formal ‘business attire’ look of corporate dress of the 1980s and 1990s gave way to the ‘business casual’ look of today. Fashions tend to grow slowly, remain popular for a while and then decline slowly. Fads are temporary periods of unusually high sales driven by consumer enthusiasm and immediate product or brand popularity.19 A fad may be part of an otherwise normal life cycle, as in the case of recent surges in the sales of poker chips and accessories. Or the fad may comprise a brand’s or product’s entire life cycle. The ‘Pet Rock’ is a classic example. Upon hearing his friends complain about how expensive it was to care for their dogs, advertising copywriter Gary Dahl joked about his pet rock. He soon wrote a spoof of a dog-training manual for it, titled The Care and Training of Your Pet Rock. Soon, Dahl was selling some 1.5 million ordinary beach pebbles at $4 a pop. Yet the fad, which broke one October, had sunk like a stone by the next February. Dahl’s advice to those who want to succeed with a fad: ‘Enjoy it while it lasts.’ Who could forget such fads as ‘Keep Calm’ posters, mugs and tea-towels or the ‘Ice Bucket Challenge’?20 Linking the concepts Pause for a bit and think about segmentation. As a consumer yourself, think about your own personal experience when you shop. ● Identify specific companies, other than the examples already mentioned, that practise the different types of segmentation just discussed. ● How do the stores you shop at use the segmentation concepts you are reading about here? And why do they do this? ● Using the segmentation bases you have just read about, segment the Australian footwear market. Describe each of the major segments and sub-segments. Keep these segments in mind as you read the next section on market targeting. Market targeting (pp. 180–86) Fashion style A basic and distinctive mode of expression. fashion A currently accepted or popular style in a given field. fad A fashion that enters quickly, is adopted with great zeal, peaks early and declines quickly. Fad Sales Style Market segmentation reveals the firm’s market segment opportunities. The firm now has to evaluate the various segments and decide how many and which segments it can serve best. We now look at how companies evaluate and select target segments. 243 Sales Linking the concepts are included at the end of each chapter’s main sections. Sales Evaluating market segments In evaluating different market segments, a firm must look at three factors: (1) segment size and growth, (2) segment structural attractiveness, and (3) company objectives and resources. The company must first collect and analyse data on current segment sales, growth rates and expected profitability for various segments. It will be interested in segments that have the right size and growth characteristics. But ‘right size and growth’ is a relative matter. The largest, fastest-growing segments are not always the most Time Time Time Figure 8.3 Styles, fashions and fads M08_ARMS1841_07_SE_C08.indd 243 M06_ARMS1841_07_SE_C06.indd 180 206 Marketing in Action 7.1 Student learning centre Each chapter concludes with a section dedicated to student learning. It provides a summary of the chapter relative to the chapter learning objectives, discussion questions, critical thinking exercises and a pagereferenced list of the chapter’s key terms. Chapter 4 Marketing analytics: Gaining customer insights Part 3 Designing a customer-driven strategy and mix Student Learning Centre Headspace and the unsought product 125 Learning Objective 3. Outline the steps in the marketing research process. (pp. 105–19) The first step in the marketing research process involves defining the problem and setting the research objectives, which may be exploratory, descriptive or causal research. The second step consists of developing a research plan for collecting data from primary and secondary sources. The third step calls for implementing Let’s face it, some goods and services are not at the top of our shopping list. both online and in the real world. Headspace ‘built’ a stigma! Actually, they built Life insurance or a will, smoke detectors and security alarms, a gravestone, a an enormous panelled dome at a railway station in Melbourne. For five days, thermometer or survival gear – these are all examples of goods and services we travellers were invited to ‘take away’ the stigma by removing a panel. Each panel just don’t want to think about needing. They are unsought products. Even though had a message about mental health and how to get help. Following the outdoor we do not really want these products they are often needed. For example, every event, the campaign launched online, with a digital ‘stigma’ to break down. home should have a smoke detector (and, often, more than one) – it’s the law! The opportunity to break down the digital stigma not only encourages visitors to But many home owners do not think about installing a smoke detector until their access the website but also provides those visitors with a story and information real estate agent reminds them they cannot sell their home without one. So local about youth mental health. The campaign was promoted via television, radio, governments and smoke-detector manufacturers and distributors can spend a social and digital media, and flyers. Comedian Dave Hughes, who experienced great deal of time and money reminding us to install smoke detectors and to mental health issues at the age of 21, also supported the campaign. unsought products that marketers play a big role in bringing to our attention. Reviewing the learning objectives To create value for customers and build meaningful relationships with them, marketers must first gain fresh, deep insights into what customers need and want. Such insights come from good marketing information. As a result of the recent explosion of ‘big data’ and marketing technology, companies can now obtain great quantities of information, sometimes even too much. Consumers themselves are now generating a tidal wave of bottom-up information through their smartphones, computers and tablets via online browsing and blogging, apps and social media interactions, and texting and video. The challenge is to transform today’s vast volume of consumer information into actionable customer The Big Stigma campaign aimed to change the way people think about check regularly that they are working. Smoke detectors are just one of many and market insights. mental wellbeing and to encourage young people to get information and help Headspace aims both to help young people with mental health matters and to when needed. In marketing terms, the goal was to shift the services and support improve the ‘wellbeing of young Australians’. Each year, many young people face provided by Headspace from unsought to a service actively sought out by young health and wellbeing issues that compromise their mental wellness, and many people. Let’s take a closer look at how they did this. face these problems alone – they don’t seek help. Sometimes this is because Headspace is a service – a service that is not only unsought but also intangible. they do not realise they need help but, more often than not, it is because they It is difficult for young people to understand what the service will provide. are embarrassed or because of a perceived stigma. For young people, support for The Big Stigma campaign brings the issue of youth mental health into the open, mental wellbeing is an unsought service. and makes it more real. Each panel removed from the Big Stigma represents Recently, Headspace launched a campaign to tackle this issue head on. another person who has heard the message and who understands the The campaign aimed to break down the stigma by creating an engaging experience, issues a bit better. With more people talking about youth mental health, the marketing research plan by gathering, processing and analysing the information. The fourth step consists of interpreting and reporting the findings. Additional information analysis helps marketing managers apply the information and provides them with sophisticated statistical procedures and models from which to develop more rigorous findings. Both internal and external secondary data sources often provide information more quickly and at a lower cost than primary data sources, and they can sometimes yield information that a company cannot collect by itself. However, needed information might not exist in secondary sources. Researchers must also evaluate secondary information to ensure that it is relevant, accurate, current and impartial. Primary research must also be evaluated for these features. Each primary Learning Objective 1. Explain the importance of information in gaining insights about the marketplace and customers. (pp. 98–102) The marketing process starts with a complete understanding of the marketplace and consumer needs and wants. Thus, the company needs sound information in order to produce superior value and satisfaction for customers. The company also requires information on competitors, resellers, and other actors and forces in the marketplace. Increasingly, marketers are viewing information not only as an input for making better decisions but also as an important strategic asset and marketing tool. data collection method – observational, survey and experimental – has its own advantages and disadvantages. Similarly, each of the various research contact methods – mail, telephone, personal interview and online – also has its own advantages and drawbacks. Learning Objective 4. Explain how companies analyse and use marketing information. (pp. 119–21) Information gathered in internal databases and through marketing intelligence and marketing research usually requires more analysis. This may include advanced statistical analysis or the application of analytical models that will help marketers make better decisions. To analyse individual customer data, many companies have now acquired or developed special software and analysis techniques – Learning Objective 2. Define the marketing information system and discuss its parts. (pp. 102–5) called customer relationship management (CRM) – that integrate, analyse and apply the mountains of individual customer data contained in their databases. The marketing information system (MIS) consists of people and procedures for assessing information needs, developing the needed information and helping decision makers to use the information to generate and validate actionable customer and market insights. A well-designed information system begins and ends with users. The MIS first assesses information needs. The marketing information system primarily serves the company’s marketing and other managers, but it may also provide information to external partners. Then, the MIS develops information from internal databases, marketing intelligence activities and marketing research. Internal databases provide information on the company’s own operations and departments. Such data can be obtained quickly and cheaply but often needs to be adapted for marketing decisions. Marketing intelligence activities supply everyday information about Marketing information has no value until it is used to make better marketing decisions. Thus, the marketing information system must make the information available to the managers and others who make marketing decisions or deal with customers. In some cases, this means providing regular reports and updates; in other cases, it means making non-routine information available for special situations and on-the-spot decisions. Many firms use company intranets and extranets to facilitate this process. Thanks to modern technology, today’s marketing managers can gain direct access to the information system at any time and from virtually any location. Learning Objective 5. Discuss the special issues some marketing researchers face, including public policy and ethics issues. (pp. 121–24) Unsought products: Many young people do not reach out to get the help they need with their mental wellbeing. Headspace’s Big Stigma campaign aimed to change attitudes and to encourage young people to get the help they need. developments in the external marketing environment. Market research consists Some marketers face special marketing research situations, such as those of collecting information relevant to a specific marketing problem faced by the conducting research in small business, not-for-profit or international situations. company. Lastly, the MIS helps users in their marketing analytics whereby they Marketing research can be conducted effectively by small businesses and non- Headspace analyse and use the information to develop customer insights, make marketing profit organisations with limited budgets. International marketing researchers decisions and manage customer relationships. follow the same steps as domestic researchers, but often face more and different M04_ARMS1841_07_SE_C04.indd 125 M07_ARMS1841_07_SE_C07.indd 206 Chapter 7 Products, services and brands: Offering customer value 227 Appendix 1 Learning Objective 3 service intangibility (p. 213) Learning Objective 4 co-branding (p. 222) interactive marketing (p. 216) service perishability (p. 214) brand equity (p. 218) line extension (p. 223) internal marketing (p. 215) service variability (p. 214) brand extension (p. 223) store brand (private brand) (p. 221) service inseparability (p. 214) service–profit chain (p. 215) Mini cases 7.1 Industrial products 6/1/17 7:24 PM 6/1/17 8:40 PM Case studies Marketing is much more than the sum of its parts. The case studies in this appendix Realestate.com.au explores the journey of two Australian entrepreneurs who show how the various marketing activities come together to shape businesses’ grew their online property business from its start in their garage to a publicly listed direction and performance. A brief overview of each case study is presented here, Australian company with an annual turnover of $500 million, in less than 20 years. along with a table showing how these case studies are linked to and integrated The entrepreneurs leveraged an understanding of changes in the technological with the chapters in the book. environment, together with insights into how to create value for their real-estate Patagonia designs and sells high-quality outdoor clothing, with stores in Opening doors with Grifco for their customers to market that property. Launching this business when the internet was relatively new, Google was just starting and YouTube did not exist, presented a also offers after-sales support for installers and customers, both online and competitive outdoor-clothing market by understanding its target in the incredibly door open and close – and they have been doing so for over 50 years. in person. The first openers were mechanical, and today Grifco make some of the best ❶ What type of industrial good are Grifco’s door openers? What factors highlights how future success will come from continued engagement with property mission and marketing strategy, segmentation and differentiation of this successful buyers. The final case takes you to Tasmania and an eco-walking business. business. The company has strong corporate social-responsibility goals and the did you consider in classifying this good? (Learning Objective 1) how having such goals can be a differentiating and value-creating case illustrates the different places industrial businesses might need door openers: from (AACSB: Communication; Application of Knowledge) door openers need to be fire-proof, others need to be ignition-proof and massive challenge. The case explores the challenges of new product adoption, and market and their needs. The case takes you on a journey through the company’s electronic door-opening systems in the world. Think for a moment about all manufacturing plants to shop fronts, warehouses and fire stations. Some business customers – the website does not sell property but, instead, provides a space Queensland, New South Wales and Victoria as well as throughout the United States. The case study shows how Patagonia is able to create and capture value Grifco makes industrial door openers – those gadgets that make a marketing feature – and not just something good to do. The business offers unique holiday experiences for their customers in Tasmania’s World Heritage-listed national park. The case shows the importance of The case study ‘Supermarket Wars’ takes you into the challenging marketing understanding the target market, positioning and socially responsible product battleground of fast-moving consumer goods. The case explores how Woolworths decisions to create and capture customer value. Insights about the customer allow ❷ An industrial product is a complex bundle of benefits in much the same way as a consumer product is. Marketers must identify the coreand customer Coles have responded to changes in the marketing environment, with not the the company owners to develop a digital and direct integrated communication still others need to be able to handle very heavy use. Grifco sell them all. value, create an actual product and choose how to augment least ofthat these changes being increased competition – both from new entrants, strategy that reaches out to customers and which enables the business to enrich They also promise their customers personalised sales service, reliable and such as ALDI, and from older competitors, such as IGA (Independent Grocers of product. Identify the core value, as well as the actual and augmented the customer experience from before they arrive for their holiday to well after efficient products of exceptional quality, and a huge array of spare parts product, for Grifco door openers (see <www.grifco.com.au/>). company (Learning responses as well as the responses themselves, from product assortment, Australia). The case highlights the importance of marketing information to shape Objective 1) (AACSB: Communication; Application of Knowledge) to pricing, sales promotion and distribution. Chapter number 7.2 Packaging Vote 1 for ‘The Original’ 1 2 they return home. The following table outlines how these four case studies link with the content of the chapters. Chapter title Marketing: Creating and capturing customer value ✓ Company and marketing strategy: Partnering to build customer engagement, value and relationships ✓ Farmers Union Iced Coffee brand was launched in 1977. It is one of ❶ Involving loyal customers in packaging decisions seems like a good 3 the largest-selling brands in the category and Australia’s only national idea, but it could also be a problem for the brand manager if there 4 Marketing analytics: Gaining customer insights iced-coffee brand. Brand owner Lion Pty Limited has asked its loyal Iced is no clear favourite package design. What are the advantages 5and Buyer behaviour: Understanding consumer and business buyers ✓ Coffee brand customers to join them in redesigning the packaging for the 6 disadvantages of involving customers in package design decisions? Customer-driven marketing strategy: Creating value for target customers ✓ ✓ market-leading brand. Brand devotees have been asked to vote for their favourite package design – choosing between ‘The Original’, ‘The Real ✓ ✓ ✓ 7 Products, services and brands: Offering customer value New products: Developing and managing innovation 9 Pricing: Capturing customer value ✓ Placement: Customer value fulfilment ✓ McCoy’, ‘The Straight-Shooter’ and ‘The Wild Card’ – with the design varying ❷ Iced coffee is a convenience good. Customers purchase such items 10 progressively from the original. In branding and packaging, consistency often and may have well-established preferences so they do not need 11 to is crucial so each of the package alternatives is the same shape and size, Communicating customer value: Advertising and public relations 12 expend a great deal of effort when choosing a brand. Customers often Personal selling and sales promotion: Creating value in relationships uses the same colours (teal and brown) and retains the same Farmers use the package design to quickly locate their favourite brand in13the Direct and digital marketing: Interactivity and fulfilment Union trademark. After voting for their favourite package design on a confusion of products on a supermarket shelf. Industrial goods also have custom-made website, customers can follow progress of the vote on the packaging. Do you think industrial buyers are influenced in the same brand’s Facebook page. Changing packaging, its layout and design is not way by a product’s packaging? Explain your answer. What might be the something a brand manager does lightly. This is because the package is considerations in designing packaging for industrial buyers? (Learning often the last and best chance to attract a buyer’s attention.45 Objectives 1 and 2) (AACSB: Communication; Application of Knowledge) Z01_ARMS1841_07_SE_APP1.indd 471 14 Sustainable marketing: Social responsibility, ethics and legal compliance ✓ ✓ 8 (Learning Objective 2) (AACSB: Communication; Application of Knowledge; Analytical Thinking) The marketplace and customers: Analysing the environment Tasmanian Walking Company and accessories. The service does not stop with the sale – the company Realestate. com.au Mini cases These short application cases at the end of each chapter address current issues and company situations. Questions are linked to the chapter’s learning objectives. 6/1/17 8:31 PM Supermarket wars Marketing in action Additional examples and important information are presented in marketing highlight exhibits throughout the book, together with questions for class and individual use. Highlighted definitions and key terms Throughout each chapter, definitions in colour are provided in the margin adjacent to where each key term is discussed in the text. 6/1/17 8:09 PM Patagonia xviii ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Case studies Appendix 1 sets out case studies that highlight key ideas, stories and marketing strategies. Cases involve small- and medium-sized enterprises, as well as large firms. 6/1/17 10:00 PM 7.3 Marketing analytics at work Just one more cereal Kellogg’s, maker of All-Bran, Special K and Kellogg’s Corn Flakes, has flavour to Kellogg’s Ultimate Spiderman cereal, and gluten-free versions more than 10 established cereal brands on the market in Australia of its iconic Special K and Corn Flakes brands. When launching a new as well as many new cereals – everything from Nutri-Grain Ice Break brand, the company must consider a number of key brand strategy Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e xix A valuable learning package MyLab Marketing for Armstrong/Adam/Denize/ Volkov/Kotler Principles of Marketing, 7th edition A guided tour for students and educators Auto-generated tests and assignments Each MyLabTM comes with pre-loaded assignments, all of which are automatically graded. Assignable content Educators can select content from the Study Plan and/or Test Bank and assign to students as homework or quizzes. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e xx A valuable learning package MyLab Marketing www.pearsonmylabandmastering.com Learning resources To further reinforce understanding, Study Plan problems link to additional learning resources, such as relevant sections of the eText. Videos and simulations are also available for students. Study Plan A personalised Study Plan is generated from each student’s results on assignments or sample tests. The Study Plan indicates learning objectives where students need more practice, and helps them work towards mastery. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e xxi Resources for educators and students A full suite of additional supplementary materials is provided with this book to assist teaching and learning. The educator resources contain a variety of useful features including: A test bank of questions. Each chapter has a bank of multiple choice, true/false, short-answer and essaytype questions featuring problems of varying complexity. These are structured by learning objective for the educator’s convenience, with questions for every learning objective. The Test Bank has been tagged by topic, AACSB standards and also by difficulty level. It is now also available in Word as well as in Blackboard and Moodle compatible formats. The solutions manual has been fully revised and updated by leading subject-matter experts to include the answers to all the questions contained in the book. For each chapter, the solutions manual provides the learning objectives, solutions to all end-of-chapter discussion questions, critical thinking exercises and mini cases, together with suggested answers for the Marketing in action questions and additional class activities. The PowerPoint slides have been updated to match the new edition. In response to market demand, they now include additional teaching tips, illustrating key concepts to enhance the learning experience and engage students. Digital image PowerPoint slides provide the full set of images, figures and tables from the book, together with the new edition’s branded PowerPoint template, enabling the personalisation of the lecturer’s presentation. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e About the authors As a team, the authors Gary Armstrong, Stewart Adam, Sara Denize, Michael Volkov and Philip Kotler provide a blend of skills and experience uniquely suited to writing the seventh edition of this widely acclaimed marketing textbook. Together, they make the complex world of marketing come alive. Gary Armstrong is Crist W Blackwell Distinguished Professor Emeritus of Undergraduate Education in the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill. He holds undergraduate and master’s degrees in business from Wayne State University in Detroit, and he received his PhD in marketing from Northwestern University in Illinois. Dr Armstrong has contributed numerous articles to leading business journals. As a consultant and researcher, he has worked with many companies on marketing research, sales management and marketing strategy. But Professor Armstrong’s first love has always been teaching. His long-held Blackwell Distinguished Professorship is the only permanent endowed professorship for distinguished undergraduate teaching at the University of North Carolina at Chapel Hill. He has been very active in the teaching and administration of Kenan-Flagler’s undergraduate program. His administrative posts have included Chair of Marketing, Associate Director of the Undergraduate Business Program, Director of the Business Honors Program, and many others. Through the years, he has worked closely with business student groups and has received several UNC campus-wide and Business School teaching awards. He is the only repeat recipient of the school’s highly regarded Award for Excellence in Undergraduate Teaching, which he received three times. Most recently, Professor Armstrong received the UNC Board of Governors Award for Excellence in Teaching, the highest teaching honour bestowed by the 16-campus University of North Carolina system. Stewart Adam is Honorary Associate Professor of Marketing in the Faculty of Business and Law at Deakin University, Melbourne, and managing partner with Melbourne-based marketing consultancy Fontech Pty Ltd, which was formed in Sydney in 1984. He was Australasia’s first professorial appointment in electronic marketing in 2001, where his research interests concerned use of digital tools and technologies in marketing, and their impact on non-financial and financial organisational performance. Of particular interest was the social and economic impact of communities of interest/practice. Dr Adam has co-authored 10 of Australasia’s most widely adopted marketing textbooks and has been lead author of two electronic-marketing textbooks in a publishing career spanning more than 25 years. He has been a regular contributor to academic and professional journals, and a keynote speaker at academic conferences and industry events on the subject of digital marketing and organisational performance. He was involved with Google’s Online Marketing Challenge, firstly in beta testing the student learning exercise in search engine marketing, and then in engaging his postgraduate Online Marketing students in the challenge. His most recent achievement in learning and teaching involved spearheading the implementation of the flipped classroom model coupled with continuous peer-reviewed assessment in marketing management, with resultant greater student engagement. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e About the authors Dr Adam has extensive industry experience, having held positions ranging from advertising agency executive to marketing manager of manufacturing and service firms, and on to general manager of an operating division of an unlisted public company, which he led from development of a green-field site to its takeover by a major investor. His industry experience was gained in both Australia and Europe. Sara Denize is Professor and Deputy Dean in the School of Business at the University of Western Sydney. She holds a Bachelor of Commerce (honours) degree in marketing from the University of Otago, New Zealand, and followed up with a Master of Commerce by research a few years later. After moving to Australia, she completed her PhD at the University of Technology, Sydney. With over 30 years of experience as an educator, Professor Denize oversees teaching and learning in business at the University of Western Sydney. Her most recent accomplishments include the complete redesign of undergraduate business programs to include opportunities for students to equip themselves for future work, to practise innovation and to prepare to be the job-makers of the future. This work included the development of flipped classrooms, hours of green-screen and screen-cast lecture pods, interviews with executives and location filming, as well as the development of exciting and active in-class learning opportunities. Professor Denize loves teaching and is keen to make all aspects of marketing and business education accessible and meaningful. Her teaching accomplishments have been recognised in national teaching citations. Also a keen researcher, she continues to develop her interest in collaboration and information exchange in business marketing and innovation contexts. Michael Volkov is the Director of Teaching and Learning in the Department of Marketing, Faculty of Business and Law, Deakin University, Melbourne, and has over 15 years’ experience in teaching and learning within the tertiary environment. He loves teaching and is passionate about student learning and developing student-centred learning environments. He is an award-winning and recognised leader in the field of teaching and learning, having been awarded numerous international, national and institutional awards, most recently including the 2015 Australia and New Zealand Marketing Academy ANZMAC Distinguished Educator Award; 2015 Deakin University Award for Teaching Excellence (Highly Commended); 2014 Deakin University, Faculty of Business and Law Award for Effectiveness, Excellence and Exemplar Practice in Teaching and Learning; 2013 Australian Award for University Teaching Office for Learning and Teaching Citation for Outstanding Contribution to Student Learning; 2013 Deakin University Award for Teaching Excellence; 2011 Deakin University, Faculty of Business and Law Award for Individual Teaching Excellence; and the 2010 Deakin University Commendation for Teaching Excellence. Michael’s research focus is in the fields of both consumer behaviour and education. In the areas of teaching and learning, Michael has addressed investigations including best practice in teaching and learning, the ingredients for student engagement, student success, student teamwork, stakeholder perception of graduates, student academic misconduct and student approaches to learning. His research has been published in a number of international journals including Education + Training; International Journal of Pedagogies and Learning; Information Technology, Education and Society; Australasian Journal of Educational Technology; European Journal of Marketing; Journal of Marketing Management; Journal of Consumer Marketing; Journal of Marketing Communication, Marketing Intelligence and Planning; and the Australasian Marketing Journal. Philip Kotler is the SC Johnson & Son Distinguished Professor of International Marketing at the Kellogg School of Management, Northwestern University, in the United States. He received his master’s degree at the University of Chicago and his PhD at MIT, both in economics. Dr Kotler is author of Marketing Management (Pearson Prentice Hall), now in its 14th edition and the most widely used marketing textbook in graduate schools of business worldwide. He has authored dozens of other successful books and has written more than 100 articles in leading journals. He is the only three-time winner of the coveted Alpha Kappa Psi award for the best annual article in the Journal of Marketing. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e xxiii xxiv About the authors Professor Kotler was named the first recipient of two major awards: the Distinguished Marketing Educator of the Year Award given by the American Marketing Association, and the Philip Kotler Award for Excellence in Health Care Marketing presented by the Academy for Health Care Services Marketing. His numerous other major honours include the Sales and Marketing Executives International Marketing Educator of the Year Award; the European Association of Marketing Consultants and Trainers Marketing Excellence Award; the Charles Coolidge Parlin Marketing Research Award and the Paul D Converse Award, given by the American Marketing Association to honour ‘outstanding contributions to science in marketing’. In a recent Financial Times poll of 1000 senior executives across the world, Professor Kotler was ranked as the fourth ‘most influential business writer/guru’ of the 21st century. Dr Kotler has served as chairman of the College on Marketing of the Institute of Management Sciences, a director of the American Marketing Association and a trustee of the Marketing Science Institute. He has consulted with many major US and international companies in the areas of marketing strategy and planning, marketing organisation and international marketing. He has travelled and lectured extensively throughout Europe, Asia and South America, advising companies and governments about global marketing practices and opportunities. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e xxv The development story No book is the work only of its authors. We greatly appreciate the valuable contributions of several people who helped make this new edition possible. Since the sixth edition of Principles of Marketing was published, a rigorous review and revision has taken place. The content was developed and reviewed by members of the Australian marketing field. Pearson Australia and the authors are indebted to the many known, as well as anonymous, academics who were surveyed or interviewed, and provided feedback in the planning, development and production stages of this new edition. Dr David Bednall, managing partner, Heatherdale Consulting Group, Melbourne, and Honorary Associate Professor of Marketing, Deakin University Alexandria Cantali, Australian Catholic University Alvin Chan, Western Sydney University Ms Yolanda de Groot, co-founder and co-CEO, de Groots Media Rohan De Pallant, The University of Queensland David Fleishman, University of the Sunshine Coast Maureen Griffiths, Monash University Ellen McArthur, Griffith University Zlatko Muhvic, RMIT Raju Mulye, RMIT Owen Seamons, The University of Queensland Tania Von der Heidt, Southern Cross University Jeaney Yip, The University of Sydney We would also like to thank the contributors who wrote the following case studies set out in Appendix 1: • Case 1: ‘Patagonia: Hiking a value trail of marketing responsibility’ – Dr David Fleischman, University of the Sunshine Coast • Case 2: ‘Supermarket wars: The battle continues!’ – Jan Charbonneau, University of Tasmania • Case 3: ‘Realestate.com.au: From garage start-up to market leader’ – Geoff Fripp, The University of Sydney • Case 4: ‘Tasmanian Walking Company: Balancing luxury and adventure in a sustainable experience’ – Dr Gemma Lewis, University of Tasmania. We also owe a great deal to the people at Pearson Australia who helped develop this book: Anna Carter, for her guidance in bringing the book to completion; Lisa Woodland, who sourced and compiled a diverse range of illustrative and photographic material; and Bernadette Chang for skilfully managing the book Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e xxvi The development story through the detailed editorial process such a complex educational publication demands. We would also like to thank lead editor Helen Eastwood for her wonderful editorial skills and for the contribution she made to the overall finish of the book. We are proud to be members of a fraternity of authors who work with such a group of professionals at Pearson Australia. Gary Armstrong Stewart Adam Sara Denize Michael Volkov Philip Kotler Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e PA RT 1 Defining marketing and the marketing process 1 Marketing: Creating and capturing customer value2 2 Company and marketing strategy: Partnering to build customer 36 engagement, value and relationships Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value You are beginning a journey into the science and practice of marketing – a journey that is both exciting and vital in the preparation for the career that awaits you. In this chapter, we start with the question, ‘What is marketing?’. Simply put, marketing is managing profitable customer relationships. The aim of marketing is to create value for customers and to capture value from customers in return. We start with a definition of marketing before proceeding to discuss the five steps in the marketing process – from understanding customer needs, to designing customer-driven marketing strategies and integrated marketing programs, to building customer relationships and capturing value for the firm, as shown in Figure 1.1. Finally, we discuss the major trends and forces affecting marketing in this age of customer relationships. Understanding these basic concepts, and forming your own ideas about what they really mean to you, will give you a solid foundation for all that follows. As you start this chapter, we suggest you pay close attention to the visual representation on the next page, which is designed to give you a ‘helicopter’ view of the main concepts covered. You will find such a visual representation, or concept map, at the start of each chapter. Learning Objectives Learning Objective 1 Define marketing, and outline the steps in the marketing process. What is marketing? pp. 4–5 Learning Objective 2 Explain the importance of understanding the marketplace and customers, and identify the five core marketplace concepts. Understanding the marketplace and customer needs pp. 5–9 Learning Objective 3 Identify the key elements of a customer-driven marketing strategy, and discuss the marketing management orientations that guide marketing strategy. Designing a customer-driven marketing strategy pp. 9–13 Preparing an integrated marketing plan and program pp. 13–15 Learning Objective 4 Discuss customer relationship management, and identify strategies for creating value for customers and capturing value from customers in return. Engaging customers and managing customer relationships pp. 15–18 Capturing value from customers pp. 18–21 Learning Objective 5 Describe the major trends and forces that are changing the marketing landscape in this age of relationships. The changing marketing landscape pp. 21–28 So, what is marketing? Pulling it all together pp. 28–30 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value CREATE VALUE FOR CUSTOMERS AND BUILD CUSTOMER RELATIONSHIPS Define marketing, and outline the steps in the marketing process. (pp. 4–5) LO 2 Explain the importance of understanding the marketplace and customers, and identify the five core marketplace concepts. (pp. 5–9) Understand the marketplace and customer needs and wants Design a customerdriven marketing strategy Production concept Build profitable relationships and create customer delight Selling concept Societal marketing concept Marketing concept Process e opl Pe Phy evid sical enc e Marketing Pri ce A an set dd cu g tin ica e for alu rge la unication Comm ent em s ac tic Pl ogis l ocesses for cre and pr a ions xchanging offerin ting, c t u g t sti and e , partners a s that omm n i s g nd s of erin , client oci have un v s ety eli omer at v st ion Promot Product Products Industry Market (a collection of sellers) (a collection of buyers) n r t ai Unce my o econ M oney In f o r m a ti o n b glo Ra al p id is a tio n M ar ke t i n g l a n d s c a p e Con trib perf ution to or m a n ce of Growth fit ro not-for-p g in t marke ge LO 5 Describe the major trends and forces that are changing the marketing landscape in this age of relationships. (pp. 21–30) Capture value from customers to create profits and customer equity MARKETING MANAGEMENT ORIENTATIONS (a lens through which managers understand the marketplace and customers) Identify the key elements of a customer-driven marketing strategy, and discuss the marketing management orientations that guide marketing strategy. (pp. 9–15) LO 4 Construct an integrated marketing program that delivers superior value Product concept LO 3 Discuss customer relationship management, and identify strategies for creating value for customers and capturing value from customers in return. (pp. 15–21) CREATE VALUE FROM CUSTOMERS IN RETURN Sus ta ma inable rket ing LO 1 3 it a Dig la Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 4 Part 1 Defining marketing and the marketing process What is marketing? (pp. 4–5) Marketing, more than any other business function, deals with customers. Although we will soon explore more-detailed definitions of marketing, perhaps the simplest definition is this one: Marketing is engaging customers and managing profitable customer relationships. The twofold goal of marketing is to attract new customers by promising superior value, and to keep and grow current customers by delivering satisfaction. Marketing comes to you in traditional forms, such as the products you see on supermarket shelves and in the windows of shopping-centre boutiques, as well as in the advertising you see and hear in newspapers and magazines, and on television and radio. However, in recent years, marketers have adopted a host of new marketing approaches, using everything from imaginative websites and social networks to smartphone apps. These new approaches do more than just blast out messages to the masses. They reach you directly and personally. Today’s marketers want to become a part of your life and enrich your experiences with their brands – to help you engage with their brands. When we examine successful marketing organisations, we see that many factors contribute to making a business or other organisational type successful. These factors include great strategy, dedicated employees, good information systems and excellent implementation, among others. However, today’s successful organisations have one thing in common – they have a strong market orientation, which means they are focused on their customers, their competitors and their profits (or surpluses in the case of those not operating for profit), and they have a commitment to sharing this marketing information with all parts of the organisation.1 These organisations share an absolute dedication to understanding and satisfying the needs of customers in well-defined target markets. They motivate everyone in the organisation to produce superior value for their customers, leading to high levels of customer satisfaction. At home, at school, where you work and where you play, you see marketing in almost everything you do. Yet, there is much more to marketing than meets the consumer’s casual eye. Behind it all is a massive network of people, technologies and activities competing for your attention and purchases. This book will give you a complete introduction to the basic concepts and practices of today’s marketing. In this chapter, we begin by defining marketing and the marketing process. Marketing defined marketing The process by which marketing organisations engage customers, build strong customer relationships and create customer value in order to capture value from customers in return. What is marketing? Many people think of marketing as only selling and advertising. We are bombarded every day with television commercials, catalogues, spiels from salespeople and online pitches. However, selling and advertising are but the tip of the marketing iceberg. Today, marketing must be understood not in the old sense of making a sale – ‘telling and selling’ – but in the new sense of satisfying customer needs. If the marketer engages consumers effectively, understands their needs, develops products that provide superior customer value, and prices, distributes and promotes them well, these products will sell easily. In fact, according to management guru Peter Drucker, ‘The aim of marketing is to make selling unnecessary.’2 Selling and advertising are only a part of a larger marketing mix – a set of marketing tools that work together to engage customers, satisfy customer needs and build customer relationships. Broadly defined, marketing is a social and managerial process by which individuals and organisations obtain what they need and want through creating and exchanging value with others. In a narrower business context, marketing involves building profitable, value-laden exchange relationships with customers. Hence, we define marketing as the process by which marketing organisations engage customers, build strong customer relationships and create customer value in order to capture value from customers in return.3 The marketing process Figure 1.1 presents a simple five-step model of the marketing process. In the first four steps, marketing organisations uncover knowledge about consumers, create customer value and build strong customer relationships. In the final step, companies reap the rewards of creating superior customer value. By creating Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value CREATE VALUE FOR CUSTOMERS AND BUILD CUSTOMER RELATIONSHIPS Understand the marketplace and customer needs, wants and demands Design a customerdriven marketing strategy Construct an integrated marketing program that delivers superior value 5 CAPTURE VALUE FROM CUSTOMERS IN RETURN Build profitable relationships and create customer delight Capture value from customers to create profits and customer equity Figure 1.1 A simple model of the marketing process value for consumers, companies, in turn, capture value from consumers in the form of sales, profits and long-term customer equity. In this chapter and the next, we examine the steps in this model of the marketing process. In this chapter, we review each step but focus more on the customer relationship management steps – understanding customers, building customer relationships and capturing value from customers. In Chapter 2, we look more deeply into the second and third steps – designing marketing strategies and constructing marketing programs. Understanding the marketplace and customer needs (pp. 5–9) As a first step, marketers need to understand customer needs, wants and demands, and the marketplace within which they operate. We now examine five core customer and marketplace concepts: (1) customer needs, wants and demands; (2) market offerings – goods, services and experiences; (3) customer value and satisfaction; (4) exchanges and relationships; and (5) markets. Figure 1.2 shows how these core marketing concepts are linked, with each concept building on the one before. Market offerings are the various product forms we examine in detail in Chapters 7 and 8. We discuss value, satisfaction and quality throughout the book. We begin our discussion of customer needs, wants and demands in this chapter, and examine them further in Chapters 4 and 5. The nature of exchange, transactions, relationships and markets is examined in this chapter and throughout the book. Customer needs, wants and demands The most basic concept underlying marketing is that of human needs. Human needs are states of felt deprivation. Humans have many complex needs. These include basic physical needs for food, clothing, warmth and safety; social needs for belonging and affection; and individual needs for knowledge and self-expression. While marketers may stimulate these needs, they do not create them for they are a basic part of human makeup. Wants are the form taken by human needs as they are shaped by culture and individual personality. A hungry person in Australia, Singapore or Hong Kong might want a rice or noodle dish for a quick lunch, accompanied by green tea. A hungry person in the South Pacific might want mangoes, suckling pig and beans. Wants are described in terms of objects that will satisfy needs. As a society evolves, the wants of its members expand. As people are exposed to more objects that arouse their interest and desire, producers try to provide more want-satisfying goods and services. needs States of felt deprivation. wants The form human needs take, as shaped by culture and individual personality. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 6 Part 1 Defining marketing and the marketing process Needs, wants and demands Market offerings CORE MARKETING CONCEPTS Value, satisfaction and quality Markets Exchange, transactions and relationships Figure 1.2 Five core customer and marketplace concepts demands Human wants that are backed by buying power. market offering Some combination of goods, services, information or experiences offered to a market to satisfy a need or want. People have almost unlimited wants but limited resources. Thus, they want to choose products that provide the most value and satisfaction for their money. When backed by buying power, wants become demands. A simple way to look at needs, wants and demands is that a person needs water to survive (thirst). The person may want a carbonated beverage to satisfy his or her thirst. If the person has the resources, he or she may demand a particular brand of carbonated beverage, such as Coca-Cola, Pepsi or another local brand. Outstanding marketers, whether profit-oriented companies, citizen-focused government or not-forprofit organisations, go to great lengths to learn about and understand their customers’ needs, wants and demands. They conduct qualitative research, such as small focus groups and customer clinics, to ascertain if there are unmet needs, wants and demands. They conduct quantitative research on a larger scale to ascertain the magnitude of the unmet needs, wants and demands. They seek customer insights when they examine their databases for patterns hidden in purchase data, customer complaints, inquiries, warranty claims and service performance data. They train salespeople and other frontline personnel to be on the lookout for unfulfilled customer needs. They observe customers using their own and competing products, and interview them in depth about their likes and dislikes. They conduct consumer research, analyse mountains of customer data and observe customers as they shop and interact, offline and online. Understanding customer needs, wants and demands in detail provides important input for designing marketing strategies. People at all levels of the company – including top management – stay close to customers.4 Market offerings: Goods, services and experiences Consumers’ needs and wants are fulfilled through market offerings – some combination of goods, services, information or experiences offered to a market to satisfy a need or a want. Usually, the word product suggests a physical object such as a car, an iPad or a bar of soap. However, the concept of product is not Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value 7 limited to physical objects; anything capable of satisfying a need can be called a product. The importance of products that are physical objects lies not so much in owning them as in the benefits they provide. We buy food not to look at, but because it satisfies our hunger. We buy a microwave not to admire its utility, but because it defrosts or cooks our food. Marketers often use the expressions goods and services/ experiences to distinguish between products that have physical form and those that do not – that is, those that are intangible. However, in Chapter 9 we show that there is a continuum involved and not a clear-cut dichotomy. Consumers also obtain benefits through experiences, people, places, organisations, activities and ideas, and so we call these products, too. Consumers decide which entertainers to watch at the movies and on television, which places to visit on holiday, which organisations to support through contributions and which ideas to adopt. Thus, the term product covers physical goods, services, experiences and a variety of other offerings that satisfy consumers’ needs and wants. If at times the term seems not to fit, we could substitute words such as satisfier, resource or offer. In the broadest sense, market offerings also include other entities, such as persons, places, organisations, information and ideas. Many sellers make the mistake of paying more attention to the attributes of the products they offer than to the benefits produced by these products. They see themselves as selling a Product offerings: Social causes are products . . . Often product, rather than providing a solution to a need. demarketing is involved. Department of Health A manufacturer of drill bits may think that the customer wants a 6 mm drill bit, but what the customer really wants is a 6 mm hole. These sellers suffer from marketing myopia.5 They are so taken with their products that they focus only on existing wants and lose sight of underlying customer marketing myopia needs. They forget that a product is only a tool to solve a consumer’s problem and they will have trouble if The mistake of paying more attention to the a new product comes along that serves the need better or less expensively. The customer with the same need specific products a will, all things being equal, want the new product. company offers than Smart marketers look beyond the attributes of the products and services they sell. By orchestrating to the benefits and several services and products, they create brand experiences for consumers. For example, you do not just experiences produced by these products. watch a V8 Supercar or MotoGP motorcycle race; you immerse yourself in the exhilarating, high-octane experience that the many on-board mini-cameras now provide. Customer value and satisfaction Consumers usually face a broad array of products and services that might satisfy a given need. How do they choose among these many market offerings? Customers form expectations about the value and satisfaction that various market offerings will deliver, and buy accordingly. Satisfied customers buy again and tell others about their good experiences. Dissatisfied customers often switch to competitors and disparage the original product to others. Marketers must be careful to set the right level of expectations. If they set expectations too low, they may satisfy those who buy but may fail to attract enough buyers. If they set expectations too high, buyers will be disappointed. Customer value and customer satisfaction are key building blocks for developing and managing customer relationships. We revisit these core concepts later in the chapter. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 8 Part 1 Defining marketing and the marketing process Exchanges, transactions and relationships exchange The act of obtaining a desired object from someone by offering something in return. transaction A trade between two parties that involves at least two things of value, agreed-upon conditions, and a time and place of agreement. market Marketing occurs when people decide to satisfy needs and wants through exchange relationships. Exchange is the act of obtaining a desired object from someone by offering something in return. In the broadest sense, the marketer tries to bring about a response to some market offering. The response may be more than simply buying or trading products and services. A political candidate, for instance, wants votes; a golf club wants members; an orchestra wants an audience; an online community of practice, such as BimmerPost (BMW owners), wants subscribers who help each other; and a social action group, such as Amnesty Australia, wants idea acceptance. Whereas exchange is the core concept of marketing, a transaction is marketing’s unit of measurement. A transaction consists of a trade of values between two parties. In a transaction, we must be able to say that one party gives X to another party and gets Y in return. For example, if you pay $1650 for a television set to Harvey Norman in Sydney or Singapore, you are engaged in a classic monetary transaction. Marketing consists of actions taken to build and maintain desirable exchange relationships with target audiences involving a product, service, idea or other object. Beyond simply attracting new customers and creating transactions, the company wants to retain customers and grow their business. Marketers want to build strong relationships by consistently delivering superior customer value. We expand on the important concept of managing customer relationships later in this chapter. Markets The set of all actual and potential buyers of a product or service. The concepts of exchange and relationships lead to the concept of a market. A market is the set of actual and potential buyers of a product. These buyers share a particular need or want that can be satisfied through exchange relationships. Marketing means managing markets to bring about profitable customer relationships. However, creating these relationships takes work. Sellers must search for buyers, identify their needs, design good market offerings, set prices for those offerings, promote them, and store and deliver them. Activities such as consumer research, product development, communication, distribution, pricing and service are core marketing activities. Although we normally think of marketing as being carried out by sellers, buyers also carry out marketing. Consumers market when they search for products, interact with companies, obtain information and make their purchases. In fact, today’s digital technologies, from websites and online social networks to tablets and smartphones, have empowered consumers and made marketing a truly interactive affair. Thus, in addition to customer relationship management, today’s marketers must also deal effectively with customer-managed relationships. Marketers are no longer asking only, ‘How can we reach our customers?’ but also, ‘How can our customers reach us?’ and even, ‘How can our customers reach each other?’. Figure 1.3 shows the main elements in a marketing system. Marketing involves serving a market of final consumers in the face of competitors. The company and competitors research the market and interact with consumers to understand their needs. They then create and send their market offerings and messages to consumers, either directly or through marketing intermediaries. All of the parties in the system are affected by major environmental forces (demographic, economic, physical, technological, political/legal and social/cultural). Each party in the system adds value for the next level. In the figure, the arrows represent relationships that must be developed and managed. Thus, a company’s success at building profitable relationships depends not only on its own actions but also on how well the entire system serves the needs of final consumers. Coles Supermarkets cannot fulfil its promise of everyday low prices unless its suppliers provide Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value 9 Company (marketer) Marketing intermediaries Suppliers Consumers Competitors Major environmental forces Figure 1.3 Elements of a modern marketing system merchandise at low costs. And Toyota cannot deliver a high-quality car-ownership experience unless its dealers provide outstanding sales and service. Designing a customer-driven marketing strategy (pp. 9–13) Once marketing management fully understands consumers and the marketplace, it can design a customerdriven marketing strategy. We define marketing management as the art and science of choosing target markets and building profitable relationships with them. The marketing manager’s aim is to attract, engage, keep and grow target customers by creating, delivering and communicating superior customer value. To design a winning marketing strategy, the marketing manager must answer two important questions: (1) What customers will we serve? (Who is our target market?) and (2) How can we serve these customers best? (What is our value proposition?). We introduce these aspects of marketing strategy here, and discuss them further in Chapters 2 and 6. marketing management The art and science of choosing target markets and building profitable relationships with them. Selecting customers to serve Marketing management first decides who the organisation will serve. This is done by examining the various segments into which the market naturally falls, based on the appropriate factors that can be used to analyse a market. We discuss this aspect in depth in Chapter 6. Marketers know they cannot serve all customers in every way with a single market offering. They know it is necessary to select customers they can serve well and profitably. This may not involve continuously seeking increasing market demand; at times, it may be necessary to seek fewer customers and reduce demand. Most people think of marketing management as finding enough customers for the company’s current output, but this is too limited a view. The organisation has a desired level of demand for its products. At any point in time there may be no demand, adequate demand, irregular demand or too much demand, and marketing management must find ways to deal with these different demand states. (See Table 1.1 for a demand management ready-reckoner.) Marketing management is concerned not only with finding and increasing demand but also with changing or even reducing it. For example, Uluru (Ayers Rock) might have too many tourists wanting to climb it, and Daintree National Park in North Queensland can become Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 10 Part 1 Defining marketing and the marketing process Table 1.1 Demand management ready-reckoner 1 Negative demand A market is in a state of negative demand if a major part of the market dislikes the product and may even pay a price to avoid it. Examples include vaccinations, dental work and gall-bladder operations. 2 No demand Target consumers may be unaware of or uninterested in the product. The marketing task is to find ways to connect the benefits of the product with the person’s natural needs and interests. 3 Latent demand Many consumers may share a strong need that cannot be satisfied by any existing product. Examples include safer communities and more fuel-efficient cars. The marketing task is to measure the size of the potential market and develop effective products and services that would satisfy the demand. 4 Declining demand Every organisation, sooner or later, faces declining demand for one or more of its products. The marketing task is to reverse the declining demand through creative remarketing of the product. 5 Irregular demand Many organisations face demand that varies on a seasonal, daily or even hourly basis, causing problems of idle or overworked capacity. Examples include public transport, museums and hospital operating theatres. Supermarkets may be less frequented early in the week and understocked after heavy weekend trading. The marketing task is to find ways to alter the same pattern of demand through flexible pricing (e.g. early-bird specials), promotion and other incentives. 6 Full demand Organisations face full demand when they are satisfied with their volume of business. The marketing task is to maintain the current level of demand in the face of changing consumer preferences and increasing competition. 7 Overfull demand Some organisations face a demand level that is higher than they can, or want to, handle. Examples include a national park that is ­carrying more tourists than the facilities can handle. The marketing task, called demarketing, requires finding ways to reduce the ­demand temporarily or permanently. Demarketing aims not to destroy demand but only to reduce its level, temporarily or permanently. 8 Unwholesome demand Unwholesome products will attract organised efforts to discourage their consumption. The marketing task is to get people who like something to give it up, using such tools as fear messages, price hikes and reduced availability. Sources: For a fuller discussion, see Philip Kotler, ‘The major tasks of marketing management’, Journal of Marketing, October 1973, pp. 42–9; and Phyllis Berman & Katherine Bruce, ‘Make-up gets a make-over’, BRW, 7 May 1999, pp. 56–7. demarketing Marketing in which the task is to temporarily or permanently reduce demand. overcrowded in the tourist season. Power companies sometimes have trouble meeting demand during peak usage periods. In these and other cases of excess demand, the needed marketing task, called demarketing, is to reduce demand temporarily or permanently. The aim of demarketing is not to completely destroy demand, but only to reduce or shift it to another time or even to another product. Thus, marketing management seeks to affect the level, timing and nature of demand in a way that helps the organisation achieve its objectives. A marketing organisation’s demand comes from two groups: new customers and repeat customers. Beyond designing strategies to attract new customers and create transactions with them, marketing organisations go all out to retain current customers and build lasting relationships. Simply put, marketing management is customer management and demand management. Choosing a value proposition The marketing organisation must also decide how it will serve targeted customers – how it will differentiate and position itself in the marketplace. A marketing organisation’s value proposition is the set of benefits or values it promises to deliver to consumers to satisfy their needs. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value 11 Such value propositions differentiate one brand from another. They answer the customer’s question, ‘Why should I buy your brand rather than a competitor’s?’. Marketing organisations must design strong value propositions that give them the greatest advantage in their target markets. For example, Telstra’s value positioning in 2016 was ‘It’s how we connect’. The company’s value propositioning is more easily identified in its WiFi advertising, which used tennis and humour to make it stand out and finished with the statement ‘Telstra Air is how’ – how to stay in touch using thousands of WiFi hotspots. Marketing management orientations We have seen that marketing managers carry out tasks to achieve desired behaviour in defined target markets and to build profitable relationships with target customers. Questions arise in this regard. For example, what philosophy should guide these marketing efforts? What weight should be given to the interests of the organisation, the customers and the society? Very often, these interests conflict with each other. There are five alternative concepts under which organisations may conduct their marketing activities: (1) production, (2) product, (3) selling, (4) marketing and (5) societal marketing. We discuss each of these below. The production concept The production concept holds that consumers will favour products that are available and highly affordable. Therefore, management should focus on improving production and distribution efficiency. This concept is one of the oldest philosophies that guide sellers. The production concept is still a useful philosophy in some situations. For example, both personalcomputer maker Lenovo and home-appliance maker Haier dominate the highly competitive, price-sensitive Chinese market through low labour costs, high production efficiency and mass distribution. However, although useful in some situations, the production concept can lead to marketing myopia. Companies adopting this orientation run a major risk of focusing too narrowly on their own operations and losing sight of the real objective – satisfying customer needs and building customer relationships. production concept The idea that consumers will favour products that are available and highly affordable, and that the organisation should therefore focus on improving production and distribution efficiency. The product concept Another major concept guiding sellers, the product concept, holds that consumers will favour products that offer the most quality, performance and innovative features. Thus, an organisation should devote energy to making continuous product improvements. Some manufacturers believe that if they can build a better mousetrap the world will beat a path to their door.6 But they are often rudely shocked. Buyers may well be looking for a better solution to a mouse problem, but not necessarily for a better mousetrap. The solution might be an electronic deterrent, an exterminating service or even a house cat, or something that works better than a mousetrap. Furthermore, a better mousetrap will not sell unless the manufacturer designs, packages and prices it attractively, places it in convenient distribution channels, brings it to the attention of people who need it and convinces buyers that it is a better product. The product concept can also lead to marketing myopia. For instance, railways management once thought that users wanted trains, rather than transportation, and overlooked the growing challenge from airlines, buses, trucks and cars. FTA-TV (free-to-air television) station management who target narrow segments overlook the fact that, in general, younger people watch less television in favour of interaction with each other via mobile devices, instant messaging and email, interactive games and social networking on the web, and even watch sporting events on YouTube after the fact. The selling concept Many companies follow the selling concept, which holds that consumers will not buy enough of the firm’s products unless the firm undertakes a large-scale selling and promotion effort. The selling concept is product concept The idea that consumers will favour products that offer the most quality, performance and features, and that the organisation should therefore devote its energy to making continuous product improvements. selling concept The idea that consumers will not buy enough of the firm’s products unless the firm undertakes a large-scale selling and promotion effort. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 12 Part 1 Defining marketing and the marketing process typically practised with unsought goods – those that buyers do not normally think of buying, such as insurance. These industries must be effective at tracking down prospects and selling them on product benefits. Such aggressive selling, however, carries high risks. It focuses on creating sales transactions rather than on building longterm, profitable customer relationships. The aim often is to sell what the company makes, rather than making what the market wants. It assumes that customers who are coaxed into buying the product will like it. Or, if they do not like it, they will possibly forget their disappointment and buy it again later. These are usually poor assumptions. The marketing concept The marketing concept holds that achieving organisational goals depends on determining the needs and wants of target markets and delivering the desired satisfaction more effectively and efficiently than competitors do. The marketing concept has often been stated in colourful ways: ‘Finger lickin’ good’ (KFC), ‘Beanzmeanz Heinz’ (Heinz), ‘You are 24 hours of sun!’ (Fronius solar energy) and ‘Where do you want to go today?’ (Microsoft). The selling concept and the marketing concept are sometimes confused. Figure 1.4 compares the two concepts. The selling concept takes an inside-out perspective. It starts with the factory, focuses on the company’s existing products, and calls for heavy selling and promotion to obtain profitable sales. It focuses primarily on customer conquest – getting short-term sales with little concern about who buys or why. In contrast, the marketing concept takes an outside-in perspective. As Herb Kelleher, Southwest Airlines’ colourful co-founder, puts it, ‘We don’t have a marketing department; we have a customer department.’ The marketing concept starts with a well-defined market, focuses on customer needs and integrates all the The marketing concept: KFC colourfully proclaims how it delivers satisfaction – ‘It’s finger lickin’ good’. Bloomberg via Getty Images marketing concept The marketing management philosophy which holds that achieving organisational goals depends on knowing the needs and wants of target markets and delivering the desired satisfactions better than competitors do. Starting point Focus Means Ends THE SELLING CONCEPT Factory Existing products Selling and promoting Profits through sales volume THE MARKETING CONCEPT Market Customer needs Integrated marketing Profits through customer satisfaction Figure 1.4 The selling and marketing concepts contrasted Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value 13 marketing activities that affect customers. In turn, it yields profits by creating lasting relationships with the right customers based on customer value and satisfaction. Implementing the marketing concept often means more than simply responding to customers’ stated desires and obvious needs. Customer-driven companies research current customers deeply to learn about their desires, gather new product and service ideas, and test proposed product improvements. Such customer-driven marketing usually works well when a clear need exists and when customers know what they want. In many cases, however, customers do not know what they want or even what is possible. As Henry Ford once remarked, ‘If I’d asked people what they wanted, they would have said faster horses.’7 For example, even 20 years ago, how many consumers would have thought to ask for now-commonplace products such as tablet computers, smartphones, digital cameras, 24-hour online buying and satellite navigation systems (GPS) in their cars? Such situations call for customer-driven marketing – understanding customer needs even better than customers themselves do and creating products and services that meet existing and latent needs, now and in the future. As an executive at 3M puts it, ‘Our goal is to lead customers where they want to go before they know where they want to go.’ The societal marketing concept The societal marketing concept questions whether the pure marketing concept overlooks possible conflicts between consumer short-run wants and consumer long-run welfare. Is a firm that satisfies the immediate needs and wants of target markets always doing what is best for consumers in the long run? The societal marketing concept holds that marketing strategy should deliver value to customers in a way that maintains or improves both the consumer’s and society’s wellbeing. It calls for sustainable marketing – socially and environmentally responsible marketing that meets the present needs of consumers and businesses while also preserving or enhancing the ability of future generations to meet their needs. Even more broadly, many leading business and marketing thinkers are now preaching the concept of shared value, which recognises that societal needs, not just economic needs, define markets.8 The concept of shared value focuses on creating economic value in a way that also creates value for society. A growing number of companies known for their hard-nosed approaches to business – such as GE, Dow, Google, IBM, Intel, Johnson & Johnson, Nestlé, Unilever and Walmart – are rethinking the interactions between society and corporate performance. They are concerned not just with short-term economic gains but with the wellbeing of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers and the economic wellbeing of the communities in which they operate. One prominent marketer calls this Marketing 3.0. ‘Marketing 3.0 organisations are values-driven,’ he says. ‘I’m not talking about being value-driven. I’m talking about “values” plural, where values amount to caring about the state of the world.’ Another marketer calls it purpose-driven marketing. ‘The future of profit is purpose,’ he says.9 societal marketing concept The idea that a company’s marketing decisions should consider consumers’ wants, the company’s requirements, consumers’ long-run interests and society’s long-run interests. Preparing an integrated marketing plan and program (pp. 13–15) The company’s marketing strategy outlines which customers the company will serve and how the company will create value for these customers. Next, the marketer develops an integrated marketing program that will actually deliver the intended value to target customers. The marketing program builds customer relationships by transforming the marketing strategy into action. It consists of the firm’s marketing mix – that is, the set of marketing tools the firm uses to implement its marketing strategy. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 14 Part 1 Defining marketing and the marketing process While the ultimate aim may be to modify people’s behaviour – to drive more carefully, drink less alcohol, use less energy or water, think favourably of a political party, give more to a charitable organisation or buy a particular brand – marketing managers have a defined set of tools they can use. The set of tools most marketers employ, in varying combinations, has developed most recently from the knowledge gained in business-to-business marketing (formerly industrial marketing) and in marketing services. We refer to these tools (see Figure 1.5) as the extended marketing mix and their blending in a strategic manner is discussed in Chapter 2. Each of the main marketing mix tools (product, price, placement logistics and promotion) is discussed in more detail in the chapters forming Part 2. It should be noted at the outset that the three remaining marketing mix tools (people, process and physical evidence) are discussed throughout the book for reasons which should become clear as the story unfolds. To deliver on its value proposition, the marketing organisation must first create a need-satisfying market offering (product). It must decide how much it will charge for the offer (price) and where it will make the offer available to target customers (placement). It must communicate with target customers about the offer and persuade them of its merits (promotion). It must decide how relationships will be developed and maintained and who will do this (people). It must decide on how customer satisfaction will be delivered and recorded (technologies) – whether a service/experiential product or after-sales service (process). And, lastly, it must manage customer expectations and relative service quality, thereby ensuring that customers have realistic expectations which the marketing organisation can meet (physical evidence). The marketing organisation must blend all these marketing mix tools into a comprehensive, integrated marketing program that communicates and delivers the intended value to chosen customers. We explore marketing programs and the marketing mix in much more detail in later chapters. PRODUCT: GOODS, SERVICES and EXPERIENCES Variety Quality Design Features Brand name Packaging Sizes Add-ons Warranties Returns PRICE PEOPLE List price Discounts Allowances Settlement and credit terms ‘People interacting with people’ is how many service experiences might be described. Relationships are important in marketing. TARGET CUSTOMERS INTENDED POSITIONING PLACEMENT LOGISTICS PROMOTION PROCESS PHYSICAL EVIDENCE Demand chain management Logistics management Channel management Advertising Personal selling Direct marketing Online marketing In the case of ‘high-contact’ services, customers are often involved in the process of creating and enjoying experiences. Increasingly, so is technology. Services are mostly intangible. The meaning of other tools and techniques used in measures of satisfaction is important. Figure 1.5 The extended marketing mix Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value 15 Linking the concepts Stop here for a moment and stretch your mind. What have you learned so far about marketing? Set aside the more formal definitions we have examined and try to develop your own understanding of marketing. ● In your own words, what is marketing? Write down your definition. Does your definition include such key concepts as customer value, engagement and relationships? ● What does marketing mean to you? How does it affect your daily life? ● What brand of athletic shoes did you last purchase? Describe your relationship with Nike, adidas, New Balance, Asics, Reebok, Puma, Converse or whatever brand of shoes you purchased. Engaging customers and managing customer relationships (pp. 15–18) The first three steps in the marketing process – understanding the marketplace and customer needs, designing a customer-driven marketing strategy and constructing marketing programs – all lead to the fourth and most important step: building profitable customer relationships. We first discuss the basics of customer relationship management. Then we examine how companies go about engaging customers on a deeper level in this age of digital and social marketing. Customer relationship management Customer relationship management is perhaps the most important concept of modern marketing. In its broadest sense, customer relationship management is the overall process of building and maintaining profitable customer relationships by delivering superior customer value and satisfaction. It deals with all aspects of acquiring, keeping and growing customers. Hence, more specifically, customer relationship management (CRM) is the process of managing detailed information about individual customers and carefully managing customer touch points in order to maximise customer loyalty. Relationship building blocks: Customer value and satisfaction The key to building lasting customer relationships is to create superior customer value and satisfaction. Satisfied customers are more likely to be loyal customers and to give the marketing organisation a larger share of their business. Customer value Attracting and retaining customers can be a difficult task. Customers often face a bewildering array of products and services from which to choose. A customer buys from the firm that offers the highest customerperceived value – the customer’s evaluation of the difference between all the benefits and all the costs of a market offering relative to those of competing offers. Importantly, customers often do not judge product values and costs accurately or objectively. They act on perceived value. For example, is a Tesla Model 3 really the most economical choice when buying a motor vehicle? In reality, it might take years to save enough in reduced fuel costs to offset the car’s higher purchase price. However, Tesla Model 3 buyers perceive that they are getting real value. It is all a matter of personal value perceptions. For many consumers, the answer to our question is ‘no’, but – for the target segment of style-conscious, affluent buyers – the answer is ‘yes’. Customer satisfaction Customer satisfaction depends on the product’s perceived performance relative to a buyer’s expectations. If the product’s performance falls short of expectations, the customer is dissatisfied. If performance matches expectations, the customer is satisfied. If performance exceeds expectations, the customer is highly satisfied or delighted. Outstanding marketing companies go out of their way to keep customer relationship management (CRM) Managing detailed information about individual customers and carefully managing customer touch points in order to maximise customer loyalty. customerperceived value The customer’s evaluation of the difference between all the benefits and all the costs of a marketing offer relative to those of competing offers. customer satisfaction The extent to which a product’s perceived performance matches or exceeds a buyer’s expectations. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 16 Part 1 Defining marketing and the marketing process important customers satisfied. Most studies show that higher levels of customer satisfaction lead to greater customer loyalty, which in turn results in better company performance. Smart companies aim to delight customers by promising only what they can deliver, then delivering more than they promise. Delighted customers not only make repeat purchases; they also become willing marketing partners and ‘customer evangelists’ who spread the word about their good experiences to others.10 For companies interested in delighting customers, exceptional value and service become part of the overall company culture. For example, year after year, Ritz-Carlton ranks at or near the top of the hospitality industry in terms of customer satisfaction. The company’s passion for satisfying customers is summed up in its credo, which promises that its luxury hotels will deliver a truly memorable experience – one that ‘enlivens the senses, instils well-being, and fulfils even the unexpressed wishes and needs of our guests’.11 Although a customer-centred firm seeks to deliver high customer satisfaction relative to competitors, it does not attempt to maximise customer satisfaction. A company can always increase customer satisfaction by lowering its price or increasing its services. But this may result in lower profits. Thus, the purpose of marketing is to generate customer value profitably. This requires a very delicate balance: the marketer must continue to generate more customer value and satisfaction but not ‘give away the house’. Customer relationship levels and tools Marketing organisations can build customer relationships at many levels, depending on the nature of the target market. At one extreme, a company with many low-margin customers may seek to develop basic relationships with them. For example, Lever-Rexona does not phone or call on all of its Sunsilk consumers to get to know them personally. Instead, the company creates relationships through brand-building advertising, websites and social media presence. At the other extreme, in markets with few customers and high margins, sellers want to create full partnerships with key customers. For example, Lever-Rexona teams work closely with Coles, Woolworths and other large retailers. In between these two extremes, other levels of customer relationships are appropriate. Beyond offering consistently high value and satisfaction, marketers can use specific marketing tools to develop stronger bonds with consumers. For example, many companies offer frequency marketing programs that reward customers who buy frequently or in large amounts. Airlines offer frequent-flyer programs, hotels give room upgrades to their frequent guests, and supermarkets – for example, Woolworths – give patronage discounts to their customers via such tools as their Woolworths Rewards card which enables customers to get money off their weekly shopping bills. Other companies sponsor club marketing programs that offer members special benefits and create member communities. For example, Harley-Davidson sponsors the Harley Owners Group (HOG), which gives Harley riders a way to share their common passion of ‘making the Harley-Davidson dream a way of life’. HOG membership benefits include a quarterly HOG magazine, the H.O.G. Touring Handbook, a roadside assistance program, a specially designed insurance program, theft reward service, a travel centre and a ‘Fly & Ride’ program enabling members to rent Harleys while on holiday. The worldwide club now numbers more than 1500 local chapters and more than a million members.12 Engaging customers Profound changes continue to occur in the ways in which companies are relating to their customers. Yesterday’s marketing organisations focused on mass marketing to all customers at arm’s length. Today’s companies build deeper, more direct and lasting relationships with more carefully selected customers. We now examine some of the important trends in the way companies are relating to their customers. Customer engagement and today’s digital and social media The digital age has spawned a dazzling set of new customer relationship-building tools, from websites, online ads and videos, mobile ads and apps, and blogs to online communities and the major social media, such as Twitter, Facebook, YouTube, Instagram and Pinterest. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value 17 Yesterday’s companies focused mostly on mass marketing to broad segments of customers at arm’s length. By contrast, today’s companies are using online, mobile and social media to refine their targeting and to engage customers more deeply and interactively. The old marketing involved marketing brands to consumers. The new marketing is customer-engagement marketing – fostering direct and continuous customer involvement in shaping brand conversations, brand experiences and brand community. Customerengagement marketing goes beyond just selling a brand to consumers. Its goal is to make the brand a meaningful part of consumers’ conversations and lives. The burgeoning internet and social media have given a huge boost to customer-engagement marketing. Today’s consumers are better informed, more connected and more empowered than ever before. Newly empowered consumers have more information about brands and they have a wealth of digital platforms for airing and sharing their brand views with others. Thus, marketers are now embracing not only customer relationship management but also customer-managed relationships, in which customers connect with companies and with each other to help forge their own brand experiences. Greater consumer empowerment means that companies can no longer rely on marketing by intrusion. Instead, they must practise marketing by attraction – creating market offerings and messages that engage consumers rather than interrupt them. Hence, most marketers now combine their mass-media marketing efforts with a rich mix of online, mobile and social media marketing that promotes brand–consumer engagement and conversation. Many companies post their latest ads and videos on social media sites, hoping they will go viral. They maintain an extensive presence on Twitter, YouTube, Facebook, Google+, Pinterest, Instagram, Vine and other social media to create brand buzz. They launch their own blogs, mobile apps, online microsites and consumergenerated review systems, all with the aim of engaging customers on a more personal, interactive level. Take Twitter, for example. Organisations ranging from computer giant, Dell, and news media to politicians and government departments have created Twitter pages and promotions. They use ‘tweets’ to start conversations with and between Twitter’s more than 317 million monthly active users, to address customer service issues, to research customer reactions and to drive traffic to relevant articles, web and mobile marketing sites, contests, videos and other brand activities.13 Similarly, almost every marketing organisation has something going on Facebook these days. Starbucks has more than 38 million Facebook ‘fans’; Coca-Cola has more than 94 million.14 And every major marketer has a YouTube channel where the brand and its fans post current ads and other entertaining or informative videos. Instagram, LinkedIn, Pinterest, Snapchat, Vine – all have exploded onto the marketing scene, giving brands more ways to engage and interact with customers. Skilled use of social media can get consumers involved with and talking about a brand. The key to engagement marketing is to find ways to enter consumers’ conversations with engaging and relevant brand messages. Simply posting a humorous video, creating a social media page or hosting a blog is not enough. Successful engagement marketing means making relevant and genuine contributions to consumers’ lives and interactions. Consumer-generated marketing Whether invited by marketers or not, consumer-generated marketing has become a significant marketing force. Through a profusion of consumer-generated videos, blogs and websites, consumers are playing an increasing role in shaping their own brand experiences and those of other consumers. Beyond creating brand conversations, on their own or by invitation, customers are having an increasing say in everything from product design, usage and packaging, to pricing and distribution and reviewing product quality and satisfaction.15 Some companies ask consumers for new product and service ideas, while others invite customers to play an active role in shaping ads. Despite the many successes, however, harnessing consumer-generated content can be a time-consuming and costly process, and companies may find it difficult to glean even a little gold from all the garbage. consumergenerated marketing Brand exchanges created by consumers themselves – both invited and uninvited – by which consumers are playing an increasing role in shaping their own brand experiences and those of other consumers. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 18 Part 1 Defining marketing and the marketing process Moreover, because consumers have so much control over social media content, inviting their input can sometimes backfire. For example, McDonald’s famously launched a Twitter campaign using the hashtag #McDStories, hoping it would inspire heart-warming stories about Happy Meals. Instead, the effort was hijacked by Twitter users, who turned the hashtag into a ‘bashtag’ by posting less-than-appetising messages about their bad experiences with the fast-food chain. McDonald’s pulled the campaign within only two hours, but the hashtag was still churning weeks, even months, later.16 As consumers become more connected and empowered, and as the boom in digital and social media technologies continues, consumer brand engagement – whether invited by marketers or not – will be an increasingly important marketing force. Through a profusion of consumer-generated videos, shared reviews, blogs, mobile apps and websites, consumers are playing a growing role in shaping their own and other consumers’ brand experiences. Engaged consumers are now having a say in everything from product design, usage and packaging to brand messaging, pricing and distribution. Brands must embrace this new consumer empowerment and master the new digital and social media relationship tools – or risk being left behind. Partner relationship management partner relationship management Working closely with partners in other company departments and outside the company to jointly bring greater value to customers. When it comes to creating customer value and building strong customer relationships, today’s marketers know they cannot go it alone. They must work closely with a variety of marketing partners. In addition to being good at customer relationship management, marketers must also be good at partner relationship management – working closely with others inside and outside the company to jointly bring more value to customers. Partners inside the organisation Traditionally, marketers have been charged with understanding customers and representing customer needs to different company departments. The old thinking was that marketing is done only by marketing, sales and customer-support people. However, in today’s more connected world, every functional area can interact with customers, especially electronically. The new thinking is that – no matter what your job is in a company – you must understand marketing and be customer-focused. Rather than letting each department go its own way, firms must link all departments in the cause of creating customer value. Partners outside the organisation Marketers must also partner with suppliers, channel partners and others outside the company. Marketing channels consist of distributors, retailers and others who connect the company to its buyers. The supply chain describes a longer channel, stretching from raw materials to components to final products that are carried to final buyers. Through supply chain management, companies today are strengthening their connections with partners all along the supply chain. They know that their fortunes rest on more than just how well they perform. Success at delivering customer value rests on how well their entire supply chain performs against competitors’ supply chains. Capturing value from customers (pp. 18–21) The first four steps in the marketing process outlined in Figure 1.1 involve building customer relationships by creating and delivering superior customer value. The final step involves capturing value in return, in the form of current and future sales, market share and profits. By building superior customer value, the firm creates highly satisfied customers who remain loyal and buy more. This, in turn, means greater long-run returns for the marketing organisation. Here, we discuss the outcomes of creating customer value: customer loyalty and retention, share of market, share of customer and customer equity. Creating customer loyalty and retention Good customer relationship management creates customer satisfaction. In turn, satisfied customers remain loyal and talk favourably to others about the company and its products. Studies show big differences in the Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value 19 loyalty of customers who are less satisfied, somewhat satisfied and completely satisfied. Even a slight drop from complete satisfaction can create an enormous drop in loyalty. Thus, the aim of customer relationship management is to create not only customer satisfaction but also customer delight. Keeping customers loyal makes good economic sense. Loyal customers spend more and stay around longer. Research also shows that it is five times cheaper to keep an old customer than to acquire a new one. Conversely, customer defections can be costly. Losing a customer means losing more than a single sale. It means losing the entire stream of purchases that the customer would make over a lifetime of patronage. Here is a classic illustration of customer lifetime value: Stew Leonard, who operates a highly profitable four-store supermarket in Connecticut and New York, once said that Customer lifetime value: To keep customers coming back, the US he sees $50,000 flying out of his store every time he sees supermarket chain Stew Leonard’s has created the ‘Disneyland of a sulking customer. Why? Because his average customer dairy stores’. Rule #1 – The customer is always right. Rule #2 – If the customer is ever wrong, reread Rule #1. spends about $100 a week, shops 50 weeks a year, and Courtesy of Stew Leonard’s remains in the area for about 10 years. If this customer has an unhappy experience and switches to another supermarket, Stew Leonard’s has lost $50,000 in lifetime revenue. The loss can be much greater if customer lifetime value the disappointed customer shares the bad experience with other customers and causes them to defect. The amount by which revenues from a To keep customers coming back, Stew Leonard’s has created what has been called the ‘Disneyland customer over time of Dairy Stores’, complete with costumed characters, scheduled entertainment, a petting zoo, and exceed the company’s costs of attracting, animatronics throughout the store. From its humble beginnings as a small dairy store in 1969, Stew selling and servicing that Leonard’s has grown at an amazing pace. It’s built 30 additions onto the original store, which now customer. The value serves more than 300,000 customers each week. This legion of loyal shoppers is largely a result of the of the entire stream store’s passionate approach to customer service. ‘Rule #1: The customer is always right. Rule #2: If the of purchases that the customer would make customer is ever wrong, reread rule #1.’17 over a lifetime of Stew Leonard is not alone in assessing customer lifetime value. Lexus, for example, estimates that a patronage. single satisfied and loyal customer is worth more than $600 000 in lifetime sales, and the estimated lifetime value of a Starbucks customer is more than $14 000.18 In fact, a company can lose money on a specific transaction but still benefit greatly from a long-term relationship. This means that companies must aim high in building customer relationships. Customer delight creates an emotional relationship with a brand, not just a rational preference. And that relationship keeps customers coming back. Growing share of customer Beyond simply retaining good customers to capture customer lifetime value, good customer relationship management can help marketers increase their share of customer – the share they get of the customer’s purchasing in their product categories. Thus, banks want to increase ‘share of wallet’. Supermarkets and restaurants want to get more ‘share of stomach’. Car companies want to increase ‘share of garage’, and airlines want greater ‘share of travel’. To increase share of customer, firms can offer greater variety to current customers. Or they can train employees to cross-sell and up-sell in order to market more products and services to existing customers. For example, Amazon.com is highly skilled at leveraging relationships with its 244 million customers to increase its share of each customer’s purchases. Originally an online bookseller, Amazon.com now also share of customer The portion of the customer’s purchasing that a company gets in its product categories. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 20 Part 1 Defining marketing and the marketing process offers customers music, videos, gifts, toys, consumer electronics, office products, home improvement items, lawn and garden products, apparel and accessories, jewellery and an online auction. Based on its system, which relies on each customer’s purchase history, the company recommends related products that might be of interest. In this way, Amazon.com captures a greater share of each customer’s spending budget. In the United States, Amazon has what it terms its Prime two-day shipping program, which has also helped boost its share of customers’ wallets. For an annual fee of $99, Prime members receive delivery of all their purchases within two days, whether it is a single paperback book or a 60-inch high-definition television. According to one analyst, the ingenious Amazon Prime program ‘converts casual shoppers, who gorge on the gratification of having purchases reliably appear two days after the order, into Amazon addicts’. As a result, Amazon’s 40 million Prime customers now account for more than half of its US sales. On average, a Prime customer spends 2.4 times more than a non-Prime customer does.19 Building customer equity We can now see the importance of not just acquiring customers, but also keeping and growing them. One marketing consultant puts it this way: ‘The only value your company will ever create is the value that comes from customers – the ones you have now and the ones you will have in the future. Without customers, you do not have a business.’20 Customer relationship management takes a long-term view. Companies want not only to create profitable customers, but to ‘own’ them for life, earn a greater share of their purchases and capture their customer lifetime value. What is customer equity? customer equity The total combined customer lifetime values of all of the company’s customers. The ultimate aim of customer relationship management is to produce high customer equity.21 Customer equity is the total combined customer lifetime values of all of the company’s current and potential customers. As such, it is a measure of the future value of the company’s customer base. Clearly, the more loyal the company’s profitable customers, the higher the company’s customer equity. Customer equity may be a better measure of a company’s performance than current sales or market share. Customer equity is one reason why upmarket car brands, such as BMW, have focused on younger customers (average age about 40), and why communities of practice, such as Bimmerpost.com and BabyBMW.net, are so important to the company’s long-term sales and profitability. There, those younger users communicate with one another across the full range of BMWs and also with companies across the world that supply original equipment accessories and more. Building the right relationship with the right customers Companies should manage customer equity carefully. They should view customers as assets that need to be managed and maximised. But not all customers, not even all loyal customers, are good investments. Surprisingly, some loyal customers can be unprofitable, and some disloyal customers can be profitable. Which customers should the company acquire and retain? The company can classify customers according to their potential profitability and manage its relationships with them accordingly. Customers can be classified into one of four relationship groups, according to their profitability and projected loyalty.22 Each group requires a different relationship management strategy. Strangers show low potential profitability and little projected loyalty. There is little fit between their needs and the company’s offerings. The relationship management strategy for these customers is simple: do not invest anything in them; make money on every transaction. Butterflies are potentially profitable but not loyal. There is a good fit between their needs and the company’s offerings. However, like real butterflies, we can enjoy them for only a short while and then they are gone. An example is stock market investors who trade shares often and in large amounts but who enjoy hunting out the best deals without building a regular relationship with any single brokerage company. Efforts to convert butterflies into loyal customers are rarely successful. Instead, the company should enjoy Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value 21 the butterflies for the moment. It should create satisfying and profitable transactions with them, capturing as much of their business as possible in the short time during which they buy from the company. Then the company should move on and cease investing in them until the next time around. True friends are both profitable and loyal. There is a strong fit between their needs and the company’s offerings. The company wants to make continuous relationship investments to delight these customers and nurture, retain and grow them. It wants to turn true friends into true believers, who come back regularly and tell others about their good experiences with the company. Barnacles are highly loyal but not very profitable. There is a limited fit between their needs and the company’s offerings. An example is smaller bank customers who bank regularly but do not generate enough returns to cover the costs of maintaining their accounts. Like barnacles on the hull of a ship, they create drag. Barnacles are perhaps the most problematic customers. The company might be able to improve their profitability by selling them more, raising their fees or reducing service to them. However, if they cannot be made profitable, they should be ‘fired’. The point here is an important one: different types of customers require different engagement and relationship management strategies. The goal is to build the right relationships with the right customers. Linking the concepts We have covered a lot of ground. Again, pause for a moment and develop your own thoughts about marketing. ● In your own words, what is marketing and what does it seek to accomplish? ● Select a company that you last purchased from. How well does that company manage its relationships with customers? What customer relationship management strategy does it use? Do you think this relationship management strategy differs from other companies you buy from? ● Are you a ‘true friend’ of any company? What strategy does this company use to manage its relationship with you? The changing marketing landscape (pp. 21–28) Marketing operates within a dynamic global environment. Every decade calls on marketing managers to think in a fresh way about their marketing objectives and practices. Rapid changes can quickly make yesterday’s winning strategies out of date. As management thought leader Peter Drucker once observed, a marketing organisation’s winning formula for the last decade will probably be its undoing in the next decade. Marketing does not take place in a vacuum. Now that we have discussed the five steps in the marketing process, let us examine how the ever-changing marketplace affects both consumers and the marketers who serve them. We look more deeply into these and other marketing environment factors in Chapter 3. In this section, we examine the major trends and forces that are changing the marketing landscape and challenging marketing strategy. We look at six major developments: (1) the digital age; (2) the challenging economic environment; (3) measuring marketing’s contribution to organisational performance; (4) the growth of notfor-profit marketing; (5) rapid globalisation; and (6) the call for more corporate social responsibility. The digital age: Online, mobile and social media marketing The information revolution has reached a critical point where a new information-based infrastructure is unfolding as we witness the convergence of telecommunications, media and technology (TMT) in the form of computer systems, information services and consumer/professional electronics. The new digital infrastructure is creating major shifts in markets and competition. As a result, traditional company and industry structures are being transformed into alliance networks. This IT explosion is accelerating the rate of change and the emergence of new global competitors as various markets become attractive due to the lower costs offered to many industries by technology such as the internet. internet A vast public web of computer networks that connects users of all types all around the world to each other and to an amazingly large information repository. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 22 Part 1 Defining marketing and the marketing process digital and social media marketing The use of digital marketing tools, such as websites, social media, mobile ads and apps, online video, email, blogs and other digital platforms, to engage consumers anywhere, anytime via their computers, smartphones, tablets, internet-ready TVs and other digital devices. The explosive growth in digital technology has fundamentally changed the way we live – how we communicate, share information, access entertainment and shop. More than 3 billion people – 42 per cent of the world’s population – are now online; over 80 per cent of Australians own smartphones. These numbers will only grow as digital technology rockets into the future.23 Most consumers are totally smitten with all things digital. For example, many smartphone users keep their mobile phone next to them when they sleep – they say it is the first thing they touch when they get up in the morning and the last thing they touch at night. In just the past few years, people averaged more time per day with digital media than they did viewing traditional television, with many using their mobile device while they watch television.24 The consumer love affair with digital and mobile technology makes it fertile ground for marketers trying to engage customers. So it is no surprise that the internet and rapid advances in digital and social media have taken the marketing world by storm. Digital and social media marketing involves using digital marketing tools, such as websites, social media, mobile ads and apps, online video, email, blogs and other digital platforms, to engage consumers anywhere, anytime via their computers, smartphones, tablets, internet-ready TVs and other digital devices. These days, it seems that every company is reaching out to customers with multiple websites, newsy tweets and Facebook pages, viral ads and videos posted on YouTube, rich-media emails and mobile apps that solve consumer problems and help them shop. At the most basic level, marketers set up company and brand websites that provide information and promote the company’s products. Many companies also set up branded community sites, where customers can congregate and exchange brand-related interests and information. For example, the Pettalk site, <www. pettalk.com.au>, is a place where pet lovers can communicate via discussion boards dedicated to various types of pets. Patient, <patient.info/forums/>, offers moderated forums where people from all over the world can register and share their medical experiences, and the research they have found for various ailments and remedies. And Sony’s GreatnessAwaits.com site serves as a social hub for PlayStation PS4 game enthusiasts. It is a place where fans can follow social media posts about PS4, watch the latest PS4 videos, discover which PS4 games are trending on social networks, share content and interact with other fans – all in real-time. To date, GreatnessAwaits.com has earned more than 4.5 million page views, curated more than 3.3 million pieces of social content and featured 75 000 fans.25 Beyond brand websites, most companies are also integrating social and mobile media into their marketing mixes. Social media marketing It is difficult to find a brand website, or even a traditional media ad, that does not feature links to the brand’s Facebook, Twitter, Google+, LinkedIn, YouTube, Instagram, Pinterest or other social media sites. Social media provide exciting opportunities to extend customer engagement and get people talking about a brand. More than 90 per cent of all US companies now use social media as part of their marketing mixes, and 71 per cent believe that social marketing is core to their business.26 Some social media are huge – Facebook has more than 1.2 billion active monthly members. Twitter has more than 317 million monthly active users; Pinterest draws in 53 million users; and Instagram racks up an estimated 300 million active monthly visitors. Reddit, the online social news community, has nearly 174 million unique visitors each month from 185 countries. But more-focused social media sites are also thriving, such as XDA-Developers, an online global community of many millions of smartphone users who exchange advice, discuss entertainment and share software development via phone at the community’s online, Facebook, Swappa, Twitter, YouTube, Google+ and mobile sites such as Tapatalk. Online social media provide a digital home where people can connect and share important information and moments in their lives. As a result, they offer an ideal platform for real-time marketing, by which marketers can engage consumers in the moment by linking brands to important trending topics, real-world events, causes, personal occasions or other important happenings in consumers’ lives. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value Using social media might involve something as simple as a contest or promotion to garner Facebook likes, tweets or YouTube postings. But more often these days, large organisations of all kinds use a wide range of carefully integrated social media. For example, space agency NASA uses a broad mix of social media to educate the next generation of space explorers on its mission to ‘boldly go where no man has gone before’. In all, NASA has more than 480 social media accounts, spanning various topics and digital platforms. The agency has more than 10 million Facebook fans, 9 million Twitter followers, 2.5 million Instagram followers and 30 000 YouTube subscribers. One of NASA’s largest-ever social media campaigns supported the recent test launch of the Orion spacecraft, which will eventually carry humans to deep-space destinations, such as Mars or an asteroid.27 Mobile marketing Mobile marketing is perhaps the fastest-growing digital marketing platform. Four out of five smartphone users use their phones to access their bank account for online transfers and payments, browse product information through apps or the mobile web, make in-store price comparisons, read online product reviews, find and redeem coupons, and a lot more.28 Smartphones are ever-present, always on, finely targeted and highly personal, and for one-third of Australians, their only means of telephone communication.29 This makes smartphones ideal for engaging customers anytime, anywhere as they move through the buying process. For example, Starbucks customers can use their mobile devices for everything from finding the nearest Starbucks and learning about new products to placing and paying for orders. We investigate the exciting use of digital technologies in marketing in the chapters ahead, particularly in Chapter 13. The challenging world economy From 2008 to 2009, the United States experienced a stunning economic meltdown, mainly due to questionable bank-lending practices. This Global Financial Crisis (GFC) was unlike anything experienced since the Great Depression of the 1930s. As a result, most world economies experienced major economic upheavals, requiring implementation of government stimulus packages. Stock markets plunged and trillions of dollars of market value simply evaporated. The financial crisis left shell-shocked US consumers short of both money and confidence as they faced losses in income, a severe credit crunch, declining home values and rising unemployment. The stimulus packages introduced by the leading economies had a beneficial effect, particularly in Australia and New Zealand. These countries were less affected by the GFC due, in part, to mineral exports and to tighter regulation of the financial services sector. However, a subsequent downturn in trade with China in 2015–16 caused concerns in both countries. The faltering and uncertain economy caused many consumers to rethink their spending priorities and to cut back on their buying. More than just a temporary change, the economic downturn has affected consumer attitudes and spending behaviour and will continue to do so for many years to come – and in many countries. In Australia and New Zealand, consumer confidence fell due to the collective impact on their economies of a number of challenges occurring internationally: first, the US crisis, then the sovereign debt issues of a number of southern European countries, followed by mass migration out of war-torn sectors of the Middle East into these countries and further into Europe, coupled with a downturn in China’s exports. In today’s post-recession era, consumer incomes and spending are again on the rise. However, even as the economy has strengthened in the United States, rather than reverting to their old free-spending ways, Americans are now showing an enthusiasm for frugality not seen in decades. Sensible consumption has made a comeback, and it appears to be here to stay. The new consumer spending values emphasise simpler living and more value for the dollar. Despite their rebounding means, consumers continue to buy less, clip more coupons, swipe their credit cards less and put more in the bank. Companies in all industries – from discounters to luxury brands – have tightened their budgets and aligned their marketing strategies with the new economic realities. More than ever, marketers are Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 23 24 Part 1 Defining marketing and the marketing process emphasising the value in their value propositions. They are focusing on value-for-the-money, practicality and durability in their product offerings and marketing pitches. In adjusting to the new economy, companies might be tempted to cut marketing budgets deeply and to slash prices in an effort to coax jittery customers into opening their wallets. Although cutting costs and offering selected discounts can be important marketing tactics in a slowing economy, smart marketers understand that making cuts in the wrong places can damage long-term brand images and customer relationships. The challenge is to balance the brand’s value proposition with the current times while also enhancing its long-term equity. Thus, rather than slashing prices in uncertain economic times, many marketers hold the line on prices and instead explain why their brands are worth it. Measuring marketing’s contribution to organisational performance Businesses exist to create wealth for their owners, while not-for-profit organisations seek to survive in order to continue satisfying those who depend on them. While some researchers initially took the view that profits are an element of market orientation, we join others in taking the view that profit is the objective of business and surpluses the objective of not-for-profit organisations.30 As performance measurement has increasingly become the domain of marketing management, one key question facing each type of organisation is which objective (independently reported from such sources as company reports) and subjective (selfreported by managers) performance measures to use in assessing performance. In one review of 150 prior studies covering the period 1991–95, it was found that the three most widely used measures were sales (and growth) (22 per cent of all measures), market share (17 per cent) and profit contribution (11 per cent).31 Such financial measures as sales revenue and profits dominated (67 per cent). Another study extended this by examining a further 46 empirical performance studies published between 1992 and Marketing a social cause: Open Family Australia provides 2003 (nearly all of them published between 1996 and 2003). They outreach support and services to homeless and at-risk young found that while the majority of measures were still financially people. Open Family Australia oriented (54 per cent of indicators used), non-financial measures were increasingly being favoured.32 The seminal US studies by researchers Narver and Slater and by Kohli and Jaworski employed subjective performance measures whereby managers self-reported their market orientation and the organisation’s performance.33 A later UK study by Harris is one of very few that employed both subjective and objective measures in assessing organisational performance.34 A meta-analysis by Ellis took these and many other similar studies and reporting methods into account and concluded that, on balance, there is a positive relationship between an organisation holding a market orientation whereby it focuses on both customer needs and competitor activities, and the organisation’s performance using a variety of financial and marketing measures or metrics.35 Marketing in action 1.1 begins our examination of marketing metrics in this book. It should be evident from this commentary on measuring marketing’s performance that, to date, most studies have used the performance indicated by management, rather than turning to more objective sources such as company reports. There are conflicting findings on the connection between holding a market orientation and organisational performance from studies in different parts of the world. Further studies are needed to provide an unequivocal answer as to which measures to use and what value-adding contribution marketing makes to both profit-oriented and not-for-profit organisations. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value Marketing in Action 1.1 25 Are marketers really that ‘lousy at selling marketing’? A former Australian marketing commentator, Neil Shoebridge, often commented For Tim Ambler, Roger Best and the many firms they have influenced, the on the issue of why marketing management seem to find it difficult to sell the most important aspect is ‘pan-company marketing’. These firms have adopted benefits of marketing to the financial management of organisations – particularly a market-oriented approach, which ensures that, from top to bottom, thanks to top management. He went so far as to indicate that, ‘Marketers might be good to effective internal marketing, their employees see the only reason for the at selling their companies’ products, but they have done a lousy job of selling organisation’s existence as satisfying customers. How? They are market-oriented marketing.’ Why this might be so, and how the matter is being addressed, is the because they repeatedly add value at every point of contact – what Jan Carlzon subject of this Marketing in action box. of Scandinavian Airways referred to as ‘moments of truth’ – and at every purchase and post-purchase situation. This market-oriented approach is also vital for not-for-profit organisations, such as the Red Cross and the Australian Cancer Why the difficulty in measuring marketing effectiveness? Council, and indeed for all levels of government, political and administrative. Not adopting this approach may result in moments of misery for customers and a falling-away in repeat business. One difficulty is that, quite apart from the fact that even marketing academics The aspect of marketing referred to throughout this book, even when and practitioners use the same words (e.g. brand equity, product innovation), examining a marketing metric that seems applicable at the budgetary level, individually they ascribe different meanings to the words. This makes it difficult is the pan-company marketing perspective. Why? The simple answer is that, to talk with certainty to others within their organisations. Another problem is while businesses might depend on shareholder satisfaction to have the funds that, while those who continually ‘count the beans’ within these organisations to continue and expand the scope of their operations, all facets of the business recognise the costs of marketing, they do not yet include such aspects as – including shareholder wealth – depend on customers and their repeated ‘brand equity’ on the assets side of the published financial statements of satisfaction. This means that all employees should see it as their duty to know the organisation. To do so would, at the outset, require agreement on what how they contribute to customer satisfaction. forms such an asset. To be fair, many sophisticated organisations do utilise a ‘dashboard’ approach to decision making and predicting the future of their business, and marketing performance measures, or metrics (metrics is here taken Which marketing metrics? to indicate a measuring system), such as ‘brand share’, ‘brand equity’ and ‘share The key to developing a metrics system is to identify a group of indicators (Ambler of voice’, are indeed monitored and used along with other financial and non- recommends ‘a dozen or so’) that aid in managing the business and enable financial measures. accurate cashflow predictions into the future. As with marketing research, we Another important issue is that, when referring to marketing, we need can ask every question imaginable, but the answers to relatively few questions to be clear about which aspect of marketing is being referred to. Shoebridge will indicate whether the customer will come back and spend more money on is clearly suggesting that marketing managers are looking to measure a our product offering. Sometimes the answer to one question indicates they will return on marketing expenditure at the ‘budgetary level’, and he cites the never come back. A non-financial marketing metric, such as ‘share of voice’ Australian Marketing Institute’s (AMI) ‘metrics tool kit’, which was developed (which includes social media word of mouth), is important to long-term ‘brand with the assistance of a grant from the Australian Research Council. Often, attitude’, and both – in time – impact on financial measures such as profitability this can simply mean trying to measure the return on integrated marketing and cashflow. The critical feature is to establish the leads and lags between the communication (IMC), or perhaps on a single element such as advertising, indicators. As we see in Appendix 3’s Spotlight 7, the link is more solid and the if that is the only communication tool used. There is a ‘functional’ aspect to effect more immediate for the direct and digital marketer – which knows its marketing that sees practitioners in different types of organisations using customers by name – than for the FMCG marketer which stands removed from different metrics and having different responsibilities. For example, marketing individual customers by a supply chain that includes wholesalers and retailers management of a service firm such as Qantas uses different metrics and is (see Appendix 3’s Spotlight 4). All such market-oriented companies depend on responsible for different facets of the business than those in a service firm such innovation for their life’s blood and continually need to develop new products as the ANZ Banking Group. And both service firms differ in their metrics and that truly add value for customers (see Appendix 3’s Spotlight 6). responsibilities from those involved in the manufacturing and marketing of fast-moving consumer goods (FMCG), such as Lever-Rexona. We begin by referring to a ranking of performance measures (or analytic measures) in Spotlight 1 in Appendix 3. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 26 Part 1 Defining marketing and the marketing process The journey has begun We address this matter by presenting a marketing analytics spotlight – a mini case study – in Appendix 3 to introduce you to the many measures that are employed in assessing the performance that results from effective marketing. The marketing analytics spotlights should therefore be seen as the start of a journey that will continue throughout your marketing studies and into your business life. As Farris and colleagues succinctly put it, ‘Being able to “crunch the numbers” is vital to success in marketing. Knowing which numbers to crunch, however, is a skill that develops over time.’ And so we ask you to work through the examples provided at the end of each chapter and begin your journey into the effective use of marketing metrics. In particular, you will find mini case studies entitled ‘Marketing analytics at work’, which are designed to allow you to work through the various marketing performance measures faced by marketing management. A word of caution: Research studies conducted at different points in time, and in various locations, are not always able to support the findings of earlier studies. It is therefore wise to read as widely as possible and to remain openminded when confronted with conflicting evidence. Marketing has adopted the scientific approach, and researchers continually seek to support or refute the findings of earlier studies in the knowledge that ‘iron laws’ are unlikely to be developed, even with continuous empirical investigation. Sources: Quotation from Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006; Shoebridge quotation from Neil Shoebridge, ‘Marketers’ measure’, BRW, 1–7 December 2005, p. 63. The term pan-company marketing is from Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003. See also T Ambler & F Kokkinaki, ‘Measures of marketing success’, Journal of Marketing Management, 13(7), 1997, pp. 665–79; T Ambler, F Kokkinaki & S Puntoni, ‘Assessing marketing performance: Reasons for metrics selection’, Journal of Marketing Management, 20, 2004, pp. 475–98; T Ambler, F Kokkinaki, S Puntoni & D Riley, ‘Assessing market performance: The current state of metrics’, Centre of Marketing, London Business School, Working Paper, 2001, pp. 1–68; Roger J Best, Market-Based Management, 4th edn, Pearson Prentice Hall: Upper Saddle River, NJ, 2005; Competitive Fitness of Global Firms report, available at <www.corvaltec.com/index.html>, accessed 9 January 2007; J-C Larréché, The Test of Business Capabilities? Highlights from Measuring the Competitiveness of Global Firms 2002, Financial Times Prentice Hall: London, 2002, available at <www.corvaltec.com>, accessed 30 August 2003. Questions ❶ What does the term marketing analytics refer to? ❷ List and describe the three aspects of marketing at the budgetary level that can influence the measures used. (Hint: One is the functional aspect of marketing.) ❸ What is the sole reason for the company’s existence put forward in this Marketing in action box? Do you agree? ❹ Which (if any) one marketing performance measure do you believe is the most important? The growth of not-for-profit marketing not-for-profit marketing Marketing as practised by a variety of organisations whose aim is to make surpluses so as to continue their operations, but that do not seek to make profits for shareholders. Over the years, marketing has been most widely applied in the business sector. In more recent times, however, not-for-profit marketing has also become a major component in the strategies of many philanthropic organisations, universities, hospitals, museums, symphony orchestras, zoos and even churches. Similarly, many private schools and, increasingly, universities, facing fluctuating domestic and international enrolments, rising costs and global competitors, are using marketing to compete for students and funds, both at home and abroad. They are redefining target markets, improving their communication and promotion, and responding more effectively to student needs and wants. Many performing arts groups face huge operating deficits that they must cover by more aggressive donor marketing, particularly from the corporate sector. Finally, many long-standing not-for-profit organisations – the YMCA, the Salvation Army, the Red Cross and the Scouts – have lost members and are now modernising their missions and ‘products’ to attract more members and donations.36 Even government agencies have shown an increased interest in marketing. For example, the armed services in many countries have marketing plans to attract recruits. And various government agencies are now designing social marketing campaigns to reward and encourage energy conservation and concern for the environment, to stimulate good corporate behaviour or to discourage smoking, excessive drinking and drug use. The continued growth of not-for-profit and public-sector marketing presents exciting challenges for marketing managers. Rapid globalisation The world economy has undergone radical change during the past three decades. Geographical and cultural distances have shrunk with the advent of jet airliners, telephone links (such as Japan’s DoCoMo iMode interactive mobile phones), digital satellite-television broadcasting (such as Britain’s BSkyB and Japan’s Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value 27 PERFECTV), internet email and instant messaging, social networking and other technical advances, such as internet-capable smartphones (iPhone and Android phones) and Video-over-IP phone services (such as Google Hangouts and Microsoft’s Skype). These technological advances have allowed companies to expand significantly their geographical market coverage, purchasing and manufacturing. The result is a vastly more complex marketing environment for both companies and consumers. Today, almost every marketing organisation, large or small, is touched in some way by global competition. From the American florist that buys its flowers from Dutch nurseries, to the Melbourne clothing designer and Sydney retailer that each source merchandise in China, to the American Telecommunications, media and technology (TMT): In this digital electronics manufacturer competing with giant Japanese age, for better or worse, technology has become an indispensable rivals in its home markets, to the Australian consumer-goods part of our lives. The technology boom provides exciting new producer introducing new products into emerging markets opportunities for marketers. abroad – companies are not only trying to sell more of their David Sacks/The Image Bank/Getty Images locally produced goods in international markets, but are also buying more components and supplies abroad. For example, an American fashion designer may choose cloth woven from Australian wool with printed designs from Italy. The designer designs a dress and electronically transmits the drawing to a factory in mainland China. Finished dresses are airfreighted to New York where they are distributed to department and specialty stores around the country. Many domestically purchased goods and services are ‘hybrids’, with design, materials purchases, manufacturing and marketing taking place in several countries. Australians who want to ‘Buy Australian’ might reasonably decide to avoid a Honda Civic or a Mitsubishi Lancer and purchase a Ford Focus. Imagine their surprise when they learn the Focus is actually a German-made vehicle that sells in great quantities in Europe. Imagine their further surprise at finding that Ford is an American company that also has part ownership of Mazda, or that the Jaguar, Daimler, Rover and Land Rover brands are owned by Indian car maker Tata, or that Zhejiang Geeley Holding Group of China owns Volvo. Consumers in many other nations suffer similar surprises. Australian car marketer General Motors Holden is owned by US giant General Motors. Iconic UK confectionery company Cadbury is now owned by US food giant Kraft. Quintessentially American McDonald’s now serves 68 million customers daily in more than 36 000 local restaurants in over 100 countries worldwide – nearly 70 per cent of its corporate revenues come from outside the United States. Similarly, Nike markets in 190 countries, with non-US sales accounting for about half of its worldwide sales. Even MTV Networks has joined the elite of global brands – its 150 channels worldwide deliver localised versions of its pulse-thumping fare to 419 million homes in 164 countries around the globe. And it reaches millions more daily via the more than 5000 mobile, console and online games and virtual worlds that it shares on its more than 300 websites worldwide.37 Thus, managers in countries around the world are asking: Just what is global marketing? How does it differ from domestic marketing? How do global competitors and forces affect our business? To what extent should we ‘go global’? Many companies are forming strategic alliances with foreign companies, even competitors, who serve as suppliers or marketing partners. The past few years have produced some surprising alliances between competitors, such as Ford and Mazda, General Electric and Matsushita, Telstra and News Corporation, Nokia and Microsoft, and Ericsson and Sony. Winning companies in the 21st century may well be those that have built the best global networks.38 There is continued resistance from various groups to perceived negatives in the process of globalisation. We examine these further in the next section. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 28 Part 1 Defining marketing and the marketing process Sustainable marketing: The call for more environmental and social responsibility A further factor in today’s marketing environment is the increased call for companies to take responsibility for the social and environmental impact of their actions. Corporate ethics have become an important matter in almost every business arena, from the corporate boardroom to the business-school classroom. Global companies, with widely adopted brands, cannot ignore the problems they cause by moving operations from one country to the next in search of lower labour costs. Such companies, and governments, can no longer ignore the disruptions caused by the anti-globalisation movement, even if they do not agree with the sentiments of this vociferous group. And few companies can disregard the well-organised and very demanding environmental movement, spearheaded by organisations such as Greenpeace. While Tesla leads the way with their fully electric vehicles, Audi, BMW, General Motors, Honda, Mercedes-Benz, Mitsubishi, Peugeot and Toyota, like others, are putting forward an environmentally friendly face with their semielectric cars and other hybrids, showing their commitment to the environment via the web, including providing support for local communities in this regard.39 Ethics and environmental movements are placing even stricter demands on companies as time passes. No wonder, when in many eastern European countries the air is fouled, the water is polluted, the rivers and the soil are poisoned by chemical dumping, and the effects of global warming are becoming evident. Intensive farming in Australia has caused land salination, algal bloom (from pesticides and reduced water flow in river systems) and general degradation of the waterways, and is destroying the Great Barrier Reef. Worldwide, the outpouring of human effluent has affected the sea, and unfettered car-exhaust emissions have degraded air quality and are contributing to changed weather patterns. In 1992, 20 years after the United Nations Conference on Human Environment, representatives from more than 100 countries attended the inaugural Earth Summit in Rio de Janeiro to consider how to handle such problems as the destruction of rainforests, global warming, endangered species and other environmental threats. [The Summit] brought environment and development issues firmly into the public arena. Along with the Rio Declaration and Agenda 21 it led to agreement on two legally binding conventions: Biological Diversity and the Framework Convention on Climate Change. It also produced a Statement of Forest Principles.40 The second Earth Summit was held in 2002 in Johannesburg, and the third in Brussels in 2005, the Copenhagen Climate Summit was held in late 2009, while the fourth Earth Summit was held in Rio de Janeiro in 2012.41 Global warming and other environmental issues make it imperative that marketing organisations examine the best use of resources, in both inputs and outputs. However, as the Climate Summit resolutions illustrate, getting individual countries to agree to carbon dioxide emission reductions remains difficult. Some companies, such as Patagonia, Timberland, Method, Ben & Jerry’s and others, practice caring capitalism, setting themselves apart by being civic-minded and responsible. They build social and environmental responsibility into their company value and mission statements. For example, Ben & Jerry’s, a division of Unilever, has long prided itself on being a ‘values-led business’, one that creates ‘linked prosperity’ for everyone connected to the brand – from suppliers to employees to customers and communities.42 So, what is marketing? Pulling it all together (pp. 28–30) In Figure 1.1, we presented a simple model of the marketing process. Now that we have discussed all the steps in the process, Figure 1.6 presents an expanded model that will help you pull it all together. What is marketing? Simply put, marketing is the process of building profitable customer relationships by creating value for customers and capturing value in return. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value CREATE VALUE FOR CUSTOMERS AND BUILD CUSTOMER RELATIONSHIPS CAPTURE VALUE FROM CUSTOMERS IN RETURN Understand the marketplace and customer needs and wants Design a customerdriven marketing strategy Construct an integrated marketing program that delivers superior value Build profitable relationships and create customer delight Capture value from customers to create profits and customer equity Research customers and the marketplace Select customers to serve: market segmentation and targeting Product and service design: build strong brands Customer relationship management: build strong relationships with chosen customers Create satisfied, loyal customers Pricing: create real value Manage marketing information and customer data Decide on a value proposition: differentiation and positioning Distribution: manage demand and supply chains Capture customer lifetime value Partner relationship management: build strong relationships with marketing partners Increase share of market and share of customer Promotion: communicate the value proposition Harness marketing technology Manage global markets Ensure ethical and social responsibility Figure 1.6 An expanded model of the marketing process The first four steps of the marketing process focus on creating value for customers. The marketing organisation first gains a full understanding of the marketplace by researching customer needs and managing marketing information. It then designs a customer-driven marketing strategy based on the answers to two simple questions. The first question is: ‘What consumers will we serve?’ (market segmentation and targeting). Successful marketing companies know they cannot serve all customers in every way. Instead, they need to focus their resources on the customers they can serve best and most profitably. The second marketing strategy question is: ‘How can we best serve targeted customers?’ (differentiation and positioning). Here, Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 29 30 Part 1 Defining marketing and the marketing process the marketer outlines a value proposition that spells out what values the company will deliver in order to win target customers. With its marketing strategy chosen, the company now constructs an integrated marketing program, consisting of a blend of the marketing mix elements as shown in Figure 1.5, which transforms the marketing strategy into real value for customers. The company develops market offerings (products) and creates strong brand identities for them. It prices these offers to create real customer value and distributes the offers to make them available to target consumers. Finally, the company designs promotion programs that communicate the value proposition to target consumers and persuade them to act on the market offering. Perhaps the most important step in the marketing process involves building value-laden, profitable relationships with target customers. Throughout this process, marketers practise customer relationship management to create customer satisfaction and delight. In creating customer value and relationships, however, the company cannot go it alone. It must work closely with marketing partners both inside the company and throughout the marketing system. Thus, beyond practising good customer relationship management, firms must also practise good partner relationship management. The first four steps in the marketing process create value for customers. In the final step, the company reaps the rewards of its strong customer relationships by capturing value from customers. Delivering superior customer value creates highly satisfied customers who will buy more and will buy again. This helps the company to capture customer lifetime value and greater share of customer. The result is increased long-term customer equity for the firm. Finally, in the face of today’s changing marketing landscape, companies must take into account three additional factors. In building customer and partner relationships, they must harness marketing technology, take advantage of global opportunities and ensure they act in an ethical and socially responsible way. Figure 1.6 provides a good road map to future chapters of the book. Chapters 1 and 2 introduce the marketing process, with a focus on building customer relationships and capturing value from customers. Chapters 3 to 6 address the first step of the marketing process – understanding the marketing environment, managing marketing information and understanding consumer and business buyer behaviour. In Chapter 6, we look more deeply into the two main marketing strategy decisions: selecting which customers to serve (segmentation and targeting) and deciding on a value proposition (differentiation and positioning). Chapters 7 to 13 discuss the marketing mix variables. Chapter 14 brings the book to a close with a discussion on ethics, social responsibility and marketing compliance. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value Student Learning Centre 31 To design a winning marketing strategy, the company must first decide who it will serve. It does this by dividing the market into segments of customers (market segmentation) and selecting which segments it will cultivate (target marketing). Next, the company must decide how it will serve targeted customers (how it will differentiate and position itself in the marketplace). Marketing management can adopt one of five competing market orientations. Reviewing the learning objectives The production concept holds that management’s task is to improve production efficiency and bring down prices. The product concept holds that consumers Today’s successful marketing organisations – whether large or small, for-profit favour products that offer the most in quality, performance and innovative or not-for-profit, domestic or global – share a strong customer focus and a features; thus, little promotional effort is required. The selling concept holds heavy commitment to marketing. The goal of marketing is to build and manage that consumers will not buy enough of the organisation’s products unless it customer relationships. undertakes a large-scale selling and promotion effort. The marketing concept Learning Objective 1. Define marketing, and outline the steps in the marketing process. (pp. 4–5) holds that achieving organisational goals depends on determining the needs and wants of target markets and delivering the desired satisfactions more effectively and efficiently than competitors do. The societal marketing concept calls for Marketing is the process by which companies create value for customers and generating customer satisfaction and long-run societal wellbeing through build strong customer relationships in order to capture value from customers sustainable marketing strategies keyed both to achieving the company’s goals in return. and to fulfilling its responsibilities. The marketing process involves five steps. The first four steps create value for step, marketers construct a marketing program that actually delivers superior Learning Objective 4. Discuss customer relationship management, and identify strategies for creating value for customers and capturing value from customers in return. (pp. 15–21) value. All these steps form the basis for the fourth step, building profitable Broadly defined, customer relationship management is the process of customer relationships and creating customer delight. In the final step, the engaging customers and building and maintaining profitable customer company reaps the rewards of strong customer relationships by capturing value relationships by delivering superior customer value and satisfaction. Customer- from customers. engagement marketing aims to make a brand a meaningful part of consumers’ customers. First, marketers need to understand the marketplace and customer needs and wants. Next, marketers design a customer-driven marketing strategy with the goal of getting, keeping and growing target customers. In the third Learning Objective 2. Explain the importance of understanding the marketplace and customers, and identify the five core marketplace concepts. (pp. 5–9) conversations and lives through direct and continuous customer involvement in shaping brand conversations, experiences and community. The aim of customer relationship management and customer engagement is to produce high customer equity, the total combined customer lifetime values of all of the Outstanding marketing companies go to great lengths to learn about and company’s customers. The key to building lasting relationships is the creation understand their customers’ needs, wants and demands. This understanding of superior customer value and satisfaction. In return for creating value for helps them to design want-satisfying market offerings and to build value-laden targeted customers, the company captures value from customers in the form of customer relationships by which they can capture customer lifetime value and profits and customer equity. greater share of customer. The result is increased long-term customer equity for offerings (products, services and experiences); value and satisfaction; exchange Learning Objective 5. Describe the major trends and forces that are changing the marketing landscape in this age of relationships. (pp. 21–30) and relationships; and markets. Wants are the form taken by human needs when Dramatic changes are occurring in the marketing arena. The digital age has shaped by culture and individual personality. When backed by buying power, created exciting new ways to learn about and relate to individual customers. wants become demands. Companies address needs by putting forth a value As a result, advances in digital and social media have taken the marketing world by proposition, a set of benefits they promise to consumers to satisfy consumers’ storm. Online, mobile and social media marketing offer exciting new opportunities needs. The value proposition is fulfilled through a market offering, which delivers to target customers more selectively and engage them more deeply. The key is to customer value and satisfaction, resulting in long-term exchange relationships blend the new digital approaches with traditional marketing to create a smoothly with customers. integrated marketing strategy and mix. Learning Objective 3. Identify the key elements of a customer-driven marketing strategy, and discuss the marketing management orientations that guide marketing strategy. (pp. 9–15) and bring their consumption back in line with their incomes. Even as the post- the firm. The core marketplace concepts are needs, wants and demands; market The Great Recession caused consumers to rethink their buying priorities recession economy has strengthened, people are now showing an enthusiasm for frugality not seen in decades. The challenge is to balance a brand’s value proposition with current times while also enhancing its long-term equity. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 32 Part 1 Defining marketing and the marketing process In recent years, marketing has become a major part of the strategies for single markets seems to be giving way to many such strategic alliances. many not-for-profit organisations, such as universities, hospitals, museums, zoos, Can you identify other markets where this process is evident? What are symphony orchestras, foundations and even churches. Also, in an increasingly the implications for marketing science and practice? (Learning Objective 4) smaller world, many marketers are now connected globally with their customers, (AACSB: Communication; Reflective Thinking) marketing partners and competitors. Finally, today’s marketers are also re- ❺ Societal marketing concept. If this term means that the organisation should examining their ethical and societal responsibilities. Marketers are being called determine the needs, wants and interests of target markets, then surely this upon to take greater responsibility for the social and environmental impacts of is the same thing as the marketing concept? Is this not simply duplication? their actions. Justify your answer. (Learning Objective 5) (AACSB: Communication; Pulling it all together, as discussed throughout the chapter, the major new Reflective Thinking) developments in marketing can be summed up in a single concept: engaging ❻ Change management. A number of enterprises – large (HIH Insurance), customers and creating and capturing customer value. Today, marketers of medium (One.Tel, Impulse Airlines, Ansett Airlines) and small – have all kinds are taking advantage of new opportunities for building value-laden achieved notoriety by their spectacular failures. There seems to be a number relationships with their customers, their marketing partners and the world of reasons, including systems failure and management failure. Using such around them. sources as the financial press and magazines, identify how marketing may or may not contribute to such failures and to other difficulties that businesses Discussion questions ❶ Telling and selling. Is marketing practice little more than ‘telling and selling’, while marketing science is really just a matter of carrying out experiments, tests, surveys and other research to help organisations sell are experiencing. (Learning Objective 5) (AACSB: Communication; Reflective Thinking) Critical thinking exercises ❶ Form a small group of three or four fellow students. Discuss a need or more? Or is marketing practice truly concerned with satisfying customer want you have that is not adequately satisfied by any offerings currently needs and wants by interacting and working with the customer, and marketing in the marketplace. Think of a product or service that will satisfy that need science concerned with furthering this aim? One way of discussing this is or want. Describe how you will differentiate and position your offering in to form class syndicates taking each position, armed with examples from the marketplace and develop the marketing program for your offering. the marketplace. (Learning Objective 1) (AACSB: Communication; Reflective Present your ideas to the other groups. (Learning Objective 2) (AACSB: Thinking) Communication; Reflective Thinking) ❷ Customer satisfaction. If it is true that smart companies aim to completely ❷ Consider a product that you use or a retailer where you shop frequently. satisfy customers by promising only what they can deliver, and then Estimate how much you are worth to the retailer or manufacturer of the delivering more than they promise, does this mean that those who follow brand you prefer if you remain loyal to that marketer for the rest of your this dictum are market leaders and the most profitable in their industry life (your customer lifetime value). What factors should you consider when sector? This very topical issue is a matter for individual research using deriving an estimate of your lifetime value to the company? How can the academic journals; the findings might then be pooled in class. Be aware that company increase your lifetime value? (Learning Objective 4) (AACSB: there is no simple answer. (Learning Objective 2) (AACSB: Communication; Reflective Thinking) Communication; Reflective Thinking; Analytic Reasoning) ❶ In a small group, create a presentation about careers in marketing. Search ❸ Market orientation or marketing orientation. At a recent academic the internet for information regarding the different career options available conference, a presenter was discussing the literature he had followed in in marketing, and the skills, education and experience necessary to advance devising his study of the connection between respondent organisations’ in the field of marketing. Then select a company and describe the marketing market orientation and their sales performance. During the presentation, career opportunities available there. (Learning Objectives 1–4) (AACSB: he inadvertently used the term marketing orientation. Some of the Communication; Reflective Thinking) audience became quite vocal at this point. Why might this be the case? Surely the two terms mean the same thing? (Learning Objective 3) (AACSB: Communication; Reflective Thinking) ❹ Globalisation. As a response to globalisation, organisations such as airlines are partnering with foreign organisations, even competitors, to form strategic alliance networks (such as the oneworld® alliance of airberlin, American Navigating the key terms Learning Objective 1 marketing myopia (p. 7) marketing (p. 4) needs (p. 5) transaction (p. 8) Airlines, British Airway, Cathay Pacific Airlines, Finnair, Iberia, LAN Airlines, Learning Objective 2 Japan Airlines, Malaysia Airlines, Qantas Airways, Qatar Airlines, Royal demands (p. 6) Jordanian, S7 Airlines, TAM, SriLankan Airlines – see <oneworld.com>) exchange (p. 8) Learning Objective 3 that compete with other networks (such as Star Alliance – see <www. market (p. 8) demarketing (p. 10) staralliance.com>). The older notion of single companies competing in market offering (p. 6) marketing concept (p. 12) wants (p. 5) Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value marketing management (p. 9) Learning Objective 4 customer satisfaction (p. 15) Learning Objective 5 product concept (p. 11) consumer-generated marketing (p. 17) customer-perceived value (p. 15) digital and social media marketing production concept (p. 11) customer equity (p. 20) partner relationship management selling concept (p. 11) customer lifetime value (p. 19) societal marketing concept customer relationship (p. 13) (p. 18) share of customer (p. 19) (p. 22) internet (p. 21) not-for-profit marketing (p. 26) management (CRM) (p. 15) Mini cases 1.1 Digital technologies in marketing Publishing: To unbundle the app or not? Newspaper and magazine publishers the world over are in a quandary. subscriptions separately. And while this has been taking place, hardcopy Digital tablets such as Apple’s iPad, and a myriad of Google Android tablets readership has been dropping. such as Samsung’s range, now bristle with apps which their owners have The Economist has a similar strategy that unbundles tablet editions from downloaded courtesy of publishers such as Australasia’s Fairfax Media print. Pricing strategy is as one might expect in that the price for a print Limited. Fairfax Media publish, among other assets, the Australian Financial subscription is more expensive than for a digital subscription, while print Review (AFR) and BRW. plus digital costs more again. These publishers appear to be ready for the Subscribe to the AFR on a five- or six-day basis and you get access, steady decline in print readers that every publisher is experiencing.43 through the AFR iPad app, to various newspaper features online. Fee- ❶ Thinking about your own reading habits, do you still read print versions paying digital subscribers have free access to the app. In a similar strategy of newspapers and magazines? Why, or why not? (Learning Objectives to that adopted by Time Inc., called ‘All Access’, the AFR gives its print 1, 2 and 4) (AACSB: Communication; Use of IT; Reflective Thinking) subscribers access to tablet and smartphone apps and also provides ❷ Do you think the strategy adopted by The Economist reflects the separate access to its digital editions and subscriber content from its needs, wants and demands of readers? (Learning Objectives 1, 2 website. Competitors, such as Hearst and Condé Nast, also sell app and 5) (AACSB: Communication; Reflective Thinking) 1.2 Customer-driven marketing strategy Apple and Adobe Flash clash: Customer-driven? Apple’s iDevices – iPods, iPhones and iPads – are globally popular. next chapter of the web’, and bloggers exclaim this is not just an ‘Adobe/ But where’s the flash? Adobe Flash, that is. Adobe’s Flash, the long-standing Apple problem . . . but an Apple/World problem’. multimedia platform behind approximately 75 per cent of the animated and ❶ Does Apple appear to embrace the marketing concept? (Learning streaming audio and video on the internet, is not supported by Apple’s Objectives 3, 4 and 5) (AACSB: Communication; Use of IT; Reflective devices. Many purchasers were disappointed after spending hundreds of Thinking; Technology) dollars on iPads and iPad Minis only to realise they could not play their ❷ Research the controversy surrounding this issue and debate whether favourite online game or watch videos on their device. And they still cannot, Apple did the right thing for its customers by not including the even with the latest-generation devices. Why not? It seems Apple’s late ubiquitous Adobe Flash software on Apple’s products. Is there a way founder and CEO, Steve Jobs, did not like Flash and would not support it on around the dilemma for those wanting to watch Flash movies and play Apple’s devices. Instead, app developers must conform to Apple’s operating Flash games on their iPhones? (Learning Objectives 1 and 5) (AACSB: system, and existing applications on the web must convert to HTML5 to play Communication; Reflective Thinking) on an Apple product. Adobe’s co-founders claim Apple is ‘undermining the Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 33 34 Part 1 Defining marketing and the marketing process 1.3 Marketing analytics at work Transport for NSW: Customer satisfaction index Every mode of transport stands or falls by its ability to satisfy customers. Having read the November CSI report, and examined Appendix 3 for The New South Wales government has a vision that promotes better outcomes any similar marketing analytics spotlights you could draw on for inspiration, for customers of its integrated public transport system. In meeting this goal, consider the following questions: it tracks the views of over 17 000 randomly selected customers over time. ❶ Do you think that each of the satisfaction parameters mentioned For example, the Customer Satisfaction Index (CSI) published in November (e.g. timeliness) would be of equal importance to customers? If not, 2015 covered seven surveys from November 2012 to November 2015. how would you calculate an overall CSI for Transport for NSW, taking Customers were asked to rate their experience of their most recent trip or account of such differences? (Learning Objectives 2 and 3) (AACSB: Communication; Reflective Thinking; Sustainability) experience.44 The customer surveys used a seven-point scale (‘very dissatisfied’ to ‘very ❷ Might there be differences in the importance level for each parameter satisfied’) to gather satisfaction levels for such parameters as timeliness, by transport mode? If so, how would you calculate an overall CSI for safety and security, ticketing, convenience, accessibility, comfort, cleanliness, Transport for NSW, taking account of such differences? (Learning information and customer service. Customer satisfaction for each transport Objectives 2 and 3) (AACSB: Communication; Reflective Thinking) mode was monitored: train, bus, ferry, light rail and the urban taxi network. 1.4 Ethical reflection The security of customer details The football club, the Mighty Emus, has approached a marketing research questionnaire website. Barry sent the list of email addresses at the behest of firm, FastAsk, to undertake a membership satisfaction survey. The club wants the club’s directors, even though he objected to this action because the email FastAsk to send an email to each of its members with an email address and list includes subscribers who asked that their details not be given to third to call the remainder using a computer-aided telephone system, inviting parties. Barry is fully aware of the amendments to the Australian Privacy Act them to complete a web form (questionnaire accessed with a web browser) that came into effect on 21 December 2001; he knows that heavy penalties that seeks their views on various aspects of the club’s performance, both may be imposed on those who do not comply with the provisions of the Act. on-field and off-field. As an inducement to respond, the research company He is also aware of the Spam Act 2003 and the introduction of the Do Not has suggested that a prize of one year’s free membership be offered to a Call Register Act 2006.45 winner drawn from a barrel. ❶ What are your views concerning the proposed marketing The Mighty Emus’ marketing officer, Barry Bright, has passed the email research? (AACSB: Communication; Ethical Reasoning; Reflective list to the research company so that they can invite members to visit the Thinking) References 1 John C Narver & Stanley F Slater, ‘The effect of a market orientation on business profitability’, Journal of Marketing, 54, October 1990, pp. 20–35; for a more embracing perspective on market orientation, see Paul D Ellis, ‘Market orientation and performance: A meta-analysis and cross-national comparisons’, Journal of Management Studies, 43(5), 2006, pp. 1089–107. 2 See Philip Kotler & Kevin Lane Keller, Marketing Management, 15th edn, Pearson Education: Hoboken, NJ, 2016, p. 5. 3 The American Marketing Association offers the following definition: ‘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.’ See <www.marketingpower.com/_layouts/Dictionary.aspx?dLetter=M>, accessed September 2015. 4 See Daniel P Smith, ‘Keep in touch’, QSR Magazine, July 2013, <www.qsrmagazine. com/executive-insights/keep-touch>; and Phil Wahba, ‘Back on target’, Fortune, 1 March 2015, pp. 86–94. 5 See Theodore Levitt’s classic article, ‘Marketing myopia’, Harvard Business Review, July–August 1960, pp. 45–56. For more recent discussions, see Minette E Drumright & Mary C Gentile, ‘The new marketing myopia’, Journal of Public Policy & Marketing, 6 7 8 9 Spring 2010, pp. 4–11; Roberto Friedmann, ‘What business are you in?’, Marketing Management, Summer 2011, pp. 18–23; and Al Ries, ‘“Marketing myopia” revisited: Perhaps a narrow vision is better business’, Advertising Age, 4 December 2013, <http://adage.com/print/245511>. Ralph Waldo Emerson offered this advice: ‘If a man . . . makes a better mousetrap . . . the world will beat a path to his door.’ Several companies, however, have built better mousetraps and yet have failed. ‘The difference in creating companies and categories’, happycustomer, 4 March 2014, <http://happycustomer.stellaservice.com/2014/03/04/column-the-difference-increating-companies-and-categories/>. See Michael E Porter & Mark R Kramer, ‘Creating shared value’, Harvard Business Review, January–February 2011, pp. 63–77; Marc Pfitzer, Valerie Bockstette & Mike Stamp, ‘Innovating for shared value’, Harvard Business Review, September 2013, pp. 100–7; ‘About shared value’, Shared Value Initiative, <http://sharedvalue.org/ about-shared-value>, accessed September 2015; and ‘Shared value’, <www.fsg.org>, accessed September 2015. Michael Krauss, ‘Evolution of an academic: Kotler on marketing 3.0’, Marketing News, 30 January 2011, p. 12; and Simon Mainwaring, ‘Marketing 3.0 will be won Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 1 Marketing: Creating and capturing customer value 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 by purpose-driven, social brands’, Forbes, 16 July 2013, <www.forbes.com/sites/ simonmainwaring/2013/07/16/marketing-3-0-will-be-won-by-purpose-driven-socialbrands-infographic/>. For more on how to measure customer satisfaction, see D Randall Brandt, ‘For good measure’, Marketing Management, January–February 2007, pp. 21–5. See <www.ritzcarlton.com/en/about/gold-standards>, accessed November 2016. Information about the Harley Owners Group from <www.harley-davidson.com/ en_US/Content/Pages/HOG/HOG.html>, accessed January 2013. For further details in Australia, see <https://members.hog.com>, accessed 2 April 2016. ‘Number of monthly active Twitter users worldwide from 1st quarter 2010 to 3rd quarter 2016 (millions)’, statista, <statista.com/statistics/282087/number-of-monthlyactive-twitter-users>, accessed November 2016. Data from statista: The Statistics Portal, <www.statista.com>. For examples, see <http://mystarbucksidea.force.com>, accessed September 2015; and ‘Product review’, <www.productreview.com.au>, accessed 3 April 2016. See ‘#Bashtag: Avoiding user outcry in social media’, WordStream, 8 March 2013, <www.wordstream.com/blog/ws/2013/03/07/bashtag-avoiding-social-mediabacklash>; and ‘What is hashtag hijacking?’, Small Business Trends, 18 August 2013, <http://smallbiztrends.com/2013/08/what-is-hashtag-hijacking-2.html>. See <www.stewleonards.com/about-us/company-story>, accessed September 2015. See Mai Erne, ‘Calculating customer lifetime value’, HaraPartners, <www.harapartners. com/blog/calculating-lifetime-value/>, accessed September 2015. See Timothy Stenovec, ‘Amazon prime members spend an astonishing $1,500 a year, survey says’, Huffington Post, 27 January 2015, <www.huffingtonpost. com/2015/01/27/amazon-prime-spending_n_6556374.html>; Brad Stone, ‘What’s in the box? Instant gratification’, Bloomberg Businessweek, 29 November–5 December 2010, pp. 39–40; and <www.amazon.com/gp/prime/ref=footer_prime>, accessed September 2015. Lloyd C Harris, ‘Market orientation and performance: Objective and subjective evidence from UK companies’, Journal of Management Studies, 38(1), 2001, pp. 17–43. For more discussions on customer equity, see Roland T Rust, Valerie A Zeithaml & Katherine N Lemon, Driving Customer Equity, Free Press: New York, NY, 2000; Roland T Rust, Katherine N Lemon & Valerie A Zeithaml, ‘Return on marketing: Using customer equity to focus marketing strategy’, Journal of Marketing, January 2004, pp. 109–27; Christian Gronroos & Pekka Helle, ‘Return on relationships: Conceptual understanding and measurement of mutual gains from relational business engagements’, Journal of Business & Industrial Marketing, 27(5), 2012, pp. 344–59; and Peter C Verhoef & Katherine N Lemon, ‘Successful customer value management: Key lessons and emerging trends’, European Management Journal, February 2013, p. 1. Based on Werner Reinartz & V Kumar, ‘The mismanagement of customer loyalty’, Harvard Business Review, July 2002, pp. 86–94. Also see Chris Lema, ‘Not all customers are equal: Butterflies & barnacles’, 18 April 2013, <http://chrislema.com/ not-all-customers-are-equal-butterflies-barnacles/>; Jill Avery, Susan Fournier & John Wittenbraker, ‘Unlock the mysteries of your customer relationships’, Harvard Business Review, July–August 2014, pp. 72–81; and ‘Telling customers “You’re fired!”’, SalesAndMarketing.com, September/October 2014, p. 8. See ‘Internet usage statistics’, Internet World Stats, <www.internetworldstats. com/stats.htm>, accessed April 2016; and ‘Mobile technology fact sheet’, <www. pewinternet.org/fact-sheets/mobile-technology-fact-sheet/>, accessed April 2016. Campbell Simpson, ‘Australians are switching their TV watching to tablets and smartphones’, Gizmodo, <gizmodo.com.au/2014/07/australians-are-switching-their-tvwatching-to-tablets-and-smartphones/>, accessed 5 April 2016; and Marla Schimke, ‘Mobile as marketing’s savior’, Adweek, 15 December 2014, p. 19. Chris Gayomali, ‘Brands are wasting their time and money on Facebook and Twitter, report says’, Fast Company,19 November 2014, <www.fastcompany. com/3038801>; ‘Greatness awaits: Sony PlayStation PS4 launch’, Empowered, <http:// groundswelldiscussion.com/groundswell/awards/detail.php?id=1174>, accessed April 2016; Roger Katz, ‘2015 will be the year of the brand community – Here’s why’, ClickZ, 23 January 2015, <www.clickz.com/clickz/column/2391666/2015-will-be-the-yearof-the-brand-community-here-s-why>; and <http://greatnessawaits.playstation.com/ en-us/>, accessed April 2016. See Stuart Feil, ‘How to win friends and influence people’, Adweek, 12 September 2013, pp. S1–S7; and Salesforce.com, ‘Just published: 2015 state of marketing report’, 13 January 2015, <http://blogs.salesforce.com/company/2015/01/2015-state-ofmarketing.html>, accessed 5 April 2016. 35 27 See Calla Cofield, ‘Social media: NASA’s not so secret weapon for the Orion test flight’, Space, 3 December 2014, <www.space.com/27912-nasa-orion-spacecraft-socialmedia-blitz.html>; Laura Nichols, ‘NASA soars on social media with Orion spacecraft’, PRWeek, 18 December 2015, <www.prweek.com/article/1327011>; ‘By the letters EFT: Sesame Street muppets count down to NASA launch’, Collect Space, 24 November 2014, <www.collectspace.com/news/news-112514a-orion-eft1-muppets-countdown. html>; and <www.nasa.gov>, accessed April 2016. 28 Michael Applebaum, ‘Mobile magnetism’, Adweek, 25 June 2012, pp. S1–S9; and Bill Briggs, ‘M-commerce is saturating the globe’, Internet Retailer, 20 February 2014, <www.internetretailer.com/2014/02/20/m-commerce-saturating-globe>. 29 ‘Australians get mobile’, ACMA, 9 June 2015, <acma.gov.au/theACMA/engage-blogs/ engage-blogs/Research-snapshots/Australians-get-mobile>. 30 See Ajay K Kohli & Bernard J Jaworski, ‘Market orientation: The construct, research propositions and managerial implications’, Journal of Marketing, 54, April 1990, pp. 1–18; and John C Narver & Stanley F Slater, ‘The effect of a market orientation on business profitability’, Journal of Marketing, 54, October 1990, pp. 20–35. 31 Tim Ambler & Flora Kokkinaki, ‘Measure of marketing success’, Journal of Marketing Management, 13(7), 1997, pp. 665–79. 32 Marcin Pont & Robin N Shaw, ‘Measuring marketing performance: A critique of empirical literature’, in R Kennedy (ed.), Proceedings of the Australian and New Zealand Marketing Academy Conference (ANZMAC), Adelaide, 2003, pp. 2064–73. 33 John C Narver & Stanley F Slater, ‘The effect of a market orientation on business profitability’, Journal of Marketing, 54, October 1990, pp. 20–35; and Ajay K Kohli & Bernard J Jaworski, ‘Market orientation: The construct, research propositions and managerial implications’, Journal of Marketing, 54, April 1990, pp. 1–18. 34 Lloyd C Harris, ‘Market orientation and performance: Objective and subjective evidence from UK companies’, Journal of Management Studies, 38(1), 2001, pp. 17–43. 35 Paul D Ellis, ‘Market orientation and performance: A meta-analysis and cross-national comparisons’, Journal of Management Studies, 43(5), 2006, pp. 1089–1107. 36 For other examples, and for a good review of not-for-profit marketing, see Philip Kotler & Alan R Andreasen, Strategic Marketing for Nonprofit Organizations, Prentice Hall: Englewood Cliffs, NJ, 1991; Cyndee Miller, ‘Churches turn to research for help in saving new souls’, Marketing News, 11 April 1994, pp. 1, 2; Philip Kotler & Karen Fox, Strategic Marketing for Educational Institutions, Prentice Hall: Englewood Cliffs, NJ, 1985; Bradley G Morrison & Julie Gordon Dalgleish, Waiting in the Wings: A Larger Audience for the Arts and How to Develop It, ACA Books: New York, NY, 1987; Norman Shawchuck, Philip Kotler, Bruce Wren & Gustave Rath, Marketing for Congregations: Choosing to Serve People More Effectively, Abingdon Press: Nashville, TN, 1993. 37 See Tom Lowry, ‘The game’s the thing at MTV networks’, BusinessWeek, 18 February 2008, p. 51. Additional information from annual reports and other information found at <www.mcdonalds.com> and <www.statista.com>, accessed April 2016. 38 For more on strategic alliances, see Jordan D Lewis, Partnerships for Profit: Structuring and Managing Strategic Alliances, Free Press: New York, NY, 1990; Peter Lorange & Johan Roos, Strategic Alliances: Formation, Implementation, and Evolution, Blackwell Publishers: Cambridge, MA, 1992; and Frederick E Webster, Jr, ‘The changing role of marketing in the corporation’, Journal of Marketing, October 1992, pp. 1–17. 39 For more on Tesla, see <www.teslamotors.com/en_AU>, accessed April 2016. 40 For more on the Rio Earth Summit 1992, see <publications.gc.ca/Collection-R/LoPBdP/ BP/bp317-e.htm>, accessed April 2016. 41 For more on the Rio Earth Summit in 2012, see <sustainabledevelopment.un.org/rio20>, accessed April 2016. For further developments, see ‘Sustainable development knowledge platform’, <sustainabledevelopment.un.org>, accessed April 2016. 42 See <www.benjerry.com/values>, <www.benandjerrysfoundation.org> and <www. unilever.com/brands-in-action/detail/ben-and-jerrys/291995>, accessed September 2015. 43 See Nat Ives, ‘Digital subs rising, The Economist unbundles tablet editions from print’, AdAge, 30 November 2012. For more on subscriptions, see <https://subscriptions. economist.com>, accessed April 2016. 44 Transport for NSW, Customer Satisfaction Index November 2015, NSW Government, <transport.nsw.gov.au/sites/default/files/b2b/publications/customer-satisfaction-indexnov-2015.pdf>, accessed April 2016. 45 For details of the Australian Privacy Act 2001 (Cth), see <www.privacy.gov.au>. See <www.acma.gov.au/webwr/consumer_info/spam/spam_overview_for%20_business. pdf> for an overview of the Spam Act 2003 (Cth). See <www.privacy.gov.au/privacy_ rights/donotcall/index.html> for an overview of the Do Not Call Register Act 2006 (Cth). Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships In Chapter 1, we explored the marketing process by which marketing organisations create value for customers in order to capture value from them in return. In this leg of the journey, we dig deeper into steps 2 and 3 of the marketing process – designing customer-driven marketing strategies and constructing marketing programs. First, we look at the organisation’s overall strategic planning, which guides marketing strategy and planning. Next, we discuss how, guided by the strategic plan, marketers partner closely with others inside and outside the firm to engage customers and create value for them. We then examine marketing strategy and planning – how marketers choose target markets, position their market offerings, develop a marketing mix and manage their marketing programs. Finally, we look at the important step of measuring and managing marketing return on investment (marketing ROI). For a visual representation of the chapter, please see the concept map on the following page. Learning Objectives Learning Objective 1 Explain company-wide strategic planning and its four steps. Company-wide strategic planning: Defining marketing’s role pp. 38–41 Learning Objective 2 Discuss how to design business portfolios and develop growth strategies. Designing the business portfolio pp. 41–45 Learning Objective 3 Explain marketing’s role in strategic planning and how marketing works with its partners to create and deliver customer value. Planning marketing: Partnering to build customer relationships pp. 45–47 Learning Objective 4 Describe the elements of a customer value-driven marketing strategy and mix, and the forces that influence it. Marketing strategy and the marketing mix pp. 47–51 Learning Objective 5 List the marketing management functions, including the elements of a marketing plan, and discuss the importance of measuring and managing return on marketing investment. Managing the marketing effort pp. 51–56 Measuring and managing return on marketing investment pp. 56–58 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships CORPORATE LEVEL LO 1 Setting company objectives and goals Planning marketing and other functional strategies Designing the business portfolio Product/market expansion grid Growth-share matrix Discuss how to design business portfolios and develop growth strategies. (pp. 41–45) ANALYSE THE BUSINESS PORTFOLIO (developing strategies for growth and downsizing) s arie i d e erm nt i Ma rke tin g Ma an rke al ce Pri Peop le P la c e m e n t lo gis ti c s pp rs Ph v e rk M a le m p im s n f e r e nti a ti o n li c mo et ro in g l D if cess Pro Pro rk M a ont c Su li e ti o PROFITABLE CUSTOMER RELATIONSHIPS Targeting Product mentation Seg LO 4 Describe the elements of a customer value-driven marketing strategy and mix, and the forces that influence it. (pp. 47–51) M pla arke n g tin g nin g tin is ys rs ito et LO 3 Explain marketing’s role in strategic planning and how marketing works with its partners to create and deliver customer value. (pp. 45–47) Co mp y id s i c a l en ce e en tin g ta tio n LO 2 Defining the company mission ion Posit ing Explain company-wide strategic planning and its four steps. (pp. 38–41) BUSINESS UNIT Pu b LO 5 EVALUATING RETURN ON MARKETING INVESTMENTS List the marketing management functions, including the elements of a marketing plan, and discuss the importance of measuring and managing return on marketing investment. (pp. 51–58) Cost of marketing investments Marketing investments Return on marketing investment Marketing returns Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 37 38 Part 1 Defining marketing and the marketing process Company-wide strategic planning: Defining marketing’s role (pp. 38–41) strategic planning The process of developing and maintaining a strategic fit between the organisation’s goals and capabilities and its changing marketing opportunities. Each marketing organisation must find the game plan for long-run survival and growth that makes the most sense given its specific situation, opportunities, objectives and resources. This is the focus of strategic planning – the process of developing and maintaining a strategic fit between the organisation’s goals and capabilities and its changing marketing opportunities. Strategic planning sets the stage for the rest of the planning in the firm. Companies usually prepare annual plans, long-range plans and strategic plans. The annual and long-range plans deal with the company’s current businesses and how to keep them going. In contrast, the strategic plan involves adapting the organisation to take advantage of opportunities in its constantly changing environment. At the corporate level, the organisation starts the strategic planning process by defining its overall purpose and mission (see Figure 2.1). This mission is then turned into detailed supporting objectives that guide the whole organisation. Next, headquarters decides what portfolio of businesses and products is best for the company and how much support to give each one. In turn, each business and product develops detailed marketing and other departmental plans that support the company-wide plan. Thus, marketing planning occurs at the business-unit, product and market function levels. It supports company strategic planning with more detailed plans for specific marketing opportunities. Defining a market-oriented mission mission statement A statement of the organisation’s purpose – what it wants to accomplish in the larger environment. An organisation exists to accomplish something, and this purpose should be clearly stated. Forging a sound mission begins with the following questions: What is our business? Who is the customer? What do consumers value? What should our business be? These simple-sounding questions are among the most difficult the company will ever have to answer. Successful companies continuously raise these questions and answer them carefully and completely. Many organisations develop formal mission statements that answer these questions. A mission statement is a statement of the organisation’s purpose – what it wants to accomplish in the larger environment. A clear mission statement acts as an ‘invisible hand’ that guides people in the organisation. Some companies define their missions myopically in product or technology terms (e.g. ‘We make and sell furniture’ or ‘We are a chemical-processing firm’). But mission statements should be market-oriented and defined in terms of satisfying basic customer needs. Products and technologies eventually become outdated, but basic market needs may last forever. For example, social scrapbooking site Pinterest does not define itself as just an online place to post pictures. Its mission is to give people a social media platform for BUSINESS UNIT, PRODUCT AND MARKET LEVEL CORPORATE LEVEL Defining the company mission Setting company objectives and goals Designing the business portfolio Planning marketing and other functional strategies Figure 2.1 Steps in strategic planning Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships 39 Table 2.1 Market-oriented business definitions Organisation Product-oriented definition Market-oriented definition Amazon.com We sell books, videos, CDs, consumer electronics and other products online. To be Earth’s most customer-centric company for four primary customer sets: consumers, sellers, enterprises and content creators. BMW We sell motor vehicles and motorcycles. To become the world’s leading provider of premium products and premium services for individual mobility. Facebook We are an online social network. We connect people around the world and help them share important moments in their lives. eBay We enable online auctions and selling. We provide a global marketplace where practically anyone can trade practically anything, enabling economic opportunity around the world. NASA We explore outer space. We reach for new heights and reveal the unknown so that what we do and learn will benefit all humankind. Revlon We make cosmetics. We sell lifestyle and self-expression; success and status; memories, hopes and dreams. Village ­Roadshow We distribute and show movies, and run theme parks. To build a world-class portfolio of entertainment and media assets in order to generate sound returns, a sustainable competitive advantage and enduring value for all stakeholders. Virgin Atlantic We fly people around the world. To embrace the human spirit and let it fly. Wesfarmers We are one of Australia’s largest listed companies with diverse business operations. To deliver ‘a satisfactory return to shareholders’. (Wesfarmers adheres to four core values: integrity; openness; accountability; and boldness.) Sources: See <www.virgin-atlantic.com>, accessed April 2016; <pages.ebay.com/vero/intro>, accessed April 2016; <examplesof.com/mission-statements>, accessed April 2016; <villageroadshow.com.au>, accessed April 2016; <strategicmanagementinsight.com/mission-statements/amazon-missionstatement.html>, accessed April 2016. collecting, organising and sharing things they love.1 Likewise, World Vision’s mission is not just to provide aid, but rather ‘to be a Christian organisation that engages people to eliminate poverty and its causes’.2 Table 2.1 provides several other examples of product-oriented versus market-oriented business definitions.3 Mission statements should be meaningful and specific, yet motivating. They should emphasise the organisation’s strengths in the marketplace. Too often, mission statements are written for public relations purposes and lack specific, workable guidelines. Finally, a marketing organisation’s mission should not be stated as making more sales or profits – profits are only a reward for creating value for customers. Instead, the mission should focus on customers and the customer experience the marketing organisation seeks to create. Thus, the mission of McDonald’s is not ‘to be the world’s best and most profitable quick-service restaurant’; rather, it is ‘to be our customers’ favourite place and way to eat and drink’. If McDonald’s accomplishes this customer-focused mission, profits will follow. Marketing in action 2.1 illustrates how BMW has employed strategic planning in the process of reinventing itself from a German aero engine manufacturer into an internationally recognised provider of premium automobile and motorcycle products and services. Setting company objectives and goals The marketing organisation needs to turn its mission into detailed supporting objectives for each level of management. Each manager should have objectives and be responsible for reaching them. For example, many companies are structured with a number of strategic business units (SBUs) – the key businesses that make up the company – that manufacture and market products in Australia, New Zealand and internationally. The corporate strategy of companies in fast-moving consumer goods (FMCG) tends to focus on the development and maintenance of strengths in technology and placement logistics, and on deepening customer relationships. strategic business units (SBUs) The key businesses that make up a company. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 40 Part 1 Defining marketing and the marketing process Marketing in Action 2.1 Strategic planning involves having the right people With the demise of the local motor-vehicle manufacturing industry in Australia, Herbert Quandt. Much has been written concerning how the Quandt family those who might have purchased a General Motors Holden Commodore, Ford initially acquired its wealth during World War II but, for the purpose of this Falcon or Toyota Aurion six-cylinder sedan or estate (station wagon) were faced discussion, we will put that part of history to the side, and turn instead to 1961 with a quandary. While these brands continued as imports, and their product and the release of the 1500 model at the Frankfurt Motor Show. lineups at dealerships seemed to grow rather than contract, many people turned Once again, the kidney grille was used to set BMW and its cars apart from to European imports made by large global companies, such as Audi, BMW, the pack. New plant and equipment came to the fore as motor vehicle production Mercedes-Benz and Volkswagen. Those wanting the ubiquitous ute (utility) either increased in the 1960s. could choose a Volkswagen Amarok or otherwise needed to think in terms of one In 1972, BMW established its motorsport division with a separate subsidiary of the major Japanese or Chinese brands. By 2015, even the Australian prime – BMW Motorsport GmbH. The company went on to build new administrative minister was being ferried about in a BMW 7 Series and an armoured BMW X5 buildings in Munich – four towers now known as ‘the four-cylinder building’ – (Commonwealth Car Fleet cars (COMCAR)) – no Holden Caprice vehicles were with the BMW Museum housed next door. used after 2014. The New Zealand prime minister and ministers of the Crown had already switched to BMW 7 Series sedans. By 1973, the company’s executive vice president of sales, and a member of the board of management, was the automotive legend Bob Lutz, and he This introduction provides us with a segue into a more detailed look at BMW is credited with many developments at BMW that helped lift the brand’s and its strategic planning. Bayerische Motoren Werke AG (BMW) can trace its profile. A former US Marine Corps pilot, Lutz was a strong character who had history back to 7 March 1916 and the manufacture of aero engines in Germany. honed his skills in executive positions at Ford Motor Company, the former The BMW emblem began to be used in 1917 and featured the Bavarian state Chrysler Corporation and General Motors. Some of these developments colours. The roundel has changed in style but not substance over the intervening include retaining the kidney grilles that are used to this day; modernising years. It was not until 1918 that the letters ‘BMW’ were included in the company the motor vehicle designs (even using General Motors staff behind the name, when BMW AG was formed (AG indicates a public company, whereas scenes in the clay-modelling process on the 3 Series); helping in the GmbH indicates a private limited company). development of BMW motorcycle strategies; setting up a company-owned The company began manufacturing motor vehicles in 1928 by purchasing sales division and setting up separate subsidiary companies to sell BMWs another company. However, while it made various models under licence, in many countries – particularly in the United States; bringing the design it was not until 1932 that the company manufactured cars using its own of BMWs in-house (from Bertone), starting with the 3 Series; helping to designs. In 1933, BMW introduced the 303, the first model to use the tailor the positioning statement ‘The Ultimate Driving Machine’, which the distinctive kidney grille. The company announced its first complete motorcycle company still uses today; and turning the company away from its ‘crazy, in 1932 – BMW Motorrad model R 32 – with its boxer engine. It continues illogical naming mishmash’ in favour of the 3-5-7 naming strategy, which to build motorcycles with longitudinally positioned cylinders and drive shaft the company has since developed into 1-2-3-4-5-6-7-8. Bob Lutz achieved to this day. all this in just three years, after which he left BMW as he could not see From 1933, aircraft construction received German government support, and this aided BMW AG. During World War II, BMW almost exclusively built aircraft engines for the German Air Force and, regrettably, used forced labour in doing so. The company’s plants were dismantled at the end of the war and so too were its machines, which were then stripped and shipped to other countries as war reparations. The first motorcycle to exit a BMW factory after the war was the R 24, which was manufactured from 1945 to 1948. The first post-war motor car was the 501, which used a modified version of the six-cylinder engine used in the 326 before the war. The motorcycle was a success, but the car was not. Daimler-Benz attempted to acquire BMW in 1959. However, small shareholders and the workforce rejected the offer to restructure the business. The government provided some financial assistance, and BMW was restructured under the majority shareholding and management of wealthy industrialist, himself achieving the position of BMW Chairman. Lutz retired in 2010 as Vice-Chairman of General Motors. It was Bob Lutz’s view that, ‘In the ’50s, ’60s, ’70s, ’80s and ’90s, it [BMW Group] was product-driven, building an impenetrable image of excellence. They have managed the acquired reputation.’ He feared the company was not building on it. He went on to add that ‘they are doing a good job managing it, because I have not heard anyone say they are displeased with their BMW’. As BMW moves into its second century of building cars, Lutz praises the brand for staying true: ‘They do build excellent cars – no question about it. They have very carefully nurtured their brand. They never strayed off the course of being a driver’s car. They have up to now been very true to their ethic and never tried to please everyone.’4 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships 41 In 1994, BMW AG purchased the UK’s Rover Group, taking on the manufacturing and marketing responsibility for their iconic brands – Land Rover, Rover, MG, Triumph and Mini. They sold off all but the Mini as BMW recognised it could not successfully integrate the BMW and Rover Groups. The company acquired Rolls-Royce in 1998, which it owns to this day as it focuses solely on the premium segment of the international automobile market with the three brands Courtesy BMW Group – BMW, Mini and Rolls-Royce – as well as motorcycle brand, BMW Motorrad. In 2007, BMW Group adopted the Strategy Number ONE with its four pillars: ‘Growth’, ‘Shaping the future’, ‘Profitability’ and ‘Access to technology and customers’. It aligns the BMW Group with two targets: to be profitable and to enhance long-term value in times of change. The mission statement up to year 2020 is clearly defined: to become the world’s leading provider of premium products and premium services for individual mobility.5 In 1975, BMW Group completely acquired the South African BMW importer. This became the first production facility for BMW motor cars outside Germany and has produced various models, including some variants of the 3 Series from 1984. BMW AG has gone on to develop many manufacturing operations, including in the United States, and launch many motorcycle and motor car models, which it sells globally. It does so because of its people. For example, it was the first Source: Much of the historical information in this vignette was sourced from <bmwgroup. com/en/company/history.html>, accessed April 2016; used with the permission of BMW AG. Questions ❶ Describe the advantages of strategic planning, and discuss how it might be employed by a company with which you are familiar. automobile manufacturer to establish a research and innovation centre that ❷ What does BMW’s brand image mean to you? relies on the teamwork of some 7000 scientists, engineers, designers, managers ❸ Are you familiar with any products that compete on the basis of simplicity, and technicians. The pure electric i3 and hybrid i8 models are the result of this rather than on the basis of how fully featured the products are? Is this a case collaboration, with many more developments to follow. of least-cost positioning versus market differentiation? Explain your answer. This broad mission leads to a hierarchy of objectives, including business objectives and marketing objectives. Companies have the overall objective of building profitable customer relationships by adding value for their stakeholders. They do this by investing heavily in research and development (R&D). R&D is expensive and requires improved profits to plough back into research programs. So, improving profits becomes another major objective for the companies. Profits can be improved by increasing sales or by reducing costs. Sales can be increased by improving the companies’ share of domestic and international markets. These goals then become the companies’ current marketing objectives. Marketing strategies and programs must be developed to support these marketing objectives. To increase customer engagement, sales and market share, a company’s SBUs might increase their products’ availability and promotion in existing markets and expand business via acquisitions. Each SBU develops broad marketing strategies that must then be defined in greater detail. For example, increasing the product’s promotion may require more salespeople, advertising and public relations efforts; if so, both requirements will need to be spelled out. In this way, the organisation’s mission is translated into a set of short-term objectives for the current period. Designing the business portfolio (pp. 41–45) Guided by the marketing organisation’s mission statement and objectives, management now must plan its business portfolio – this is the collection of businesses and products that make up the company. The best business portfolio is the one that best fits the company’s strengths and weaknesses to opportunities in the environment. Business portfolio planning involves two steps. First, the company business portfolio The collection of businesses and products that make up the company. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 42 Part 1 Defining marketing and the marketing process must analyse its current business portfolio and decide which businesses should receive more, less or no investment. Second, the company must shape the future portfolio by developing strategies for growth and downsizing. When we examine Goodman Fielder-branded products, we see that they are icons in some of the largest grocery categories and include Meadow Lea, Praise, White Wings, Pampas, Mighty Soft, Helga’s, Wonder White, Vogel’s (under licence), Meadow Fresh, Edmonds and Irvines. The company also supplies edible fats and oils to Australian and New Zealand food manufacturers and wholesalers, and is the largest supplier of flour to New Zealand food industry customers. Thus, Goodman Fielder seeks to add value by leveraging off its strength in the technology used to manufacture and distribute products by a portfolio of SBUs. portfolio analysis The process by which management evaluates the products and businesses that make up the company. Analysing the current business portfolio The major activity in strategic planning is business portfolio analysis, whereby management evaluates the products and businesses that make up the company. The company will want to put strong resources into its more profitable businesses and scale down or drop its weaker ones. Management’s first step is to identify the strategic business units that make up the company. An SBU can be a company division, a product line within a division or, sometimes, a single product or brand. The company next assesses the attractiveness of its various SBUs and decides how much support each deserves. When designing a business portfolio, it is a good idea to add and support products and businesses that fit closely with the organisation’s core philosophy and competencies. The purpose of strategic planning is to find ways in which the company can best use its strengths to take advantage of attractive opportunities in the environment. So, most standard portfolio analysis methods evaluate SBUs on two important dimensions – the attractiveness of the SBU’s market or industry, and the strength of the SBU’s position in that market or industry. The best-known portfolio-planning method was developed by the Boston Consulting Group, a leading management consulting firm.6 The Boston Consulting Group approach growth-share matrix A portfolio-planning method that evaluates a company’s strategic business units (SBUs) in terms of its market growth rate and relative market share. SBUs are classified as stars, cash cows, question marks or dogs. Using the now-classic Boston Consulting Group (BCG) approach, a company classifies all its SBUs according to the growth-share matrix, as shown in Figure 2.2. On the vertical axis, market growth rate provides a measure of market attractiveness. On the horizontal axis, relative market share serves as a measure of company strength in the market. The growth-share matrix defines four types of SBUs: • Stars. Stars are high-growth, high-share businesses or products. They often need heavy investments to finance their rapid growth. Eventually, their growth will slow down, and they will turn into cash cows. • Cash cows. Cash cows are low-growth, high-share businesses or products. These established and successful SBUs need less investment to hold their market share. Thus, they produce a lot of cash that the company uses to pay its bills and to support other SBUs that need investment. • Question marks. Question marks are low-share business units in high-growth markets. They require a lot of cash to hold their share, let alone increase it. Management has to think hard about which question marks it should try to build into stars and which should be phased out. • Dogs. Dogs are low-growth, low-share businesses and products. They may generate enough cash to maintain themselves but do not promise to be large sources of cash. The 10 yellow circles in the growth-share matrix (refer Figure 2.2) represent a company’s 10 current SBUs. The company has two stars, two cash cows, three question marks and three dogs. The areas of the circles are proportional to the SBU’s dollar sales. This company is in fair shape, although not in good shape. It wants to invest in the more-promising question marks to make them stars and to maintain the stars so Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Question mark Cash cow Dog High Low High Star 43 Low MARKET GROWTH RATE Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships RELATIVE MARKET SHARE Figure 2.2 The BCG growth-share matrix that they will become cash cows as their markets mature. Fortunately, the company has two good-sized cash cows. Income from these cash cows will help finance the company’s question marks, stars and dogs. The company should take some decisive action concerning its dogs and its question marks. Once it has classified its SBUs, the company must determine what role each will play in the future. One of four strategies can be pursued for each SBU. The company can (1) invest more in the business unit in order to build its share. Or it can (2) invest just enough to hold the SBU’s share at the current level. It can (3) harvest the SBU, milking its short-term cashflow, regardless of the long-term effect. Finally, the company can (4) divest the SBU by selling it or phasing it out and using the resources elsewhere. As time passes, SBUs change their positions in the growth-share matrix. Many SBUs start out as question marks and move into the star category if they succeed. They later become cash cows as market growth falls, then finally die off or turn into dogs towards the end of their life cycle. The company needs to add new products and units continuously so that some of them will become stars and, eventually, cash cows that will help finance other SBUs. Problems with matrix approaches While the BCG and other formal methods revolutionised strategic planning, such centralised approaches have limitations: they can be difficult, time consuming and costly to implement. Management may find it difficult to define SBUs and measure market share and growth. In addition, these approaches focus on classifying current businesses, but provide little advice for future planning. Because of such problems, many companies have dropped formal matrix methods in favour of more customised approaches that better suit their specific situations. Moreover, unlike former strategic planning efforts that rested mostly in the hands of senior managers at company headquarters, today’s strategic planning has Managing the business portfolio: Most people think of Disney as theme parks and wholesome family entertainment. However, over the past two decades, it has become a sprawling collection of media and entertainment businesses that requires big doses of the famed ‘Disney Magic’ to manage. Martin Beddall/Alamy Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 44 Part 1 Defining marketing and the marketing process product/market expansion grid A portfolio-planning tool for identifying company growth opportunities through market penetration, market development, product development or diversification. market penetration Company growth by increasing sales of current products to current market segments without changing the product. market development Company growth by identifying and developing new market segments for current company products. been decentralised. Increasingly, companies are placing responsibility for strategic planning in the hands of cross-functional teams of divisional managers who are close to their markets. Let us consider The Walt Disney Company. Most people think of Disney as theme parks and wholesome family entertainment. But, in the mid-1980s, Disney set up a powerful, centralised strategic planning group to guide the company’s direction and growth. Over the next two decades, the strategic planning group turned The Walt Disney Company into a huge and diverse collection of media and entertainment businesses. The sprawling Disney grew to include everything from theme resorts and film studios (Walt Disney Pictures, Touchstone Pictures, Hollywood Pictures, Pixar Animation and Marvel Studios) to media networks (ABC plus Disney Channel, ESPN, A&E, History Channel and half a dozen others) to consumer products (from apparel and toys to interactive games) and a cruise line. The newly transformed company proved difficult to manage and performed unevenly. To improve company performance, Disney disbanded the centralised strategic planning unit, decentralising its functions to Disney division managers. For example, although carefully coordinated with other Disney units, in many respects ESPN runs autonomously. As a result of such decisions, The Walt Disney Company retains its position at the head of the world’s media conglomerates. And even through the recently uneven economy, Disney’s sound strategic management of its broad mix of businesses, plus a touch of the famed ‘Disney magic’, has helped it fare better than rival media companies.7 Developing strategies for growth and downsizing Beyond evaluating current businesses, designing the business portfolio involves finding businesses and products the company should consider in the future. Companies need growth if they are to compete more effectively, satisfy their stakeholders and attract top talent. At the same time, an organisation must be careful not to make growth itself an objective. The company’s objective must be to manage ‘profitable growth’. Marketing has the main responsibility for achieving profitable growth for the company. Marketing needs to identify, evaluate and select market opportunities and lay down strategies for capturing them. One useful device for identifying growth opportunities is the product/market expansion grid, shown in Figure 2.3.8 To see how the product/market expansion grid works, let us apply it to fashion house Sass & Bide. As a first step, the company might consider whether it can achieve deeper market penetration – that is, by making more sales without changing its original product lines. It can spur growth through marketing mix improvements – adjustments to its product design, advertising, pricing and distribution efforts. For example, Sass & Bide might offer an ever-increasing range of styles and colours in its original apparel lines. Second, Sass & Bide might consider possibilities for market development – identifying and developing new markets for its current products. Sass & Bide could review new demographic markets. For instance, the company continues to expand internationally, bringing its products to more young women in Japan and Asia and moving further beyond its Australasian and UK markets using its e-Boutique and stockists. EXISTING PRODUCTS NEW PRODUCTS EXISTING MARKETS Market penetration Product development NEW MARKETS Market development Diversification Figure 2.3 The product/market expansion grid Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships Third, Sass & Bide could consider product development – offering modified or new products to current markets. For example, Sass & Bide might add vie denims to its current range of vie leggings and T-shirts. Finally, Sass & Bide might consider diversification – starting up or buying businesses outside of its current products and markets. For example, it could move into performance leisurewear or begin making and marketing Sass & Bide shoes. When diversifying, companies must be careful not to overextend their brands’ positioning. Companies must develop strategies not only for growing their business portfolios, but also for downsizing them. There are many reasons that a firm might want to abandon products or markets. The firm may have grown too fast or entered areas where it lacks experience. This can occur when a firm enters too many international markets without the appropriate research, or when it introduces new products that do not offer superior customer value. The market environment might change, making some of the company’s products or markets less profitable. For example, in difficult economic times, many firms prune out weaker, less-profitable products and markets in order to focus their more limited resources on the strongest ones. Finally, some products or business units simply age and die. When a firm finds brands or businesses that are unprofitable or that no longer fit its overall strategy, it must carefully prune, harvest or divest them. Weak businesses usually require a disproportionate amount of management attention. Managers should focus on promising growth opportunities, not fritter away energy trying to salvage fading ones. 45 product development Company growth by offering modified or new products to current market segments diversification Company growth through starting up or acquiring businesses outside the company’s current products and markets. Planning marketing: Partnering to build customer relationships (pp. 45–47) The company’s strategic plan establishes what kinds of businesses the company will operate and its objectives for each. Then, within each business unit, more detailed planning takes place. The main functional departments in each unit – marketing, finance, accounting, purchasing, operations, information systems, human resources and others – must work together to accomplish strategic objectives. Marketing plays a key role in the company’s strategic planning in several ways. First, it provides a guiding philosophy – the marketing concept – which suggests that company strategy should revolve around building profitable relationships with important consumer groups. Second, marketing provides inputs to strategic planners by helping to identify attractive market opportunities and by assessing the firm’s potential to take advantage of them. Finally, within individual business units, marketing designs strategies for reaching the unit’s objectives. Once the unit’s objectives are set, marketing’s task is to help carry them out profitably. Customer engagement and value are the key ingredients in the marketer’s formula for success. However, as we noted in Chapter 1, marketers alone cannot produce superior value for customers. Although marketing plays a leading role, it can be only a partner in attracting, keeping and growing customers. In addition to customer relationship management, marketers must also practise partner relationship management. They must work closely with partners in other company departments to form an effective internal value chain that serves the customer. Moreover, they must partner effectively with other companies in the marketing system to form a competitively superior external value delivery network. We now take a closer look at the concepts of a company value chain and a value delivery network. Partnering with other company departments Each company department can be thought of as a link in the company’s internal value chain.9 That is, each department carries out value-creating activities to design, produce, market, deliver and support the firm’s products. The organisation’s success depends not only on how well each department performs its work, but also on how well the various departments coordinate their activities. value chain The series of internal departments that carry out value-creating activities to design, produce, market, deliver and support a firm’s products. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 46 Part 1 Defining marketing and the marketing process For example, the goal of major grocery and liquor retailers ALDI, Coles and Woolworths is to create customer value and satisfaction by providing shoppers with the products they want at the lowest possible prices. Marketers at these chains play an important role. They learn what customers need and ensure the stores’ shelves are stocked with the desired products at competitively low prices. They prepare advertising and merchandising programs and assist shoppers with customer service. Through these and other activities, the chain stores’ marketers help deliver value to customers. However, the marketing department needs help from the company’s other departments. For instance, Coles Supermarkets’ ability to offer the right products at low prices depends on the skill of its buyers and controllers in developing the needed suppliers and buying from them at low cost. Coles’ information technology (IT) department must provide fast and accurate information about which products are selling in each store. And its operations people must provide effective, low-cost merchandise handling. A company’s value chain is only as strong as its weakest link. Success depends on how well each department performs its work of adding customer value, and on how well the activities of various departments are coordinated. At Coles Supermarkets, if buyers cannot obtain the lowest prices from suppliers, or if operations cannot distribute merchandise at the lowest costs, then marketing cannot deliver on its promise of everyday low prices. Ideally, then, a company’s different functions should work in harmony to produce value for consumers. However, in practice, departmental relations are full of conflicts and misunderstandings. The marketing department takes the consumer’s point of view – but, when marketing tries to develop customer satisfaction, it can cause other departments to do a poorer job in their terms. Marketing department actions can increase purchasing costs, disrupt production schedules, increase inventories and create budget headaches. For example, if a loyalty program proves ineffective, this will impact on customer satisfaction and sales. Thus, the other departments may resist the marketing department’s efforts. Marketers must find ways to get all departments to ‘think consumer’ and to develop a smoothly functioning value chain. One marketing expert puts it this way: ‘True market orientation does not mean becoming marketing-driven; it means that the entire company obsesses over creating value for the customer and views itself as a bundle of processes that profitably define, create, communicate, and deliver value to its target customers . . . Everyone must do marketing regardless of function or department.’10 Thus, whether you are an accountant, operations manager, financial analyst, IT specialist or HR manager, you need to understand marketing and your role in creating customer value. Partnering with others in the marketing system value delivery network The network made up of the company, suppliers, distributors and, ultimately, customers who partner with each other to improve the performance of the entire system. In its quest to create customer value, the firm needs to look beyond its own internal value chain and into the value chains of its suppliers, distributors and, ultimately, its customers. Consider McDonald’s. People do not swarm to McDonald’s only because they love the chain’s hamburgers. Consumers flock to the McDonald’s system, not just to its food products. Throughout the world, McDonald’s’ finely tuned value delivery system delivers a high standard of QSCV – quality, service, cleanliness and value. McDonald’s is effective only to the extent that it successfully partners with its franchisees, suppliers and others to jointly create ‘our customers’ favourite place and way to eat’. More companies today are partnering with the other members of the supply chain – suppliers, distributors and, ultimately, customers – to improve the performance of the customer value delivery network. Increasingly in today’s marketplace, competition no longer takes place between individual competitors. Rather, it takes place between the entire value delivery networks created by these competitors. Thus, car maker Toyota’s performance against Holden and Ford depends on the quality of Toyota’s overall value delivery network compared to those of its competitors. Despite recalls of various models in recent times, Toyota and Honda have been renowned for making good cars. Toyota’s network provides very customersatisfying sales and service. This, on top of speed to market with innovative products – such as the Prius, and its new sports car, the 86, manufactured in partnership with Subaru – has led to Toyota’s global success. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships 47 Cooperation and competition: The Toyota 86 is a well-reviewed sports car made in conjunction with Subaru, which markets the BRZ. Bloomberg via Getty Images Linking the concepts Pause here for a moment to apply what you have read in the first part of this chapter. ● Why are we talking about company-wide strategic planning in a marketing book? What does strategic planning have to do with marketing? ● What are the BMW Group’s strategy and mission? What role does marketing play in helping BMW to accomplish its strategy and mission? ● What roles do other BMW Group’s departments play, and how can the company’s marketers partner with these departments to maximise overall customer value? What roles do BMW’s suppliers play? Marketing strategy and the marketing mix (pp. 47–51) The strategic plan defines the company’s overall mission and objectives. Marketing’s role and activities are shown in Figure 2.4, which summarises the main activities involved in managing a customer-driven marketing strategy and the marketing mix. Customers stand in the centre. The goal is to create value for customers and build profitable customer relationships. Next comes marketing strategy – the marketing logic by which the company hopes to create this customer value and achieve these profitable relationships. The company decides which customers it will serve (segmentation and targeting) and how (differentiation and positioning). It identifies the total market, then divides it into smaller segments, selects the most promising segments, and focuses on serving and satisfying the customers in these segments. Guided by marketing strategy, the company designs an integrated marketing mix made up of factors under its control – product, price, placement logistics, promotion, people, process and physical evidence. marketing strategy The marketing logic by which the company hopes to create customer value and achieve profitable customer relationships. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Part 1 Defining marketing and the marketing process s arie i d e erm t n i Ma an rke al Ma rke tin g Peop le rs ito et ce Pri M pla arke n g tin g nin g tin is ys Co mp P la c e m e n t lo gis ti c s Ph v e pp rs rk M a le m p im s n f e r e nti a ti o n y id s i c a l en ce e en tin g ta tio n ion Posit ing mo et ro in g l D if cess Pro Pro rk M a ont c Su li e ti o PROFITABLE CUSTOMER RELATIONSHIPS Targeting Product mentation Seg li c 48 Pu b Figure 2.4 Managing marketing strategies and the marketing mix To find the best marketing strategy and mix, the company engages in marketing analysis, planning, implementation and control. Through these activities, the company watches and adapts to the actors and forces in the marketing environment. We now look briefly at each activity. Then, in later chapters, we discuss each one in more depth. Customer value-driven marketing strategy market segmentation Analysing how a market is naturally broken into distinct groups of buyers who have different needs, characteristics or behaviours, and who might require tailored products or marketing programs. As we emphasise throughout Chapter 1, to succeed in today’s competitive marketplace, companies need to be customer-centred. They must win customers from competitors, then keep and grow them by delivering greater value. But before it can satisfy customers, a company must first understand their needs and wants. Thus, sound marketing requires careful customer analysis. Companies know they cannot profitably serve all consumers in a given market – at least not all consumers in the same way. There are too many different kinds of consumers with too many different kinds of needs. And most companies are in a position to serve some segments better than they can serve others. Thus, each company must divide up the total market, choose the best segments and design strategies for profitably serving chosen segments. This process involves market segmentation, market targeting, differentiation and positioning. Market segmentation The market consists of many types of customers, products and needs. The marketer has to determine which segments offer the best opportunities. Consumers can be grouped and served in various ways based on geographic, demographic, psychographic and behavioural factors. The process of analysing how a market is naturally broken into distinct groups of buyers who have different needs, characteristics or behaviours, and who might require tailored products or marketing programs, is called market segmentation. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships Every market has segments, but not all ways of segmenting a market are equally useful. For example, Panadol or Herron would gain little by distinguishing between low-income and high-income pain-reliever users if both respond the same way to marketing efforts for paracetamol analgesics. A market segment consists of consumers who respond in a similar way to a given set of marketing efforts. In the car market, for example, consumers who want the best-handling, high-performance car regardless of price make up one market segment. Consumers who care mainly about price and operating economy make up another segment. As became clear in Marketing in action 2.1, it would be difficult to make one car model that was the first choice of consumers in both market segments. Companies are wise to focus their efforts on meeting the distinct needs of individual market segments. 49 market segment A group of consumers who respond in a similar way to a given set of marketing efforts. Market targeting After a company has defined market segments, it can enter one or many of these segments. Market targeting involves evaluating each market segment’s attractiveness and selecting one or more segments to enter. A company should target segments in which it can profitably generate the greatest customer value and sustain it over time. A company with limited resources might decide to serve only one or a few special segments or ‘market niches’. Such ‘nichers’ specialise in serving customer segments that major competitors overlook or ignore. For example, Ferrari sells fewer than 100 of its four-seater, V8-powered Californias in Australia each year, but at very high prices – at an eye-opening $400 000-plus. Most nichers are not quite so exotic. Yakult, maker of a fermented milk drink containing a beneficial bacterium called Lactobacillus casei Shirota strain, has found its niche as the nation’s market leader of this type of acidophilus that helps get rid of unwanted bacteria in the body. And although Logitech is only a fraction of the size of giant Microsoft, through skilful niching it dominates the PC mouse market, with Microsoft as its runner-up. Alternatively, a company might choose to serve several related segments – perhaps those with different kinds of customers who have the same basic wants. Or a large company, such as Toyota, might decide to offer a complete range of products to serve all market segments. Most companies enter a new market by serving a single segment and, if this proves successful, they add more segments. For example, Nike started with innovative running shoes for serious runners. Large companies eventually seek full market coverage. Nike now makes and sells a broad range of sports products for just about anyone and everyone. It has different products designed to meet the special needs of each segment it serves. market targeting The process of evaluating each market segment’s attractiveness and selecting one or more segments to enter. Market differentiation and positioning Once a company has decided which market segments to enter, it must decide how it will differentiate its market offering for each targeted segment and what positions it wants to occupy in those segments. A product’s position is the place the product occupies relative to competitors’ products in consumers’ minds. Marketers want to develop unique market positions for their products. If a product is perceived to be exactly like others in the market, consumers would have no reason to buy it. Positioning is arranging for a product to occupy a clear, distinctive and desirable place in the minds of target consumers relative to competing products. As one positioning expert puts it, positioning is ‘why a shopper will pay a little more for your brand’.11 Thus, marketers plan positions that distinguish their products from competing brands and give them the greatest advantage in their target markets. Bunnings promises: ‘Lowest prices are just the beginning . . . ’; Kmart says it is: ‘Cutting the cost of living’; Telstra professes: ‘We strive to serve and know our customers better than anyone else’;12 whereas YouTube lets you ‘Broadcast Yourself’. You can ‘Think smarter, act faster’ with Berocca; and with GSK’s Nicabate aid to stop smoking, smokers are encouraged to ‘Pledge to quit’ and to join Facebook for more community support. While at Hungry Jack’s ‘Better Beef makes Better Burgers’, people at McDonald’s say, ‘I’m lovin’ it’. Such deceptively simple statements form the backbone of a product’s marketing strategy. positioning Arranging for a product to occupy a clear, distinctive and desirable place in the minds of target consumers relative to competing products. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 50 Part 1 Defining marketing and the marketing process differentiation Differentiating the company’s market offering from that offered by competitors, to create superior customer value. In positioning its product, a company first identifies possible customer value differences that provide competitive advantages upon which to build the position. The company can offer greater customer value either by charging lower prices than competitors or by offering more benefits to justify higher prices. But if the company promises greater value, it must then deliver that greater value. Thus, effective positioning begins with differentiation – differentiating the company’s market offering from that offered by competitors so that it gives consumers more value. Once the company has chosen a desired position, it must take strong steps to deliver and communicate that position to target consumers. The company’s entire marketing program should support the chosen positioning strategy. For example, BMW designs its entire integrated marketing campaign – from television and print commercials to its online marketing – around its ‘The Ultimate Driving Machine’ positioning. McDonald’s does this integration on a global basis. Developing an integrated marketing mix marketing mix The set of controllable tactical marketing tools – product, price, place, promotion, people, process and physical evidence – that the firm blends to produce the response it wants in the target market. After deciding on its overall marketing strategy, the company is ready to begin planning the details of the marketing mix, one of the main concepts in modern marketing. The marketing mix is the set of controllable, tactical marketing tools that the company blends to produce the response it wants in the target market. The marketing mix consists of everything the company can do to influence the demand for its product. The many possibilities can be collected into groups of variables known as ‘the extended marketing mix’, which we touched on in Figure 1.5 in Chapter 1: product, price, placement logistics, promotion, people, process and physical evidence. • Product means the combination of goods and services that the company offers to the target market. Thus, a Ford Focus consists of nuts and bolts, spark plugs, pistons, headlights and thousands of other parts. Ford Motor Company offers several Focus models and dozens of optional features, such as self-assist parking. The car comes fully serviced and with a comprehensive warranty that is as much a part of the product as the tailpipe. • Price is the amount of money customers must pay to obtain the product. Ford calculates suggested retail prices that its dealers might charge for each Focus. But Ford dealers rarely charge the full sticker price. Instead, they negotiate the price with each customer, offering discounts, trade-in allowances and credit terms. These actions adjust prices for the current competitive and economic situations and bring them into line with the buyer’s perception of the car’s value. • Placement logistics includes company activities that make the product available to target customers and end-consumers. Ford partners with a large body of independently owned dealerships that sell the company’s many different models. Ford selects its dealers carefully and supports them strongly. The dealers keep an inventory of Ford motor vehicles, demonstrate them to potential buyers, negotiate prices, close sales and service the cars after the sale. • Promotion means activities that communicate the merits of the product and persuade target customers to buy it. Ford spends millions each year on advertising in Australia and New Zealand to tell consumers about the company and its many products. Dealership salespeople assist potential buyers and persuade them that the Ford brand is the best car for them. Ford and its dealers offer special promotions – sales, cash rebates, low financing rates – as added purchase incentives. The subject of finance for motor vehicle purchases introduces the notion of financial services. As we discuss more fully in Chapter 7, services are intangible products. As such, they often require a variation in the marketing mix employed by service organisations. It is in this context that we briefly discuss three additional marketing mix variables. • People. Services are often people-based, such as when a service manager attends to a customer’s needs at a Ford service centre. Such service encounters can be highly variable. The variation may be because the organisation’s people lack motivation or have attitudinal issues, in which case the organisation needs to engage in internal marketing and perhaps provide additional training. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships 51 • Process. When Ford Focus owners take their car in for service, or when people check-in or -out of airlines, hotels and motels, the process can be a satisfying experience, or one that causes the customer to vow never to return. Worse still, the latter customers may tell others of their poor experience, thereby negating the positive effects of any brand advertising. Marketers need to be involved in designing and monitoring the processes involved in buying and servicing any type of product. • Physical evidence. Often, it is necessary to manage customer and potential customer expectations, commencing with an explanation of the criteria to use when comparing products. This also applies when buying any major product for the first time. For example, what criteria might young parents adopt in order to compare day-care centres for their young child? Clearly, one cannot ask a very young child if she or he liked the food provided or to provide feedback on other aspects of the daycare centre. Arguably, however, there are many criteria, ranging from the qualifications of the staff to the modernity of the centre, among others. The same young parents must also learn which are the relevant criteria upon which to compare brands when buying their first washing machine and many other such products. We might argue that physical evidence is an important aspect when buying other products, such as decay-prevention toothpaste. But when might we realistically say that a child’s tooth decay has been prevented? It might be a decade or more later when we have the physical evidence to hand, by which time either the product was successful or it is now too late to do anything but visit the dentist for a filling or two. An effective marketing program blends all of the marketing mix elements into an integrated marketing program designed to achieve the company’s marketing objectives by delivering value to consumers. The marketing mix constitutes the company’s tactical tool kit for establishing strong positioning in target markets. There is another concern, however, that is valid. It holds that the focus on marketing mix elements takes the seller’s view of the market, not the buyer’s view. From the buyer’s viewpoint, in this age of customer value and relationships, the various Ps might be better described in terms of Cs, such as these four: customer solution, customer cost, convenience and communication.13 Thus, whereas marketers see themselves as selling products, customers see themselves as buying value or solutions to their problems. And customers are interested in more than just the price; they are interested in the total costs of obtaining, using and disposing of a product. Customers want the product and service to be as conveniently available as possible. Finally, they want two-way communication. Marketers would do well to think through the four Cs first and then build the marketing mix they use accordingly. Managing the marketing effort (pp. 51–56) In addition to being good at the marketing in marketing management, companies also need to pay attention to the management. Managing the marketing process requires the four marketing management functions shown in Figure 2.5 – analysis, planning, implementation and control. The company first develops company-wide strategic plans and then translates them into marketing and other plans for each division, product and brand. Through implementation, the company turns the plans into actions. Control consists of measuring and evaluating the results of marketing activities and taking corrective action where needed. Finally, marketing analysis provides information and evaluations needed for all of the other marketing activities. Marketing analysis Managing the marketing function begins with a complete analysis of the marketing organisation’s situation. The marketer should conduct a SWOT analysis, by which it evaluates the company’s overall strengths (S), SWOT analysis An overall evaluation of the company’s strengths (S), weaknesses (W), opportunities (O) and threats (T). Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 52 Part 1 Defining marketing and the marketing process ANALYSIS Planning Implementation Control Develop strategic plans Carry out the plans Measure results Evaluate results Develop marketing plans Take corrective action Figure 2.5 Managing marketing: Analysis, planning, implementation and control weaknesses (W), opportunities (O) and threats (T) (see Figure 2.6). Strengths include internal capabilities, resources and positive situational factors that may help the company to serve its customers and achieve its objectives. Weaknesses include internal limitations and negative situational factors that may interfere with the company’s performance. Opportunities are favourable factors or trends in the external environment that the company may be able to exploit to its advantage. And threats are unfavourable external factors or trends that may present challenges to performance. The company should analyse its markets and marketing environment to find attractive opportunities and identify environmental threats. It should analyse company strengths and weaknesses, as well as current and possible marketing actions, to determine which opportunities it can best pursue. The goal is to match the company’s strengths to attractive opportunities in the environment, while eliminating or overcoming the POSITIVE S O Strengths INTERNAL EXTERNAL NEGATIVE W T Weaknesses Internal capabilities that may help a company reach its objectives Internal limitations that may interfere with a company’s ability to achieve its objectives Opportunities Threats External factors that the company may be able to exploit to its advantage Current and emerging external factors that may challenge the company’s performance Figure 2.6 SWOT analysis: Strengths (S), weaknesses (W), opportunities (O) and threats (T) Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships weaknesses and minimising the threats. Marketing analysis provides inputs to each of the other marketing management functions. We discuss marketing analysis more fully in Chapter 3. Marketing planning Through strategic planning, the company decides what it wants to do with each business unit. Marketing planning involves deciding on marketing strategies that will help the company attain its overall strategic objectives. A detailed marketing plan is needed for each business, product or brand. What does a marketing plan look like? Our discussion focuses on product or brand marketing plans. Table 2.2 outlines the main sections of a typical product or brand marketing plan. (See Appendix 2 for a sample marketing plan.) The marketing plan begins with an executive summary that briefly reviews major assessments, goals and recommendations. The main section of the plan presents a detailed SWOT analysis of the current marketing situation as well as potential threats and opportunities. The plan next states major objectives for the brand and outlines the specifics of a marketing strategy for achieving them. A marketing strategy consists of specific strategies for target markets, positioning, the marketing mix and marketing expenditure levels. It outlines how the company intends to create value for target customers Table 2.2 Contents of a marketing plan Section Purpose Executive summary Presents a brief summary of the main goals and recommendations of the plan for management review, helping top management to find the plan’s major points quickly. A table of contents should follow the executive summary. Current marketing situation Describes the target market and company’s position in it, including information about the market, product performance, competition and distribution. This section includes: • A market description, which defines the market and major segments, then reviews customer needs and factors in the marketing environment that may affect customer purchasing. • A product review, which shows sales, prices and gross margins of the major products in the product line. • A review of competition, which identifies the main competitors and assesses their market positions and strategies for product quality, pricing, distribution and promotion. • A review of marketing channels and logistics, which evaluates recent sales trends and other developments in the major distribution channels. Threats and ­opportunities analysis Assesses major threats and opportunities that the product might face, helping management to anticipate important positive or negative developments that might have an impact on the firm and its strategies. Objectives and issues States the marketing objectives the company would like to attain during the plan’s term and discusses key issues that will affect their attainment. Marketing strategy Outlines the broad marketing logic by which the business unit hopes to create customer value and relationships and the specifics of target markets, positioning and marketing expenditure levels. How will the company create value for customers in order to capture value from customers in return? This section also outlines specific strategies for each marketing mix element and explains how each strategy responds to the threats, opportunities and critical issues spelled out earlier in the plan. Action programs Spells out how marketing strategies will be turned into specific action programs that answer the following questions: What will be done? When will it be done? Who will do it? How much will it cost? Budgets Details a supporting marketing budget that is essentially a projected profit and loss statement. It shows expected revenues (forecasted number of units sold and the average net price) and expected costs of production, distribution and marketing. The difference is the projected profit. Once approved by higher management, the budget becomes the basis for materials buying, production scheduling, personnel planning and marketing operations. Controls Outlines the controls that will be used to monitor progress and allow higher management to review implementation results and identify products that are not meeting their goals. It includes measures of return on marketing investment. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 53 54 Part 1 Defining marketing and the marketing process in order to capture value in return. In this section, the planner explains how each strategy responds to the threats, opportunities and critical issues spelled out earlier in the plan. Additional sections of the marketing plan lay out an action program for implementing the marketing strategy along with the details of a supporting marketing budget. The last section outlines the controls that will be used to monitor progress, measure return on marketing investment and take corrective action. Marketing implementation marketing implementation The process that turns marketing strategies and plans into marketing actions in order to accomplish strategic marketing objectives. Planning good strategies is only a start towards successful marketing. A brilliant marketing strategy counts for little if the company fails to implement it properly. Marketing implementation is the process that turns marketing plans into marketing actions in order to accomplish strategic marketing objectives. Whereas marketing planning addresses the what and why of marketing activities, implementation addresses the who, where, when and how. Many managers think that ‘doing things right’ (implementation) is as important as, or even more important than, ‘doing the right things’ (strategy). The fact is that both are critical to success, and companies can gain competitive advantages through effective implementation. One firm can have essentially the same strategy as another, yet win in the marketplace through faster or better execution. Still, implementation is difficult – it is often easier to think up good marketing strategies than it is to carry them out. In an increasingly connected world, people at all levels of the marketing system must work together to implement marketing strategies and plans. At Ryobi, for example, marketing implementation for the company’s power tools, garden tools and other home products requires day-to-day decisions and actions by thousands of people both inside and outside the organisation. Marketing managers make decisions about target segments, branding, packaging, pricing, promoting and distributing. They talk with engineering about product design, with manufacturing about production and inventory levels, and with finance about funding and cashflows. They also connect with outside people, such as advertising agencies to plan ad campaigns and the news media to obtain publicity support. The salesforce urges Bunnings, Mitre 10 and other retailers to advertise Ryobi products, provide ample shelf space and use company displays. Marketing department organisation Marketing organisations must design a marketing organisation that can carry out marketing strategies and plans. If the company is very small, one person might do all of the research, selling, advertising, customer service and other marketing work. As the company expands, a marketing department emerges to plan and carry out marketing activities. In large companies, this department contains many specialists, comprising product and market managers, sales managers and salespeople, market researchers, advertising experts, web designers and social media specialists, among others. To lead such large marketing organisations, many companies have a chief marketing officer (or CMO) position. The CMO heads up the company’s entire marketing operation and represents marketing on the company’s top management team. The CMO position puts marketing on an equal footing with other C-level executives, such as the chief executive officer (CEO) and the chief financial officer (CFO). As a member of top management, the CMO’s role is to champion the customer’s cause – to be the ‘chief customer officer’. To that end, British Airways even went so far as to rename its top marketing position as Director of Customer Experience.14 Modern marketing departments can be arranged in several ways. The most common form of marketing organisation is the functional organisation. Under this organisation, different marketing activities are headed by a functional specialist – a sales manager, advertising manager, marketing research manager, customer service manager or new product manager. A company that sells across the country or internationally often uses a geographic organisation. Companies with many very different products or brands often create a product management organisation. Using this approach, a product manager develops Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships 55 and implements a complete strategy and marketing program for a specific product or brand. Product management first appeared at Procter & Gamble (P&G) in 1929. A new company product, Camay soap, was not doing well and a young P&G executive was assigned to give his exclusive attention to developing and promoting this product. He was successful, and the company soon extended this approach to other products.15 Since then, many firms, especially consumer-products companies, have set up product management organisations. For companies that sell one product line to many different types of markets and customers that have different needs and preferences, a market or customer management organisation Marketing planning: Marketers must continually plan their analysis, might be best. A market management organisation is similar implementation and control activities. to the product management organisation. Market managers © Nyul | 123RF are responsible for developing marketing strategies and plans for their specific markets or customers. This system’s main advantage is that the company is organised around the needs of specific customer segments. Many companies develop special organisations to manage their relationships with large customers. For example, companies such as Procter & Gamble and Black & Decker have large teams, or even whole divisions, set up to serve large customers such as Coles, Woolworths, ALDI or Kmart. Large companies that produce many different products flowing into many different geographic and customer markets usually employ some combination of the functional, geographic, product and market organisation forms. Marketing organisation has become an increasingly important issue in recent years. More and more, companies are shifting their brand management focus towards customer management – moving away from managing only product or brand profitability and towards managing customer profitability and customer equity. They think of themselves not as managing portfolios of brands but as managing portfolios of customers. And rather than managing the fortunes of a brand, they see themselves as managing customer– brand experiences and relationships. This is particularly the case in direct and digital marketing, which we discuss in Chapter 13. Marketing control Because many surprises occur during the implementation of marketing plans, marketers must practise constant marketing control – evaluating the results of marketing strategies and plans, and taking corrective action to ensure that objectives are attained. Marketing control involves four steps. Management first sets specific marketing goals. It then measures its performance in the marketplace and evaluates the causes of any differences between expected and actual performance. Finally, management takes corrective action to close the gaps between its goals and its performance. This may require changing the action programs or even changing the goals. Operating control involves checking ongoing performance against the annual plan and taking corrective action when necessary. Its purpose is to ensure that the company achieves the sales, profits and other goals set out in its annual plan. It also involves determining the profitability of different products, territories, markets and channels. Strategic control involves looking at whether the company’s basic strategies are well matched to its opportunities. Marketing strategies and programs can quickly become outdated, and each company should periodically reassess its overall approach to the marketplace. marketing control Measuring and evaluating the results of marketing strategies and plans and taking corrective action to ensure that objectives are achieved. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 56 Part 1 Defining marketing and the marketing process Linking the concepts Let’s take a break at this point and reflect on the contents of a marketing plan. You might like to dig more deeply into the various sections by examining the sample marketing plan in Appendix 2. The marketing plan set out in Appendix 2 is for SonicaTab – makers of smartphones and tablets. Measuring and managing return on marketing investment (pp. 56–58) return on marketing investment (marketing ROI) The net return from a marketing investment divided by the costs of the marketing investment. Marketing managers must ensure their marketing dollars are being well spent. In the past, many marketers spent freely on big, expensive marketing programs and flashy advertising campaigns, often without thinking carefully about the financial returns on their spending. Their goal was often a general one – to ‘build brands and consumer preference’. They believed that marketing produces intangible creative outcomes, which do not lend themselves readily to measures of productivity or return. In today’s tighter economic times, however, all that has changed. The free-spending days have been replaced by a new era of marketing measurement and accountability, as the marketing analytics spotlights in Appendix 3 illustrate. More than ever, today’s marketers are being held accountable for linking their strategies and tactics to measurable marketing performance outcomes. One important marketing performance measure is return on marketing investment. Return on marketing investment (or marketing ROI ) is the net return from a marketing investment divided by the costs of the marketing investment. It measures the profits generated by investments in marketing activities. Marketing returns can be difficult to measure. In measuring financial ROI, both the R and the I are uniformly measured in dollars. For example, when buying a piece of equipment, the productivity gains resulting from the purchase are fairly straightforward. But there is as yet no consistent definition of marketing ROI. For instance, returns such as advertising and brand-building impact are not easily put into dollar returns. In one recent survey, 64 per cent of senior marketers rated accountability as a top three concern, well ahead of the 50 per cent who rated the hot topic of integrated marketing communications as a top concern. However, another survey found that only about 36 per cent of chief marketing officers felt able to quantitatively prove the short-term impact of marketing spending on their business; only about 29 per cent felt able to prove long-term impact. Another CMO survey showed that a startling 57 per cent of CMOs do not take ROI measures into account when setting their marketing budgets, and an even more startling 28 per cent said they base their marketing budgets on ‘gut instinct’. Clearly, marketers must think more strategically about the marketing performance returns of their marketing spending.16 A company can assess return on marketing investment in terms of standard marketing performance measures, such as brand awareness, sales or market share. Many companies are assembling such measures into marketing dashboards – meaningful sets of marketing performance measures in a single display used to monitor strategic marketing performance (see Figure 2.7). Just as automobile dashboards present drivers with details on how their cars are performing, the marketing dashboard gives marketers the detailed measures they need to assess and adjust their marketing strategies.17 Increasingly, however, beyond standard performance measures, marketers are using customercentred measures of marketing impact, such as customer acquisition, customer retention, customer lifetime value and customer equity. These measures capture not just current marketing performance but also future performance resulting from stronger customer relationships. Figure 2.8 views marketing expenditures as investments that produce returns in the form of more profitable customer relationships.18 Marketing investments result in improved customer value and satisfaction, which in turn increase Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships 2,832 $m enterprise value 445 $m brand value 16% BV/EV Summary 272 Investment % change 3% Equity % change 3% 279 2756 2832 7.5 $m $m 7.3 $m Value % change 3% Investment Staff investment Sales & Marketing Store investment 18 170 % from previous % of budget % of revenue 2016/17 Q2 QUARTERLY TOTAL 90 $m 177 27 $m $m 215 18 4% 82% 5% % from previous % of budget % of revenue q1 q2 q3 q4 quarterly all quarters total central eastern northern western 84 0% 67% 5% % from previous % of budget % of revenue total spirits beer wine other all products 0% 93% 5% Regional summary Estimated enterprise value Brand value BV/BBV Brand strength 678 $m 109 $m 16% 83 653 $m 101 $m 15% 81 Central Eastern 695 $m 106 $m 15% 86 663 $m 94 $m 14% 81 all regions TOTAL 84 Northern 745 $m 95 $m 13% 76 761 $m 106 $m 14% 81 Western 714 $m 135 $m 19% 86 679 $m 131 $m 19% 81 Figure 2.7 Brand Finance® dashboard Source: Brand Finance® dashboard, courtesy Brand Finance Plc, with adaptations Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 57 58 Part 1 Defining marketing and the marketing process MARKETING INVESTMENTS MARKETING RETURNS Increased customer attraction Improved customer value and satisfaction Increased customer retention Increased customer lifetime values and customer equity Cost of marketing investment RETURN ON MARKETING INVESTMENT Figure 2.8 Return on marketing investment Source: Adapted from Roland T Rust, Katherine N Lemon & Valerie A Zeithaml, ‘Return on marketing: Using consumer equity to focus marketing strategy’, Journal of Marketing, January 2004, 68(1), Figure 1, p. 112. customer attraction and retention. This increases individual customer lifetime values and the firm’s overall customer equity. Increased customer equity, in relation to the cost of the marketing investments, determines marketing ROI. Regardless of how it is defined or measured, the concept of return on marketing investment is here to stay. ‘The marketing accountability revolution must continue,’ says one marketer. ‘In today’s demanding business environment, companies must know the impact of their marketing investments.’ Adds another, ‘You gotta be accountable.’19 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships Student Learning Centre 59 Marketers alone cannot produce superior value for customers. Marketers must practise partner relationship management, working closely with partners in other departments to form an effective value chain that serves the customer. And they must also partner effectively with other companies in the marketing system to form a competitively superior value delivery network. In Chapter 1, we defined marketing and outlined the steps in the marketing process. Learning Objective 4. Describe the elements of a customer value-driven marketing strategy and mix, and the forces that influence it. (pp. 47–51) In this chapter, we examined organisation-wide strategic planning and the role of Customer value and relationships are at the centre of marketing strategy marketing in the organisation. Then, we looked more deeply into marketing strategy and programs. Through market segmentation, targeting, differentiation and and the extended marketing mix, and reviewed the main marketing management positioning, the company divides the total market into smaller segments, selects functions. So, you have now had a pretty good overview of the fundamentals of segments it can best serve and decides how it wants to bring value to target modern marketing. In future chapters, we expand on these fundamentals. customers in the selected segments. It then designs an integrated marketing mix Reviewing the learning objectives Learning Objective 1. Explain company-wide strategic planning and its four steps. (pp. 38–41) to produce the response it wants in the target market. The marketing mix consists of product, price, place and promotion decisions, and taking account of people, process and physical evidence, particularly in service encounters. Strategic planning sets the stage for the rest of the company’s planning. Marketing contributes to strategic planning, and the overall plan defines marketing’s role in the company. Strategic planning involves developing a strategy for long-run survival and growth. It consists of four steps: (1) defining the company’s mission, (2) setting objectives and goals, (3) designing a business portfolio and (4) developing functional plans. The company’s mission should be market-oriented, realistic, specific, motivating and consistent with the market environment. The mission is then transformed into detailed supporting goals and objectives, which in turn guide decisions about the business portfolio. Then each business and product unit must develop detailed marketing plans in line with the company-wide plan. Learning Objective 2. Discuss how to design business portfolios and develop growth strategies. (pp. 41–45) Guided by the company’s mission statement and objectives, management plans its business portfolio, or the collection of businesses and products that make up the company. The firm wants to produce a business portfolio that best fits its strengths and weaknesses to opportunities in the environment. To do this, it must analyse and adjust its current business portfolio and develop growth and downsizing strategies for adjusting the future portfolio. The company might use a formal portfolio-planning method. But many companies are now designing morecustomised portfolio-planning approaches that better suit their unique situations. Learning Objective 3. Explain marketing’s role in strategic planning and how marketing works with its partners to create and deliver customer value. (pp. 45–47) Under the strategic plan, the main functional departments – marketing, finance, Learning Objective 5. List the marketing management functions, including the elements of a marketing plan, and discuss the importance of measuring and managing return on marketing investment. (pp. 51–58) To find the best strategy and mix and to put them into action, the company engages in marketing analysis, planning, implementation and control. The main components of a marketing plan are the executive summary, current marketing situation, threats and opportunities, objectives and issues, marketing strategies, action programs, budgets and controls. To plan good strategies is often easier than to carry them out. To be successful, companies must also be effective at implementation – turning marketing strategies into marketing actions. Marketing departments can be organised in one or a combination of ways: functional marketing organisation, geographic organisation, product management organisation or market management organisation. In this age of customer relationships, more and more companies are now changing their organisational focus from product or territory management to customer relationship management. Marketing organisations carry out marketing control, both operating control and strategic control. Marketing managers must ensure their marketing dollars are being well spent. In a tighter economy, today’s marketers face growing pressures to show they are adding value in line with their costs. In response, marketers are developing better measures of return on marketing investment. Increasingly, they are using customer-centred measures of marketing impact as a key input into their strategic decision making. accounting, purchasing, operations, information systems, human resources and Discussion questions others – must work together to accomplish strategic objectives. Marketing ❶ Marketing planning. When preparing marketing plans, some of the plays a key role in the company’s strategic planning by providing a marketing components are considered to be more important than others. Given this, concept philosophy and inputs regarding attractive market opportunities. Within discuss whether there is justification for leaving out some components individual business units, marketing designs strategies for reaching the unit’s from the marketing plan. (Learning Objectives 1, 3 and 4) (AACSB: objectives and helps to carry them out profitably. Communication; Reflective Thinking) Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 60 Part 1 Defining marketing and the marketing process ❷ Market turbulence. Sometimes the marketplace and products change so quickly there is no time to develop marketing plans. Businesses, such as company might use each strategy to grow. (Learning Objective 2) (AACSB: Communication; Analytical Thinking; Reflective Thinking) BMW (see Marketing in action 2.1), face such market turbulence. Discuss ❷ Marketers are increasingly held accountable for demonstrating the marketing whether businesses should simply ignore the marketing planning process success of their companies. Research the various marketing performance and just get on with meeting their competitors head on in marketing measures, in addition to those described in this chapter and in Appendix 3, their offerings. (Learning Objectives 2, 3 and 4) (AACSB: Communication; used by marketers to measure marketing performance. Write a brief report Analytical Thinking; Reflective Thinking) of your findings. (Learning Objective 5) (AACSB: Communication; Analytical ❸ Marketing plans and small businesses. Do you agree or disagree with the Thinking; Reflective Thinking) following statement by a marketing commentator: ‘Most small businesses ❸ Explain the role of a chief marketing officer (CMO). Learn more about this don’t prepare marketing plans because the information needed to complete C-level executive position and source an article that describes the importance them is too difficult to gather’? Justify your answer. What other reasons (if of this position, the characteristics of an effective CMO and any issues any) could there be why small businesses might not complete marketing surrounding this position. (Learning Objective 5) (AACSB: Communication; plans? (Learning Objectives 1, 2 and 3) (AACSB: Communication; Analytical Analytical Thinking; Reflective Thinking) Thinking; Reflective Thinking) ❹ Strategic business unit planning. Many organisations are restructuring as smaller SBUs. Does this action make it any easier to develop marketing Navigating the key terms plans? Justify your answer. What other reasons (if any) could explain why Learning Objective 1 value delivery network (p. 46) mission statement (p. 38) Learning Objective 4 this is happening? (Learning Objectives 2, 3 and 4) (AACSB: Communication; Analytical Thinking; Reflective Thinking) ❺ Marketing planning process. There is often confusion between the marketing plan and the marketing planning process. Elaborate on each, and discuss why they are important. (Learning Objectives 1, 2 and 3) (AACSB: Communication; Analytical Thinking; Reflective Thinking) ❻ Business plans versus marketing plans. Is there a difference between a business plan and a marketing plan? Be sure to explain the reasoning behind your answer. (Learning Objectives 1, 2 and 3) (AACSB: Communication; Analytical Thinking; Reflective Thinking) strategic business units (SBUs) (p. 39) strategic planning (p. 38) ❶ In a small group, give an example of how Red Bull energy-drink makers can grow by applying each of the product/market expansion grid strategies. Be sure to name and describe each strategy and discuss how the market segment (p. 49) Learning Objective 2 market segmentation (p. 48) business portfolio (p. 41) market targeting (p. 49) diversification (p. 45) marketing mix (p. 50) growth-share matrix (p. 42) marketing strategy (p. 47) market development (p. 44) positioning (p. 49) market penetration (p. 44) Learning Objective 5 portfolio analysis (p. 42) Critical thinking exercises differentiation (p. 50) product development (p. 45) product/market expansion grid (p. 44) Learning Objective 3 value chain (p. 45) marketing control (p. 55) marketing implementation (p. 54) return on marketing investment (marketing ROI) (p. 56) SWOT analysis (p. 51) Mini cases 2.1 Marketing strategy Online, mobile and social media marketing: Google’s mission Founded in 1998 as an internet search engine, Google’s mission statement IoT operating system, dubbed Brillo (after the Brillo scrubbing pad because remains the same to this day: to ‘organise the world’s information and make it is a scrubbed-down version of its Android operating system), targeted it universally accessible and useful’. Google is certainly successful, with to developers of smart products connected to the internet, such as ovens, revenues growing from US$3.2 billion in 2002 to US$74.5 billion in 2015, thermostats and even toothbrushes. It has also developed Weave, the 90 per cent of which comes from advertisers. Google is expanding rapidly corresponding IoT language that will allow smart products to speak to each into other areas well beyond its search engine, such as self-driving cars, other. Perhaps one day you will be sitting in your Google self-driving car, smart contact lenses that measure a person’s blood sugar levels, internet- streaming the news, checking your blood sugar and cooling your home by bearing balloons to create internet hotspots anywhere on Earth, and even turning down your thermostat on the way home from work. magnetic nanoparticles to search for disease within the human bloodstream. ❶ Conduct research on Google to learn more about its products and services. Google has been on a buying frenzy recently, purchasing security, biotech Some say the time has come for Google to create a new mission statement. 20 and robotic companies in a quest to capitalise on the Internet of Things (IoT) Do you agree? Explain. (AACSB: Communication; Reflective Thinking) phenomenon. Experts predict there will be 25 million connected devices in ❷ Create a new mission statement for Google that will take it through the our homes and workplaces by 2020. Google recently announced its new rest of this century. (AACSB: Communication; Reflective Thinking) Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships 61 2.2 Customer focus Maccas’ mission More than half a century ago, Ray Kroc, a 52-year-old salesman of milkshake-mixing machines, set out on a mission to transform the way Americans eat and, in the process, influenced many people’s eating habits around the world. In 1955, Kroc discovered a string of seven restaurants Helen Sessions/Alamy owned by Richard and Maurice McDonald. He saw the McDonald brothers’ fast-food concept as a perfect fit for America’s increasingly on-the-go, timesqueezed, family-oriented lifestyles. Kroc bought the small chain for US$2.7 million and the rest is history. From the start, Kroc preached a motto of QSCV – quality, service, cleanliness and value. These goals became mainstays in McDonald’s’ customer-focused mission statement. Applying these values, the company of its ‘Premium’ salads. The company also launched a multifaceted perfected the fast-food concept – delivering convenient, good-quality food education campaign that underscores the importance of eating right and at affordable prices. staying active. McDonald’s grew quickly to become the world’s largest ‘fast-feeder’. ‘Maccas’, as the chain is colloquially known in Australia and New The fast-food giant’s more than 32 000 restaurants worldwide now serve Zealand, consistently outperforms its competitors. Updates to its restaurants 64 million customers each day, racking up system-wide sales of more than and the constant introduction of innovations, such as salads, snack wraps, US$77 billion annually. Arguably, the ‘golden arches’ are one of the world’s Angus Burgers, McCafé coffees and smoothies, have customers and the most familiar symbols and, other than Santa Claus, no character in the world company alike humming the chain’s catchy jingle, ‘I’m lovin’ it’. is more recognisable than Ronald McDonald. ❶ Does McDonald’s’ marketing strategy of innovating via its menus After many ups and downs that saw the company actually losing differentiate it from (say) Hungry Jack’s? Explain your answer. (Learning money, in 2003 McDonald’s adopted a new strategic blueprint which Objectives 3 and 4) (AACSB: Communication; Reflective Thinking) it called its ‘Plan to Win’. The new mission was ‘to be our customers’ ❷ Research the positioning statements for each of the major fast-food favourite place to eat’. As part of the strategic plan, the restaurants were chains. In what way do their advertising lines, such as ‘I’m lovin’ it’, redecorated and, more importantly, the menu was reworked by a well- position the brands differently? (Learning Objectives 3 and 4) (AACSB: recognised chef, resulting in many innovations, including the introduction Communication; Reflective Thinking) 2.3 Marketing analytics at work Dick Smith’s demise: Poor strategy? As anyone who bought electronic components, CB radios and computers in meaner retail group, stripped the inventory out of the business, which the 1970s and ’80s knows, Dick Smith was a solid player in that sphere of Dick Smith management then replaced with the ‘wrong’ stock, comprising retailing, firstly in Australia and then in New Zealand. Having been founded many generic house-brand electronic products. Moreover, supplier rebates for $610 by then-young electronics technician Dick Smith in Sydney in 1968 were used to inflate earnings. This sent the company into a tailspin as the as a car-radio installation business, the store group went on to become a company’s bankers and creditors circled ominously. trusted iconic brand in consumer electronics, with sales revenue of $1.2 billion in the 2014 financial year. Competitor Gerry Harvey was one critic of the company’s strategy, putting it this way: ‘We virtually don’t do any of that sort of [generic branded] Woolworths bought a 60 per cent shareholding in the company in stuff. I think there is room for some of that but if you are out there trying to 1981, then moved to 100 per cent ownership in 1983. The shareholding establish a brand name with your company, you are better off doing it with cost Woolworths $25 million. The company set up online access in 2000, other brand names as your partner . . . When you go to house brands, you are including an eBay store. However, Woolworths could not seem to wring basically looking for margin and mostly looking at inferior products and you shareholder value from their acquisition. are mostly trying to sell it as being superior product, which it mostly isn’t.’ Woolworths sold Dick Smith to private equity firm, Anchorage Capital, From holding the wrong stock, Dick Smith issued gift vouchers before in 2012 for $94 million. Anchorage turned around and floated the company Christmas 2015 in a fire sale, which they were unable to honour as creditors on the stock exchange for five times their purchase price in 2014, or were clamouring for payment. This caused social media outrage among some $500 million. There are views that Anchorage, in making a leaner, consumers, which added to the negativity already being expressed in Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 62 Part 1 Defining marketing and the marketing process 2.3 Marketing analytics at work continued leveraging our existing systems and infrastructure, we are in the best position out of any retailer in Australia and New Zealand to run Dick Smith as an online only retailer. The Dick Smith online offering will soon be better Richard Milnes/Alamy Live News than ever.’21 ❶ What marketing strategy options existed for Dick Smith when rebuilding the Dick Smith retail brand after being floated by Anchorage Capital in 2014? (Learning Objectives 1, 2, 3 and 4) (AACSB: Communication; Reflective Thinking) ❷ What methods would you have used to assess consumers’ perceptions of Dick Smith’s positioning relative to retail competitors prior to the company’s demise? (Learning Objectives 1, 2, 3 and 4) (AACSB: Communication; Reflective Thinking) ❸ What part does inventory play in the strategy(ies) you put forward consumers’ dissatisfaction with fulfilment from the company’s eBay store. The fire sale did not move the requisite stock levels. Larger suppliers to for rebuilding the Dick Smith brand? (Learning Objectives 3, 4 and 5) (AACSB: Communication; Reflective Thinking) the company, such as Apple and Samsung, had already moved to cash-on- ❹ What method would you have used to analyse inventory turns? delivery terms, but the many smaller suppliers suddenly found themselves Assuming sales of $1.2 billion in the 2014 financial year (FY), and as creditors as receivers took control of the company’s 393 outlets at the a beginning inventory of $400 000 and an end-of-year inventory of behest of the company’s bankers. $700 000, calculate the inventory turns in FY 2014. How many days’ In early 2016, online retailer Ruslan Kogan purchased Dick Smith’s worth of inventory would Dick Smith be holding in this example? online retail business, including goodwill and brand, for an undisclosed (Hint: See Appendix 3.) (Learning Objectives 3, 4 and 5) (AACSB: sum. Kogan commented after the acquisition: ‘We do know that by Communication; Reflective Thinking) 2.4 Ethical reflection Making the figures tell a story You are chief marketing officer (CMO) of the international division of your investment in marketing is not usually possible until after three or four years company. Your division has made a number of unsuccessful attempts to of operations in that market. You are firmly convinced that your company penetrate several Asian markets. Your board of directors has asked you to will achieve very large profits and sales in the Chinese market in the long submit a new international marketing plan. You know that the plan must term. As you are the only executive with international experience and your show a return on marketing investment in year 1 and profit from year 2 reputation is excellent with all the board members, they will accept your onwards for it to be acceptable to the board. Otherwise, they will close recommendation. your division, resulting in the loss of your position and the jobs of your staff. Would you ‘sweeten’ the figures to show profitability in the short term Your investigations of the Asian markets clearly identify China as being to save your division and your job from extinction, or would you present a by far the best prospect for your company’s products, but the experience of realistic plan showing losses in the short term and profits in the long term? almost all companies entering the Chinese market indicates that a return on References 1 For more on Pinterest, see <justcreative.com/2012/04/24/pinterest-guide>, accessed April 2016. 2 See World Vision’s mission statement, <worldvision.com.au/AboutUs/ OurMissionMotivationValues.aspx>, accessed April 2016. 3 For many examples of mission statements for various types of organisations, see <examplesof.com/mission-statements>, accessed April 2016; and <strategicmanagementinsight.com/mission-statements/amazon-mission-statement. html>, accessed April 2016. 4 Bob Lutz quotations sourced from Diana T Kurylko, ‘Lutz helped create “Driving Machine” tag line’, Automotive News, 7 March 2016. 5 Sourced from ‘Strategy NUMBER ONE’, <bmwgroup.com/en/company/history.html>, accessed April 2016. 6 The following discussion is based in part on information found at <www.bcg.com/ documents/file13904.pdf>, accessed April 2016. 7 See ‘Annual reports’ at <corporate.disney.go.com/investors/>, accessed April 2016. 8 H Igor Ansoff, ‘Strategies for diversification’, Harvard Business Review, September– October 1957, pp. 113–24. 9 See Michael E Porter, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press: New York, NY, 1985; and Michael E Porter, ‘What is strategy?’, Harvard Business Review, November–December 1996, pp. 61–78. Also see ‘The value Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships 10 11 12 13 14 15 16 17 chain’, <www.quickmba.com/strategy/value-chain>, accessed June 2015; and Philip Kotler & Kevin Lane Keller, Marketing Management, 15th edn, Prentice Hall: Hoboken, NJ, 2016, chapter 2. Nirmalya Kumar, ‘The CEO’s marketing manifesto’, Marketing Management, November– December 2008, pp. 24–9; and Tom French, Laura LaBerge & Paul Magill, ‘We’re all marketers now’, McKinsey Quarterly, July 2011, <www.mckinseyquarterly.com/ Were_all_marketers_now_2834>. Jack Trout, ‘Branding can’t exist without positioning’, Advertising Age, 14 March 2005, p. 28. See <www.telstra.com.au/aboutus/ourcompany>, accessed April 2016. The four Ps classification was first suggested by E Jerome McCarthy, Basic Marketing: A Managerial Approach, Irwin: Homewood, IL, 1960. The four As are discussed in Jagdish Sheth & Rajendra Sisodia, The 4 A’s of Marketing: Creating Value for Customer, Company and Society, Routledge: New York, NY, 2012; and Philip T Kotler & Kevin L Keller, Marketing Management, 15th edn, Prentice Hall: Hoboken, NJ, 2016, p. 26. For a refreshing view of marketing’s place in marketing strategy, see Robert F Lusch & Stephen L Vargo, The Service-dominant Logic of Marketing: Dialog, Debate, and Directions, Routledge: New York, NY, 2014. Tim Dunn, ‘Is the era of CMO over?’, Adweek, 2 March 2015, p. 14. For more on brand and product management, see Kevin Lane Keller, Strategic Brand Management, 4th edn, Pearson: Upper Saddle River, NJ, 2012. ‘Study finds marketers don’t practice ROI they preach’, Advertising Age, 11 March 2012, <http://adage.com/article/233243/>; ‘Accountability remains senior marketers’ top concern’, Marketing Charts, 7 March 2013, <www.marketingcharts.com/wp/topics/ branding/accountability-remains-senior-marketers-top-concern-27565/>; ‘Quantitative proof of marketing spend’s ROI still eludes CMOs’, Marketing Charts, 21 February 2014, <www.marketingcharts.com/wp/traditional/quantitative-proof-of-marketingspends-impact-still-eludes-cmos-40005/>; and Christine Moorman, ‘From marketing spend to marketing accountability’, Marketing News, May 2014, pp. 24–5. For more on marketing dashboards and financial measures of marketing performance, see Bruce H Clark, Andrew V Abela & Tim Ambler, ‘Behind the wheel’, Marketing Management, May–June 2006, pp. 19–23; Ofer Mintz & Imran S Currim, ‘What drives managerial use of marketing financial metrics and does metric use affect performance of marketing-mix activities?’, Journal of Marketing, March 2013, pp. 17–40; and <http://marketingnpv.com/dashboard-platform>, accessed September 2015. 63 18 For a full discussion of this model and details on customer-centred measures of marketing return on investment, see Roland T Rust, Katherine N Lemon & Valerie A Zeithaml, ‘Return on marketing: Using customer equity to focus marketing strategy’, Journal of Marketing, January 2004, pp. 109–27; Roland T Rust, Katherine N Lemon & Das Narayandas, Customer Equity Management, Prentice Hall: Upper Saddle River, NJ, 2005; Roland T Rust, ‘Seeking higher ROI? Base strategy on customer equity’, Advertising Age, 10 September 2007, pp. 26–7; Andreas Persson & Lynette Ryals, ‘Customer assets and customer equity: Management and measurement issues’, Marketing Theory, December 2010, pp. 417–36; and Kirsten Korosec, ‘“Toma-to, tomäto”? Not exactly’, Marketing News, 13 January 2012, p. 8. 19 Bob Liodice, ‘Marketers, get serious about accountability’, Advertising Age, 8 September 2008, p. 22; and Gray Hammond, ‘You gotta be accountable’, Strategy, 1 December 2008, <http://strategyonline.ca/2008/12/01/forumhammond-20081201/>, accessed November 2016. 20 ‘Google’s revenue worldwide from 2002 to 2015 (in billion US dollars)’, statista, <statista.com/statistics/266206/googles-annual-global-revenue>, accessed November 2016. 21 Gerry Harvey quote from Elizabeth Knight, ‘The anatomy of Dick Smith’s decline’, Sydney Morning Herald, 6 January 2016, <smh.com.au/business/the-anatomy-of-dicksmiths-decline-20160105-glzrll.html>. Also see Sue Mitchell, ‘Dick Smith “inflated” profit’, Australian Financial Review, 12 July 2016, pp. 1, 8; Sue Mitchell, ‘Dick Smith trouble began under private equity owners’ and ‘Anchorage started Dick Smith rebate’, Australian Financial Review, 13 July 2016, pp. 1, 13, 16; Michael Smith, ‘Dick Smith’s joyless Christmas’, Australian Financial Review, 6 January 2016, p. 28; Tony Boyd, ‘Dick Smith receivership a lesson for all’, Australian Financial Review, Chanticleer [column], 6 January 2016, p. 40; Editorial & Opinion, ‘Dick Smith just bad shopkeeping’, Australian Financial Review, 7 January 2016, p. 38; Patrick Hatch, ‘Dick Smith’s eBay feedback a sign of oncoming meltdown’, Australian Financial Review, 12 January 2016, p. 15; Catie Low, ‘Dick Smith creditors look for answers’, Australian Financial Review, 14 January 2016, p. 15; and Dick Smith, ‘About us’, <dicksmithholdings.com.au/ about-us>, accessed April 2016. Ruslan Kogan quotation from Rae Johnston, ‘Kogan buys Dick Smith’s online store’, Gizmodo, 15 March 2016, <gizmodo.com.au/2016/03/ kogan-buys-dick-smiths-online-store/>. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e This page intentionally left blank. Pa rt 2 Understanding the marketplace and consumers 3The marketplace and customers: Analysing the environment 66 4 Marketing analytics: Gaining customer insights96 5 Buyer behaviour: Understanding consumer and business buyers 130 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment In Part 1 (Chapters 1 and 2), you learned about the basic concepts of marketing and the steps in the marketing process for building profitable relationships with targeted consumers. In Part 2, we look deeper into the first step of the marketing process – understanding the marketplace and customer needs and wants. In this chapter, you will discover that marketing operates in a complex and changing environment. Other actors in this environment – suppliers, intermediaries, customers, competitors, publics and others – may work with or against the company. Major environmental forces – demographic, economic, natural, technological, political and cultural – shape marketing opportunities, pose threats and affect the company’s ability to build customer relationships. To develop effective marketing strategies, you must first understand the environment in which marketing operates. For a visual representation of the chapter, please see the concept map on the following page. Learning Objectives Learning Objective 1 Describe the environmental forces that affect the company’s ability to serve its customers. The marketing environment p. 68 The company’s microenvironment pp. 68–71 The company’s macroenvironment pp. 72–90 Learning Objective 2 Explain how changes in the demographic and economic environments affect marketing decisions. Demographic environment pp. 72–79 Economic environment pp. 79–80 Learning Objective 3 Identify the main trends in the firm’s natural and technological environments. Natural environment pp. 80–82 Technological environment p. 83 Learning Objective 4 Explain the key changes in the political and cultural environments. Political and social environment pp. 83–87 Cultural environment pp. 87–90 Learning Objective 5 Discuss how companies can react to the marketing environment. Responding to the marketing environment p. 90 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment 67 LO 1 Describe the environmental forces that affect the company’s ability to serve its customers. (pp. 68–90) Demogra phic Eco no LO 2 Act al Tech n io n s olo gic i n t h e m i c r o e nv i r o n m e nt Pu b e macroenvir h t n o i n s me rce nt Fo Competit ors C OECONOMI ENVIRONMEN T MICR Su pp lie r s The company a l c liti Po LO 4 Explain the key changes in the political and cultural environments. (pp. 83–90) l Cultura RESPONDING TO THE MARKETING ENVIRONMENT LO 5 Discuss how companies can react to the marketing environment. (p. 90) Proactive Reactive Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e CONOMIC ENVIRONMEN MACROE T ing Market iaries inter m ed LO 3 Identify the main trends in the firm’s natural and technological environments. (pp. 80–83) s lic ral Natu Explain how the changes in the demographic and economic environments affect marketing decisions. (pp. 72–80) c mi Customers Part 2 Understanding the marketplace and consumers The marketing environment (p. 68) A company’s marketing environment consists of the actors and forces outside of marketing that affect marketing management’s ability to build and maintain successful relationships with target customers. Companies constantly watch and adapt to the changing environment. More than any other group in the company, marketers must be the environmental trend trackers and opportunity seekers. Although every manager in an organisation needs to observe the outside environment, marketers have two special aptitudes. They have disciplined methods – marketing research and marketing intelligence – for collecting information about the marketing environment. They also spend more time in customer and competitor environments. By carefully studying the environment, marketers can adapt their strategies to meet new marketplace challenges and opportunities. The marketing environment is made up of a microenvironment and a macroenvironment. The microenvironment consists of the actors close to the company that affect its ability to serve its customers – the company, suppliers, marketing intermediaries, competitors, publics and customer markets. The macroenvironment consists of the larger societal forces that affect the microenvironment – demographic, economic, natural, technological, political and cultural forces. We look first at the company’s microenvironment. The company’s microenvironment (pp. 68–71) Marketing management’s job is to build relationships with customers by creating customer value and satisfaction. However, marketing managers cannot do this alone. Figure 3.1 shows the main actors in the marketer’s microenvironment. Marketing success will require building relationships with other company departments, suppliers, marketing intermediaries, competitors, various publics and customers that combine to make up the company’s value delivery network. The company In designing marketing plans, marketing management takes other company groups into account – groups such as top management, finance, research and development, purchasing, operations and accounting. Compet itors Pu b rs lie s lic Su pp keting Mar ediaries rm inte omers Cust The com pany 68 MARKETING Figure 3.1 Actors in the microenvironment Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment 69 All of these interrelated groups form the internal environment. Top management sets the company’s mission, objectives, broad strategies and policies. Marketing managers make decisions within the strategies and plans made by top management. Then, as we discussed in Chapter 2, marketing managers must work closely with other company departments. With marketing taking the lead, all departments – from manufacturing and finance to legal and human resources – share the responsibility for understanding customer needs and creating customer value. Suppliers Suppliers form an important link in the company’s overall customer value delivery system. They provide the resources needed by the company to produce its goods and services. Supplier problems can seriously affect marketing. Marketing managers must be attentive to supply availability and costs. Supply shortages or delays, labour strikes and other events can cost sales in the short run and damage customer satisfaction in the long run. Rising supply costs may force price increases that can harm the company’s sales volume. Most marketers today treat their suppliers as partners in creating and delivering customer value. In an Australian study, researchers found that strong supplier relationships contributed significantly to business performance, and that when businesses focus on the whole supply chain (customers and suppliers) they will do even better.1 Marketing intermediaries Marketing intermediaries help the company to promote, sell and distribute its products to final buyers. They include resellers, physical distribution firms, marketing services agencies and financial intermediaries. Resellers are distribution channel firms that help the company find customers or make sales to them. These include wholesalers and retailers who buy and resell merchandise. Selecting and partnering with resellers is not easy. No longer do manufacturers have many small, independent resellers from which to choose. They now face large and growing reseller organisations, such as Woolworths, Target, marketing intermediaries Businesses that help the company to promote, sell and distribute its products to final buyers. Financial intermediaries: Accounting firms, such as Nudge Accounting, which provides services to smallbusiness owners, are among the many financial intermediaries that comprise the broader value network in which a business operates. Managing these relationships is also important. Nudge Accounting Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 70 Part 2 Understanding the marketplace and consumers The Warehouse, Myer and Kmart. These organisations frequently have enough power to dictate terms or even to shut smaller manufacturers out of large markets. Physical distribution firms help the company to stock and move goods from their points of origin to their destinations (see also Chapter 10). Marketing services agencies are the marketing research firms, advertising agencies, media firms and marketing consulting firms that help the company to target and promote its products to the right markets. Financial intermediaries include banks, credit companies, insurance companies, accountants and other businesses that help finance transactions or manage the risks associated with the buying and selling of goods. Like suppliers, marketing intermediaries form an important component of the company’s overall value delivery system. In its quest to create satisfying customer relationships, the company must do more than just optimise its own performance. It must partner effectively with marketing intermediaries to optimise the performance of the entire system. Thus, today’s marketers recognise the importance of working with their intermediaries as partners rather than simply as channels through which they sell their products. For example, when Coca-Cola signs on as the exclusive beverage provider for a fast-food chain such as McDonald’s or Subway, it provides much more than just soft drinks. It also pledges powerful marketing support. Competitors The marketing concept states that to be successful a company must provide greater customer value and satisfaction than its competitors do. Thus, marketers must do more than simply adapt to the needs of target consumers. They also must gain strategic advantage by positioning their offerings strongly against competitors’ offerings in the minds of consumers. No single competitive marketing strategy is best for all companies. Each firm should consider its own size and industry position compared to those of its competitors. Large firms with dominant positions in an industry can use certain strategies that smaller firms cannot afford. But being large is not enough. There are winning strategies for large firms, but there are also losing ones. And small firms can develop strategies that give them better rates of return than large firms enjoy. public Publics Any group that has an actual or potential interest in or impact on an organisation’s ability to achieve its objectives. The company’s marketing environment also includes various publics. A public is any group that has an actual or potential interest in or impact on an organisation’s ability to achieve its objectives. We can identify seven types of publics: 1 Financial publics. This group influences the company’s ability to obtain funds. Banks, investment houses and shareholders are the main financial publics. 2 Media publics. This group carries news, features and editorial opinion. It includes television and radio stations, newspapers, magazines, and blogs and other social media. 3 Government publics. Management must take government developments into account. Marketers must often consult the company’s legal advisers on issues of product safety, truth in advertising and other matters. 4 Citizen-action publics. A company’s marketing decisions may be questioned by consumer organisations, environmental groups, minority groups and others. Its public relations department can help it stay in touch with consumer and citizen groups. 5 Local publics. This group includes local residents and community organisations. Large companies usually appoint a community relations officer to deal with the community, attend meetings, answer questions and contribute to worthwhile causes. For example, mining giant BHP Billiton knows that working alongside the community in which it operates is crucial, and, by making social investments in those communities, it aims to contribute to a resilient and diversified local economy. In one program, the company partners with the Art Gallery of South Australia to present the TARNANTHI Festival of Contemporary Aboriginal and Torres Strait Islander Art, which includes a two-day art fair. In 2015, the fair featured the work of over 1000 Aboriginal and Torres Strait Islander artists and generated nearly half a million dollars in sales for the artists and art centres.2 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment Public: BHP Billiton supports Aboriginal and Torres Strait Islander artists through the TARNANTHI Art Fair as part of its commitment to Indigenous peoples. Courtesy Art Gallery of South Australia, Adelaide 6 General public. A company needs to be concerned about the general public’s attitude towards its products and activities. The public’s image of the company affects its buying. 7 Internal publics. This group includes workers, managers, volunteers and the board of directors. Large companies use newsletters, a company website and other means to inform and motivate their internal publics. When employees feel good about their company, this positive attitude spills over to external publics. A company can prepare marketing plans for these major publics as well as for its customer markets. Suppose the company wants a specific response from a particular public, such as goodwill, favourable word of mouth or donations of time or money. The company would have to design an offer to this public that is attractive enough to produce the desired response. Customers As we have emphasised throughout, customers are the most important actors in the company’s microenvironment. The aim of the entire value delivery system is to serve target customers and create strong relationships with them. The company might target any or all of five types of customer markets. Consumer markets consist of individuals and households that buy goods and services for personal consumption. Business markets buy goods and services for further processing or for use in their production process, whereas reseller markets buy goods and services to resell at a profit. Government markets are made up of government agencies that buy goods and services to produce public services, or to transfer the goods and services to others who need them. Finally, international markets consist of these buyers in other countries, including consumers, producers, resellers and governments. Each market type has special characteristics that call for careful study by the seller (see Chapter 5 for more on consumer and business markets). Linking the concepts Take a moment to reflect on the complex network of actors that make up a firm’s microenvironment. ● Think about your breakfast McMuffin, the company McDonald’s, and its suppliers, intermediaries, competitors, publics and customers. Draw a diagram showing the microenvironment for McDonald’s restaurants. ● In Chapter 10, we discuss marketing intermediaries involved with physical distribution. Here, we also consider the service intermediaries that are part of the microenvironment. Compile a list of all the different types of service intermediaries and make notes on why they need to be considered as part of the company’s microenvironment. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 71 72 Part 2 Understanding the marketplace and consumers The company’s macroenvironment (pp. 72–90) The company and all of the other actors operate in a larger macroenvironment of forces that shape opportunities and pose threats to the company. Figure 3.2 shows the six main forces in the company’s macroenvironment. In the remaining sections of this chapter, we examine these forces and show how they affect marketing plans. demography Demographic environment (pp. 72–79) The study of human populations in terms of size, density, location, age, gender, race, occupation and other statistics. Demography is the study of human populations in terms of size, density, location, age, gender, race, occupation and other statistics. The demographic environment is of major interest to marketers because it involves people, and people make up markets. The world population is growing at an explosive rate. It now exceeds 7.4 billion people and will grow to more than 8.5 billion by the year 2030.3 The world’s large and highly diverse population poses both opportunities and challenges. Changes in the world demographic environment have major implications for business. So, marketers keep close track of demographic trends and developments in their markets, both at home and abroad. They analyse changing age and family structures, geographic population shifts, educational characteristics and population diversity. Here, we discuss the most important demographic trends in Australia and New Zealand. Changing age structure of the population In 2016, the Australian and New Zealand populations stood at 24.2 million and 4.7 million, respectively, and the combined population may reach around 35 million by the year 2030.4 The single most important demographic trend in Australasia is the changing age structure of the population. Primarily because of falling birthrates and longer life expectancies, the Australian and New Zealand populations are rapidly getting older. In 1980, the median age was 29.4 years (in Australia) and 27.9 years (in New Zealand), and, by 2020, it is estimated to be about 38 years.5 This ageing of the population will have a significant impact on markets and those who service them. The Australian and New Zealand populations contain several generational groups. Here, we discuss the four largest groups – the baby boomers, Generation X, the Millennials and Generation Z – and their impact on today’s marketing strategies. Po lit ic om ral Cultu Demogr aphi c Technol ogic al l ica Ec on ral Natu COMPANY Figure 3.2 Major forces and the company’s macroenvironment Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment 73 The baby boomers The post-World War II baby boom produced 7 million baby boomers in Australia and New Zealand, born between 1946 and 1964. Over the years, the baby boomers have been one of the most powerful forces shaping the marketing environment. The youngest boomers are now in their fifties; the oldest are in their seventies. The baby boomers are the wealthiest generation in Australian history, accounting for about 25 per cent of the Australian Targeting boomers: The name says it all! ‘Fun Over 50’ tap into population but controlling an estimated 53 per cent of the national baby boomers’ desire to experience life to the fullest. wealth. The boomers constitute a lucrative market for financial Fun Over 50 services, new housing and home renovation, new cars, travel and entertainment, dining out, health and fitness products, and just about everything else.6 baby boomers At a recent industry forum, advertising experts advised that brands focusing on younger demographic People born during the period following World groups are missing a big opportunity. Boomers ‘outspend every other generation in every category, yet War II, between 1946 advertisers remain obsessed with extolling youth and targeting young audiences’. Less than 10 per cent and 1964. of the total annual advertising expenditure targets these older Australians. But, with interest in this group growing, it is not surprising to see the launch of a specialist agency, My Generation Advertising, devoted to advertising to baby boomers. The agency is pretty sure it understands the over-50s because they themselves are boomers too.7 It would be a mistake to think of the older boomers as slowing down. Instead, they see themselves as entering new life phases. The more active boomers – sometimes called zoomers – have no intention of abandoning their youthful lifestyles as they age. They travel, they buy luxury products, they are tech-savvy, they shop online and they have money to spend. Thus, although the boomers buy lots of products that help them deal with issues of ageing – from vitamins to blood pressure monitors to Good Grips kitchen tools – they also constitute a lucrative market for products and services that help them to live life to the fullest. For example, Fun Over 50 offers travel in style for older Australians and New Zealanders. Travellers enjoy adventure-packed days, new places and new experiences. The travel business aims to fulfil boomers’ desire to experience life to the fullest. Generation X The baby boom was followed by a ‘birth dearth’, creating another generation of over 4 million people in Australia and New Zealand born between 1965 and 1976. Author Douglas Coupland calls them Generation X because they lie in the shadow of the boomers. Comprising a population considerably smaller than the boomer generation that precedes them and the Millennials who follow, the Generation Xers are a sometimes-overlooked consumer group. Social commentator Mark McCrindle points out that, ‘They have worked hard, are bearing the burden of taxes, done dutiful parenting and haven’t made much of a fuss. They have just [got] on with it.’ Although Gen Xers seek success, they are less materialistic than the other groups; they prize experience, not acquisition. For many of the Gen Xers who are parents, family comes first – both children and their ageing parents – and career second.8 From a marketing standpoint, the Gen Xers are a more sceptical bunch. They tend to research products heavily before they consider a purchase, prefer quality to quantity and tend to be less receptive to overt marketing pitches. They are more likely to be receptive to irreverent ad pitches that make fun of convention and tradition. The first to grow up in the internet era, Generation X is a connected generation that embraces the benefits of new technology. Of the over 80 per cent of Gen Xers online, roughly a third spend more than an hour a day connected. Three-quarters are doing the banking and social networking Generation X People born between 1965 and 1976, in the ‘birth dearth’ that followed the baby boom. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 74 Part 2 Understanding the marketplace and consumers and more than half have bought goods and services online in the last three months, while nearly a fifth are studying.9 A National Australia Bank study showed that younger Gen Xers are spending more money online each month than any other generation. This group makes up almost a quarter of Australian online sales. Not surprisingly, Gen Xers are much more likely to click through online advertising. Despite their spending, they are also savvy consumers who seek out information before they buy. As one expert notes, ‘Generation Xers tend to use information not as a point of pride but as assurance that they are not being taken advantage of by marketers and are getting the best deal possible.’10 The Gen Xers, now middle-aged, have grown up and are taking over. They have increasingly displaced the lifestyles, culture and values of the baby boomers. They are firmly into their careers, and many are proud homeowners with growing families. They are the most-educated generation to date, and they possess hefty annual purchasing power. It is not surprising, then, that many brands and organisations focus on Gen Xers as a prime target segment. For example, the Heart Foundation’s Mums United campaign taps straight into the Gen Xers’ concern for family. The word-of-mouth campaign aimed to ‘get Australian mums to band together and make small lifestyle changes within their families and local communities – with the ultimate goal of improving the shape of Australia’. The successful campaign used a social media company to reach over 1500 mums who all had large social networks. They ran events, and many of the participants blogged, encouraging others to take on ‘one of the “Mums United” healthier living changes’. The Gen X-focused campaign produced over 800 000 offline conversations and nearly 80 000 online ones, roughly twice as many as the target set before the campaign. The companion website offers information to help mums ‘change the shape’ of their families, including suggestions for family fun activities, a family activity tracker, a junk-food swapper and recipes. Links to social media help to maintain the buzz after the initial word-of-mouth campaign.11 Millennials (Generation Y) The children of baby boomers, born between 1977 and 2000. Millennials Both the baby boomers and Gen Xers will one day be passing the reins to the Millennials (also called Generation Y). Born between 1977 and 2000, these children of the baby boomers number approximately 9.5 million in Australia and New Zealand combined, a population that dwarfs the Gen Xers and is larger even than the baby boomer segment. Spanning more than 20 years, the youngest are just finishing secondary school and the oldest have established careers. Many have families, homes and debt while others are single with few responsibilities. Compared to the baby boomers and Gen Xers, the Millennials are the most educated, and those who are employed have good jobs with above-average income. But they are also the most financially strapped generation; for some, high unemployment is a factor while others are saddled with debt, ranging from credit cards to loans. Still, because of their numbers, the Millennials make up a huge and attractive market, both now and in the future.12 One characteristic that all Millennials have in common is their comfort with digital technology. They do not just embrace technology; it is a way of life. The Millennials were the first generation to grow up in a world filled with computers, mobile phones, satellite television, iPods and iPads, and online social media. One study found that over 96 per cent of Millennials use the web, making up over 40 per cent of all Australian internet users, with many spending well over two hours per day online. With their high ownership of smartphones, which enable easy access to the mobile web, this is not surprising. Marketers of all kinds now target the Millennials segment, from car makers to political campaigns. More than sales pitches from marketers, Millennials seek authenticity and opportunities to shape their own brand experiences and share them with others. One marketer identifies what she calls ‘universal Millennial truths: being transparent, authentic, immediate and versatile’.13 Reaching these sceptical, message-saturated consumers requires creative marketing approaches. Airbnb and Uber are the quintessential millennial brands – offering the connected millennial consumer authenticity (Airbnb invites users to ‘Get lost in a city with insiders’) and immediacy (Uber offers ‘Your ride, on demand’). Mini is Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment targeting Millennials with an Instagram competition: 29 000 likes to win a new Mini Ray. As part of the launch of the Mini Ray in Australia, Instagram users are encouraged to post images, games, gifs, challenges, video and stunts, each with one of the car’s accent colours – pink, green or yellow – and all tagged #MINIRAY29K. The online promotion combines with the outdoor, print and digital advertising. The national marketing manager for Mini explains: ‘Given traditional . . . channels don’t typically resonate well with the millennial set, we wanted to find a way to reach them in a medium they engage with every day.’ The car itself taps into the millennial desire to shape the brand experience, with options to personalise each car with the driver’s choice of coloured accents. With its promise of head-turning fun, the campaign and the car speak to the heart of the millennial mindset at a price point that is affordable for this group.14 75 Millennials: Mini Ray speaks to the millennial mindset, with its launch campaign on Instagram #MINIRAY29K and the car itself – offering headturning fun! Creative agency: Ogilvy Australia. Media agency: Vizeum Generation Z Hard on the heels of the Millennials is Generation Z, young people born after 2000 (although many analysts include people born after 1995 in this group). The approximately 6 million Australian and New Zealand Gen Zers make up important children’s, tweens’ and teens’ markets. In Australia, the tweens alone are estimated to be spending $11–$21 per week, with an annual combined spend of over $1 billion. These young consumers also represent tomorrow’s markets – they are now forming brand relationships that will affect their buying well into the future.15 Even more than the Millennials, the defining characteristic of Gen Zers is their utter fluency and comfort with digital technologies. In the words of one researcher, ‘Generation Z are digital integrators, in that they have integrated technology seamlessly into their lives, and having used it from the youngest age, it is almost like the air that they breathe, permeating almost all areas of their lifestyle and relationships.’ Gen Zers do not wear watches because they carry a phone and use that to tell time (as well as checking the weather, getting directions, taking selfies and catching up with friends and family). Gen Zers blend the online and offline worlds seamlessly as they socialise and shop. According to recent studies, despite their youth, more than half of all Generation Z tweens and teens do product research before buying a product or having their parents buy it for them. Of those who shop online, more than half prefer shopping online in categories ranging from electronics, books, music, sports equipment and beauty products to clothes, shoes and fashion accessories. Companies in almost all industries market products and services aimed at Generation Z. For example, many retailers have created special lines or even entire stores appealing to Gen Z buyers and their parents – consider Cotton On Kids, Jacadi and Factorie (for clothing); EB-Games (for gaming); Toys Paradise, Kidzinc and Toys2Learn (for toys); Gymbaroo (for activities) and Smiggle (for stationery); and the large chain stores, such as Target, Myers and Big W, all carry children’s lines. Marketing to Gen Zers and their parents presents special challenges. Traditional media are still important to this group. Magazines such as K-Zone and Girlfriend are popular with some Gen Z segments, as are television channels such as ABC Kids and the Disney Channel. But marketers know they must meet Gen Zers where they hang out and shop. Increasingly, that is in the online and mobile worlds. Although the under-13 set remains barred from social media such as Facebook and Instagram – at least officially – the social media will play a crucial marketing role as the children and tweens grow into teens. Generation Z People born after 2000 (although many analysts include people born after 1995) who make up the children’s, tweens’ and teens’ markets. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 76 Part 2 Understanding the marketplace and consumers Today’s children are notoriously fickle and hard to pin down, and they have short attention spans. The key is to engage these young consumers and let them help to define their brand experiences. Another Generation Z concern involves children’s privacy and their vulnerability to marketing pitches. Companies marketing to this group must do so responsibly or risk the wrath of parents and public policy makers. Generational marketing Do marketers need to create separate products and marketing programs for each generation? Some experts warn that marketers need to be careful about ‘turning off’ one generation each time they craft a product or message that appeals effectively to another. Others caution that each generation spans decades of time and many socioeconomic levels. For example, marketers often split the baby boomers into three smaller groups – leading-edge boomers, core boomers and trailing-edge boomers – each with its own beliefs and behaviours. Similarly, they split Generation Z into children, tweens and teens. Thus, marketers need to form more precise age-specific segments within each group. More importantly, defining people by their birthdates may be less effective than segmenting them by their lifestyle, life stage or the common values they seek in the products they buy. We discuss many other ways to segment markets in Chapter 6 . The changing family The ‘traditional household’ consists of a husband, wife and children (and sometimes grandparents). Although two-parent families still make up a very large part of Australian and New Zealand families, this pattern is changing. Today, approximately 40 per cent of all family households in both countries have two parents living at home but, in the next 20 years, this is expected to fall slightly in Australia and closer to 38 per cent in New Zealand. During the same period, the proportion of single-parent families is expected to stay much the same, at about 17 per cent. What is changing is the steady increase in the number of families with no children living at home – expected to increase from about 38 per cent to 41 per cent of all families in Australia, and to a massive 45 per cent of all New Zealand families in the next 20 years. This big shift is partly due to the ageing population, but also to the fact that some couples are choosing not to have children. As the population ages, there will also be an increasing number of one-person households – from about 24–25 per cent to about 27–28 per cent of all households in the next 20 years. All this means that the average household size in both New Zealand and Australia is expected to decline over the next two decades.16 More people are divorcing or separating, choosing not to marry, marrying later or marrying without intending to have children. Marketers must increasingly consider the needs of non-traditional households, because their numbers are now growing more rapidly compared to traditional households. Each group has distinctive needs and buying habits. The number of women working outside the home has also increased, growing from 52 per cent of all women in the 1990s to 58 per cent today. In many families, both parents are working Changing families: HelloFresh invites time-poor families to ‘Discover the joy of cooking!’ without the hassle of the planning full-time although this does vary, depending on the age of the and shopping. children. Meanwhile, though comprising only a small number, Supplied by HelloFresh Australia more men are staying at home with their children and managing Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment the household while their partners go to work.17 The significant number of women in the workforce has spawned the child day-care business and increased consumption of career-oriented women’s clothing, financial services and convenience foods and services. With limited time yet loving to cook, families have responded favourably to the new-to-market subscription food boxes, such as HelloFresh and My Food Bag. Each week, time-poor families receive a delivery of everything they need to prepare between three and five meals. The food is convenient, healthy and home-cooked. HelloFresh invites customers to ‘Discover the joy of cooking!’ without the hassle of the planning and shopping: a perfect solution for the changing Australian family.18 Geographic shifts in population This is a period of great migratory movements between and within countries. Australians, for example, are mobile people, with about 40 per cent of all Australian residents moving every five years. Young and old alike are moving to urban communities, such as Melbourne and Brisbane, and to larger coastal towns, such as Hervey Bay in Queensland and Nelson Bay in New South Wales. At the same time, greater numbers of older people are moving to regional towns and the coast (such as Geelong and the Sunshine Coast). The same types of broad population moves can be seen in New Zealand. New Zealanders tend to live in urban centres (such as Auckland, Wellington and Dunedin); however, larger regional towns are also popular among retirees (for example, Wanaka and Thames or Coromandel). New Zealanders are also moving northward, with a slow but definite increase relative to the South Island. There was a population shift following the 2010 Christchurch earthquake, with people leaving – and more recently returning to – the city. And quite possibly there will be further population shifts following the massive 7.8 Kaikoura earthquake in 2016. People move for many reasons, but employment and social/lifestyle considerations are important factors. Such population shifts interest marketers because people in different regions buy differently. For example, consumers in the north of both Australia and New Zealand are more likely to buy air-conditioning and swimming pools, and window double-glazing is more likely to be in demand in the colder southern regions.19 In both Australia and New Zealand, and for more than a century, there has been a gradual geographic shift of population from rural to metropolitan areas. The metropolitan areas have a faster pace of living, more commuting, higher incomes and a greater variety of goods and services than can be found in the small towns and rural communities that dot the country. The largest cities account for most of the sales of expensive apparel, perfumes, luggage and works of art. These cities also support the opera, ballet and other forms of ‘high culture’. In the 1960s, Australians made an exodus from the inner cities to the suburbs. The larger cities became surrounded by even larger suburbs. Australians living in the suburbs engage in more casual, outdoor living and greater neighbour interaction; they have lower incomes and younger families. Suburbanites buy station wagons, four-wheel-drive recreational vehicles, aluminium and fibreglass boats, home-workshop equipment, garden furniture, lawn and gardening tools, and outdoor cooking equipment. Now, however, many suburban areas, such as Melbourne’s Eastern Suburbs, are undergoing a renewal, with in-fill high-rise apartment blocks dominating the landscape as younger couples, retirees and singles, priced out of the market, look for homes in well-established suburban communities.20 The shift in where people live has also caused a shift in where they work. For example, the migration to suburban areas has resulted in a rapid increase in the number of people who ‘telecommute’ – work from home or in a remote office and conduct their business by phone or via the internet. This trend, in turn, has created a booming SOHO (small office/home office) market. Estimates of the extent of teleworking vary greatly; however, recent studies have reported that as many as one in three employees is involved in some teleworking each week. While most teleworkers work from home, a number report working from clients’ offices and others from cafés.21 Many marketers are actively courting the lucrative telecommuting market. For example, Officeworks provides almost every piece of equipment the serious teleworker could want. From shredders to stationery, smart pens and smartphones, as well as computers and the desks to put them on, Officeworks Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 77 78 Part 2 Understanding the marketplace and consumers has everything needed to set up a home office. The company even sells complete office furniture collections, promising to ‘create an office environment that is a joy to work in each day’. Technology plays a big role in successful teleworking, so web-meeting services, such as Zoom and GoToMeeting, are part of the essential tool kit for the stay-at-home worker. With such apps, people can meet and collaborate online via computer, tablet or smartphone, no matter what their work location. And companies ranging from Salesforce.com to Google and Dropbox offer Cloud-computing apps that let people collaborate and share documents anywhere and everywhere through the internet and mobile devices.22 A better-educated, more white-collar, more professional ­population Australians and New Zealanders are becoming better educated. Over 40 per cent of the Australian population and 34 per cent of the New Zealand population have attended university. While only 33 per cent of those over age 55 have completed any post-secondary study, the number increases to more than 47 per cent for people aged 25–34. Individuals who achieve higher educational outcomes are often better off in a number of ways; importantly, their lifestyles are different and they earn more. The rising number of educated people will increase the demand for quality products, books, magazines, travel, personal computers, tablet devices and internet services.23 The workforce is also becoming more white-collar. Today, nearly 70 per cent of Australians are employed in white-collar jobs. Job growth is now strongest for community and services workers as well as for professional workers, and weakest for labourers. This trend is expected to continue. The rising number of educated professionals will affect not just what people buy but also how they buy.24 Increasing diversity Diversity: Link Disability Magazine readership includes people who are living with a disability, their families and carers, and health-care professionals. The magazine provides a way for marketers to speak directly to these audiences. Countries vary in their ethnic and racial makeup. At one extreme is Japan, where almost everyone living there is Japanese. The populations in both Australia and New Zealand are much more diverse, with nearly one in three people born overseas. In Australia, migrants from the United Kingdom make up the biggest group, but many people living in Australia who were born overseas are from New Zealand, China and India. The mix is a little different in New Zealand, with the largest migrant groups coming equally from the United Kingdom, Ireland and Asia. Pacific Islanders comprise another big cultural group. Aboriginal and Torres Strait Islander peoples in Australia, and Maoˉ ri in New Zealand, are also important groups in both communities. Each national group has specific wants and different buying habits. Many marketers of food, clothing, furniture and other products have targeted specially designed products and promotions to one or more of these groups.25 Diversity goes beyond ethnic heritage. For example, many major companies have recently begun to explicitly target gay and lesbian consumers. One estimate puts the Australian buying power of lesbian, gay, bisexual, transgender and intersex people (LGBTI) at a massive $20 billion per annum. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment 79 According to the Pink Media Group (which represents media owners across g­ ay- and lesbian-focused media channels), gay and lesbian consumer households typically have single or double incomes and often have no children. Consequently, the LGBTI markets tend to have higher disposable incomes and are often trendsetters. They ‘tend to spend more on luxury goods, travel, technology and fashion’, though they buy many of the same brands as do all Australians. They are also brand-loyal – an attractive characteristic for any market segment.26 As a result of television shows such as Modern Family, and openly gay celebrities and public figures such as Ellen DeGeneres, politician Penny Wong and Apple CEO Tim Cook, the LGBTI community has increasingly emerged into the public eye. A number of media now provide companies with access to this market. For example, LOTL and DNA are successful magazines with a combined readership of over 200 000. Melbourne radio station JOY 94.9 also serves this market. Companies in a wide range of industries are now targeting the LGBTI community with gay-specific marketing efforts. For example, Medibank featured same-sex couples in their recent ‘Health care for every kind of family’ television campaign. The inclusive ad shows a diverse mix of families, including same-sex families, and concludes with the phrase, ‘With Medibank, I am better’.27 Another diversity group is the estimated 4.3 million Australians and over 1 million New Zealanders living with a disability. Most individuals with a disability are active consumers. As one expert explains, people with disabilities ‘are getting out and about’ and they ‘have disposable income’. Many marketers now recognise that the worlds of people with disabilities and those without are one and the same. Marketers, such as McDonald’s, have featured people with disabilities in their mainstream advertising. Other companies use specially targeted media to reach this segment. There is a range of websites and print media with a greater proportion of readers who are living with a disability, their families and carers, as well as health-care service providers. For example, Link Disability Magazine advertises a wide range of services for both persons with a disability and those without.28 As the populations in Australia and New Zealand grow more diverse, successful marketers will continue to diversify their marketing programs to take advantage of opportunities in fast-growing segments. Linking the concepts Pause here and think about how deeply these demographic factors affect all of us and, as a result, marketing strategies. ● Apply these demographic developments to your own life. Discuss some specific examples of how changing demographic factors affect you and your buying behaviour. Economic environment (pp. 79–80) ● Identify a specific company that has done a good job of reacting to the shifting demographic environment – generational segments (baby boomers, Gen Xers, Millennials or Gen Zers), the changing family and increased diversity. Compare this company with one that has done a poor job. Markets require buying power as well as people. The economic environment consists of factors that affect consumer purchasing power and spending patterns. Economic factors can have a dramatic effect on consumer spending and buying behaviour. For example, until fairly recently, consumers spent freely, fuelled by income growth, a boom in the stock market, rapid increases in housing values and other economic good fortunes. They bought and bought, seemingly without caution, amassing record levels of debt. However, the free spending and high expectations of those days were dashed by the global economic recession of 2008–09. Consumers have now adopted a back-to-basics sensibility in their lifestyles and spending patterns that will likely persist for years to come. They are buying less and looking for greater value in the things they do buy. In turn, value marketing has become the watchword for many marketers. Marketers in all industries are looking for ways to offer today’s more financially frugal buyers greater value – just the right combination economic environment Factors that affect consumer purchasing power and spending patterns. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 80 Part 2 Understanding the marketplace and consumers of product quality and good service at a fair price. For example, Target promises customers ‘great quality and lower prices every day’ and even marketers of luxury items are emphasising good value. For instance, Australian online jeweller, Sheils, promises ‘the best prices, value and products’ and to ‘deliver service, quality and jewellery unlike any other jeweller in Australia’.29 Changes in income Marketers should pay attention to income distribution as well as to income levels. Over the past several decades, the rich have grown richer, the middle class has shrunk and the poor have remained poor. As shown in Figure 3.3, the top 20 per cent of Australian households earn nearly 50 per cent of the country’s adjusted gross household income. In contrast, the bottom 40 per cent of Australian households earn just 13.3 ­per cent of the country’s adjusted gross household income. This changing pattern of income distribution is similar in many Western countries, including New Zealand.30 This distribution of income has created a tiered market. Many companies, such as Bang & Olufsen and Tiffany & Co., aggressively target the affluent. Others – such as Australian discount retailers The Reject Shop and Crazy Clarks, and The Warehouse in New Zealand – target those with more modest means. Still other companies tailor their marketing offers across a range of markets, from the less affluent to the very affluent. For example, Ford offers cars ranging from the low-priced Ford Fiesta, starting at $19 451, to the luxury Mustang GT convertible, starting at $72 433.31 Changing consumer spending patterns Engel’s laws Differences noted more than a century ago by Ernst Engel in how people shift their spending patterns across food, housing, transportation, health care and other goods and services as family income rises. natural environment Natural resources that are needed as inputs by marketers or that are affected by marketing activities. Most household income is spent on food, housing and transportation. However, consumers at different income levels have different spending patterns. Some of these differences were noted more than a century ago by Ernst Engel, who studied how people shifted their spending as their income rose. He found that as family income rises, the percentage spent on food declines, the percentage spent on housing remains about constant (except for such utilities as gas, electricity and public services, which decrease), and both the percentage spent on most other categories and that devoted to savings increase. Engel’s laws generally have been supported by later studies. Changes in major economic variables, such as income, cost of living, interest rates, and savings and borrowing patterns, have a large impact on the marketplace. Companies monitor these variables by using economic forecasting. Businesses do not have to be wiped out by an economic downturn or caught short in a boom. With adequate warning, they can take advantage of changes in the economic environment. Natural environment (pp. 80–82) The natural environment involves the natural resources that are needed as inputs by marketers or that are affected by marketing activities. At the most basic level, unexpected happenings in the physical environment – anything from weather to natural disasters – can affect companies and their marketing strategies. For example, in early 2016, unseasonably warm El Niño conditions significantly impacted the sales of winter clothing. In fact, retail sales were down across Australia – the milder weather meant that shoppers, who typically head to shopping centres when it is very cold or very hot, stayed away, significantly impacting impulse purchases. In contrast, the milder weather was great news for outdoor entertainment businesses, such as the rooftop bar at the Glenmore Hotel in The Rocks, or the Sydney Bridge climb. Although companies cannot prevent such natural occurrences, they should prepare for dealing with them.32 At a broader level, environmental sustainability concerns have grown steadily over the past three decades. In many cities around the world, air and water pollution have reached dangerous levels. World concern continues to mount about the possibilities of global warming, and many environmentalists fear we soon will be buried in our own rubbish. Marketers should be aware of several trends in the natural environment. The first involves growing shortages of raw materials. Air and water may seem to be infinite resources, but some groups Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment INCOME SHARE 1994–95 QUINTILE INCOME SHARE 2013–14 45.8% 5 Highest (top 20% of households) 48.5% 11.5 × Average weekly household income $ 24.9% 23.3% 6.5 × Average weekly household income $ 4 16.1% 15.0% 9.4% 8.9% 3.9% 1 Lowest (bottom 20% of households) $ 3.5 × Average weekly household income 2.1 × Average weekly household income $ 2 5.5 × Average weekly household income 4 × Average weekly household income $ 3 11.5 × Average weekly household income 2 × Average weekly household income 4.2% 1 × Average weekly household income 1 × Average weekly household income Figure 3.3 Economic environment: The changing household income distribution in Australia, 1994–95 and 2013–14 Based on data from Australian Bureau of Statistics, Household Incomes and Wealth, Australia, 2013–14, Cat. No. 6523.0, 4 September 2015, <www.abs.gov.au>. see long-term dangers. Air pollution chokes many of the world’s large cities, and water shortages are already a big problem in most of Australia, and in some parts of New Zealand and the world. By 2030, more than one in three of the world’s human beings will not have enough water to drink.33 Renewable resources, such as forests and food, also have to be used wisely. Non-renewable resources, such as Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 81 82 Part 2 Understanding the marketplace and consumers environmental sustainability Developing strategies and practices that create a world economy that the planet can support indefinitely. oil, coal and various minerals, pose a serious problem. Businesses making products that require these scarce resources face large cost increases, even if the materials remain available. A second environmental trend is increased pollution. Industry will almost always damage the quality of the natural environment. Consider the disposal of chemical and nuclear wastes; the dangerous mercury levels in the ocean; the quantity of chemical pollutants in the soil and food supply; and the littering of the environment with non-biodegradable bottles, plastics and other packaging materials. Waste bakery products have been reduced at Goodman Fielder, one of Australia’s leading food companies, by identifying new uses for the waste. Working with a company specialising in animal nutrition, waste bakery products are now converted to pet food.34 A third trend is increased government intervention in natural resource management. The governments of different countries vary in their concern and efforts to promote a clean environment. Some, such as the German government, vigorously pursue environmental quality. Others, especially those of many poorer nations, do little about pollution, largely because they lack the needed funds or political will. Even the richer nations lack the vast funds and political accord needed to mount a worldwide environmental effort. The general hope is that companies around the world will accept more social responsibility, and that lessexpensive devices can be found to control and reduce pollution. Both Australia and New Zealand have organisations established by government to protect the environment: the Environmental Protection Authority (EPA) in New Zealand and various state environmental protection authorities in Australia. The role of each authority varies from state to state and country to country, but their general focus is on protecting the environment. This includes everything from enforcing environmental laws, to conducting environmental impact assessments and maintaining emissions trading schemes. In the future, companies doing business in Australia and New Zealand can expect continued strong controls from government and pressure groups. Instead of opposing regulation, marketers should help develop solutions to the material and energy problems facing the world. Concern for the natural environment has spawned an environmental sustainability movement. Today, enlightened companies go beyond what government regulations dictate. They are developing strategies and practices that create a world economy that the planet can support indefinitely. Environmental sustainability means meeting present needs without compromising the ability of future generations to meet their needs. Many companies are responding to consumer demands with more environmentally responsible products. Others are developing recyclable or biodegradable packaging, recycled materials and components, better pollution controls and more energy-efficient operations. For example, LUSH Australia was recently recognised for its sustainable business practices, reflected in its core values: fighting animal testing, freshest cosmetics online, ethical buying, 100% vegetarian, handmade, and naked packaging. They sell solid shampoos that do not need packaging; unavoidable packaging is recycled or repurposed; and they source sustainably produced raw materials. At the other end of the marketing spectrum, Auckland manufacturer Cemix has developed a new concrete, Envirocrete, which uses 50 per cent recycled materials. A major hardware chain has picked up this product and distributes it throughout New Zealand.35 Companies today are looking to do more than just good deeds. More and more, they are recognising the link between a healthy ecology and a healthy economy. They are learning that environmentally responsible actions can also be good business. Environmental sustainability: LUSH is committed to producing handmade goods that minimise the impact on the environment. LUSH Fresh Handmade Cosmetics Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment Technological environment (p. 83) The technological environment is perhaps the most dramatic force now shaping our destiny. Technology has released such wonders as antibiotics, robotic surgery, miniaturised electronics, laptop computers and the internet. It also has released such horrors as nuclear missiles, chemical weapons and assault rifles. Additionally, it has given rise to such mixed blessings as the automobile, television and credit cards. Our attitude towards technology depends on whether we are more impressed with its wonders – or with its blunders. New technologies can offer exciting opportunities for marketers. For example, what would you think about having tiny little transmitters implanted in all the products you buy that would allow tracking of the products from their point of production through use and disposal? Or how about a bracelet with a chip inserted that would let you make and pay for purchases, receive personalised specials at retail locations, or even track your whereabouts or those of friends? On the one hand, such technology would provide many advantages to both buyers and sellers. On the other hand, it could be a bit scary for consumers concerned with, for example, invasion of their privacy. Either way, with the advent of radio-frequency identification (RFID) transmitters, it is already happening. Many firms are already using RFID technology to track products and customers at various points in the distribution channel. For example, libraries around Australia and New Zealand are using 3M RFID tracking systems to manage their books. Tags are fixed on each item and then library visitors can check-out their own books; librarians can use a hand-held reader to check the collection and to assist with re-shelving items; and, finally, when a book comes back to the library, the RFID tag is automatically tracked as the book passes into the return bin.36 The technological environment changes rapidly, creating new markets and opportunities. However, every new technology replaces an older technology. Transistors hurt the vacuum-tube industry, digital photography hurt the film business, and digital downloads and streaming are hurting the CD and DVD businesses. When old industries fight or ignore new technologies, their businesses decline. Thus, marketers should monitor the technological environment closely. Companies that do not keep up will soon find their products outdated. If that happens, they will miss new product and market opportunities (see Marketing in action 3.1 for trending technological development that many marketers are currently exploring). Investment in research and development will be crucial for companies and nations. Scientists today are researching a wide range of promising new products and services, ranging from practical solar energy, electric cars, paint-on computer and entertainment video displays, and powerful computers that you can wear or fold into your pocket, to go-anywhere concentrators that produce drinkable water from the air. Many companies are adding marketing people to research and development teams in an effort to obtain a stronger marketing orientation. The challenge in each case is not only technical but also commercial – that is, to make practical, affordable versions of these products. (See also Chapter 8, where we explore newproduct development and innovation in more detail.) As products and technology become more complex, the public needs to know that these are safe. Thus, government agencies investigate and ban potentially unsafe products. In Australia and New Zealand, there is a comprehensive set of laws and guidelines to help businesses develop new products that are safe for all users (especially children). Marketers should be aware of these regulations when applying new technologies and developing new products. Political and social environment (pp. 83–87) Marketing decisions are strongly affected by developments in the political environment. The political environment consists of laws, government agencies and pressure groups that influence or limit various organisations and individuals in a given society. 83 technological environment Forces that create new technologies, creating new products and market opportunities. political environment Laws, government agencies and pressure groups that influence or limit various organisations and individuals in a given society. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 84 Part 2 Understanding the marketplace and consumers Marketing in Action 3.1 The quite real virtual experience What is reality? When it comes to some experiences, is virtual reality any less real than – well – real reality? If you attend your marketing lecture online, is it less real than a face-to-face lecture? Let us suppose you enjoyed the lecture in the comfort of your own home (or office) and, because it was delivered using a virtual reality system, you could look around and see your classmates, you could chat with your work group and complete an in-class assessment, but you did not have to go out in the heat (or cold) to get there. You did not have to spend an hour and a half in traffic or on public transport, and you made it to your friend’s party without skipping class on Friday night. That seems pretty real and really useful. This is the promise of the virtual experience – something as real as reality – with all the conveniences, flexibility and even safety of not being there. For example, as part of an event to promote safety, NRMA insurance offered drivers the chance to experience a virtual car accident in two different cars – first in a modern car and then in a car designed 30 years ago. Wearing a virtual reality (VR) headset and inside a car rigged with a hydraulic system to sync with the VR vision, the crash testers experienced the accident and walked away – a bit shaken but not hurt. The promotion really brought home the message of car safety to drivers. RMIT University in Melbourne has a Virtual Experience Laboratory, which has been designed for students and industry to explore how VR can be used in industrial settings. The lab provides opportunities to consider how activities can be transformed to enhance the design and testing of complex systems, to make dangerous jobs safer, to enable access to remote locations and to make many other process and activities easier. This type of tool and other VR systems offer unique opportunities for marketers. For example, Qantas used a virtual destinations tour with first-class travellers, who, wearing VR headsets, had the opportunity to see before they landed, with virtual tours of Kakadu National Park and the Great Barrier Reef. In fact, Hamilton Island’s Virtual destinations: Hamilton Island used virtual reality to offer visitors at various industry exhibitions around the world a unique and breathtaking experience of the Great Barrier Reef. How better to transport visitors to the beauty on the doorstep of this magnificent island resort? Hamilton Island luxury resort, qualia, recently made great use of VR at an international travel and accommodation exhibition in Las Vegas. Exhibitors toured the Great Barrier Reef and Hamilton Island by helicopter. At the same exhibition, Business Events Sydney offered an even more knuckle-clenching bridge climb. But it is important to get the content right when using VR for destination marketing. As one visitor to the exhibition noted, ‘content really is key when it comes to virtual reality experiences’ – get it wrong and, instead of a great communication tool, the experience will be ‘dull and flat’ and no marketer manager wants that perception connected with their brand. Virtual reality is not just about creating new and exciting promotional experiences – it offers unique opportunities to create new products. Consider Sources: Adam Bender, ‘Oculus Rift shows (virtual) reality of car crashes’, Computerworld, 17 March 2014, <www.computerworld.com.au/article/540645/oculus_rift_shows_virtual_ reality_car_crashes/>; Adam Bender, ‘Qantas tests virtual reality for in-flight entertainment’, Computerworld, 29 January 2015, <www.computerworld.com.au/article/565044/qantastests-virtual-reality-in-flight-entertainment/>; ‘Virtual experiences laboratory’, RMIT University, <www.rmit.edu.au/about/our-locations-and-facilities/facilities/research-facilities/virtualexperiences-laboratory>. Quotes from ‘Integrating virtual reality into the event world’, The Nibbler, 3 November 2016, <www.thenibbler.com.au/article/integrating-virtual-realityinto-the-event-world/> ; and Daniel Kreps, ‘ABBA plan “previously unimagined” virtual reality experience’, Rolling Stone, 26 October 2016, <www.rollingstone.com/music/news/abba-planpreviously-unimagined-virtual-reality-experience-w446845>; all accessed December 2016. the last concert ticket you bought – how much did it cost you? It is not unusual Questions for tickets to cost in the region of $300–$400. Rolling Stone magazine recently ❶ Virtual reality offers exciting possibilities for marketing communications shared details of a new project between the iconic 70’s band, ABBA, and music entrepreneur, Simon Fuller. The Swedish band has consistently resisted requests to reform, playing only once in the last 30 years. But, in 2018, that is all to change as and new product innovation. Choose a brand you know really well – how would you use VR to augment consumer experiences? ❷ The sales team for a mid-sized real-estate business has asked you to a new generation of fans will get the opportunity to see ABBA perform ‘live’. Details develop a VR sales strategy for their business. The company is keen to reach of the project are yet to be revealed but it is said to include both VR and artificial out to new market segments (both buyers and sellers) with a VR experience. intelligence technologies to ‘create new forms and entertainment and content’. What advice would you give to the company and the sales team? Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment Legislation regulating business Even the strongest advocates of free-market economies agree that the system works best with at least some regulation. Well-conceived regulation can encourage competition and ensure fair markets for goods and services. Thus, governments develop public policy to guide commerce – sets of laws and regulations that limit business for the good of society as a whole. Almost every marketing activity is subject to a wide range of laws and regulations. Legislation affecting business around the world has increased steadily over the years. Australia and New Zealand have many laws covering issues such as competition, fair trade practices, environmental protection, product safety, truth in advertising, consumer privacy, packaging and labelling, pricing and other important areas. Understanding the public policy implications of a particular marketing activity is not a simple matter. For example, in Australia, there are many laws created at the national, state and local levels, and these regulations often overlap. Moreover, regulations are constantly changing – what was allowed last year may now be prohibited, and what was prohibited may now be allowed. Marketers must work hard to keep up with changes in regulations and their interpretations. Business legislation has been enacted for a number of reasons. The first is to protect companies from each other. Although business executives may praise competition, they sometimes try to neutralise it when it threatens their business. So, laws are passed to define and prevent unfair competition. In Australia, such laws are enforced by the Australian Competition and Consumer Commission (ACCC), an independent authority established by the Commonwealth government. The second purpose of government regulation is to protect consumers from unfair business practices. Some firms, if left alone, would make shoddy products, invade consumer privacy, tell lies in their advertising, and deceive consumers through their packaging and pricing. Unfair business practices have been defined and are enforced by various agencies. The third purpose of government regulation is to protect the interests of society against unrestrained business behaviour. Profitable business activity does not always create a better quality of life. Regulation arises to ensure that firms take responsibility for the social costs of their production or products. International marketers will encounter dozens, or even hundreds, of agencies set up to enforce trade policies and regulations. The Australian and New Zealand governments have established many of these bodies – for example, Food Standards Australia New Zealand (FSANZ) is a statutory body jointly established by the two countries to ensure safe food supply in both Australia and New Zealand. This authority develops and administers the Australia New Zealand Food Standards Code, which sets standards in food production, processing and labelling. Similarly, the ACCC is Australia’s national agency dealing with competition matters and is the agency responsible for enforcing the Competition and Consumer Act 2010 (Cth). This Act covers a wide range of business activities, but most relevant to marketers is Schedule 2, which sets out the Australian Consumer Law (ACL). The ACL deals with deceptive advertising, consumer guarantees and product safety, among other matters. Other agencies are organised at state level – for example, environmental protection authorities are established in each Australian state. These organisations affect business processes and can have a significant impact on marketing performance, and effective managers will keep up with developments and changes in these authorities. New laws and their enforcement will continue to increase. Business executives must monitor these developments when planning their products and marketing programs. Marketers need to know about the main laws protecting competition, consumers and society. They need to understand these laws at the local, state, national and international levels. Increased emphasis on ethics and socially responsible actions Written regulations cannot possibly cover all potential marketing abuses, and existing laws are often difficult to enforce. However, beyond written laws and regulations, business is also governed by social codes and rules of professional ethics. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 85 86 Part 2 Understanding the marketplace and consumers Socially responsible behaviour Enlightened companies encourage their managers to look beyond what the regulatory system allows and simply ‘do the right thing’. These socially responsible firms actively seek out ways to protect the long-term interests of their consumers and the environment. Almost every aspect of marketing involves ethics and social responsibility issues. Unfortunately, because these issues usually involve conflicting interests, well-meaning people can honestly disagree about the right course of action in a given situation. Thus, many industrial and professional trade associations have developed codes of ethics – for example, the Market Research Society of New Zealand (MRSNZ) and the Australian Association of National Advertisers (AANA). Additionally, more companies are now developing policies, guidelines and other responses to complex social responsibility issues. The boom in online marketing has created a new set of social and ethical issues. Critics worry most about online privacy issues. There has been an explosion in the amount of personal digital data available. Users themselves supply some of these data. They voluntarily place highly private information on social networking sites, such as Facebook or LinkedIn, or on genealogy sites that are easily searched by anyone with a computer or smartphone. However, much of the information is systematically developed by businesses seeking to learn more about their customers, often without consumers realising they are under the microscope. Legitimate businesses track consumers’ online browsing and buying behaviour and collect, analyse and share digital data from every move consumers make at their online sites. Critics are concerned that companies may now know too much and that some companies might use digital data to take unfair advantage of consumers. Although most companies fully disclose their internet privacy policies, and most work to use data to benefit their customers, abuses do occur. As a result, consumer advocates and policymakers are taking action to protect consumer privacy. In both Australia and New Zealand, there is legislation regarding what companies are able to do with the personal information they collect about their customers, employees and various publics. Legislation aside, responsible businesses tell their customers and publics how they will use such information. For example, the Australian Broadcasting Corporation (ABC) states that it ‘will be transparent about how and why we collect and use your information’, and makes its privacy policy available on its website.37 In Chapters 4 and 14, we discuss these and other societal marketing issues in greater depth. Cause-related marketing: Qantas partners with UNICEF with its ‘Change for Good’ campaign. Qantas passengers share their spare change to support UNICEF’s global health, child protection and education programs. Qantas Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment 87 Cause-related marketing To exercise their social responsibility and build more positive images, many companies are now linking themselves to worthwhile causes. These days, every product seems to be tied to some cause. Buy fresh daffodils or a daffodil pin from Coles and support the Cancer Council. Or next time you travel with Qantas, put your foreign and local currency in the ‘Change for Good’ envelope and support UNICEF’s global health, child protection and education programs.38 In fact, some companies are founded entirely on causerelated missions. Under the concept of ‘value-led business’ or ‘social enterprise’, their mission is to use business to make the world a better place. Cause-related marketing has become a primary form of corporate giving. It lets companies ‘do well by doing good’ by linking purchases of the company’s products or services with fundraising for worthwhile causes or charitable organisations. Companies now sponsor dozens of cause-related marketing campaigns each year. Many are backed by large budgets and a full complement of marketing activities. Beyond being socially admirable, it also makes good economic sense, for both the company and its customers. Companies can do good in the world while still being profitable.39 Cause-related marketing has stirred some controversy. Critics worry that it is more a strategy for selling than a strategy for giving – that ‘cause-related’ marketing is really ‘cause-exploitative’ marketing. Thus, companies using cause-related marketing might find themselves walking a fine line between increased sales and an improved image, and facing charges of exploitation. However, if handled well, cause-related marketing can greatly benefit both the company and the cause. The company gains an effective marketing tool while building a more positive public image. The charitable organisation or cause gains greater visibility and important new sources of funding and support. Cultural environment (pp. 87–90) The cultural environment is made up of institutions and other forces that affect a society’s basic values, perceptions, preferences and behaviours. People grow up in a particular society that shapes their basic beliefs and values. They absorb a world view that defines their relationships with others. The following cultural characteristics can affect marketing decision making. Persistence of cultural values People in a given society hold many beliefs and values. Their core beliefs and values have a high degree of persistence. For example, most Australians believe in working, getting married, giving to charity and being honest. These beliefs shape more specific attitudes and behaviours found in everyday life. Core beliefs and values are passed on from parents to children and are reinforced by schools, churches, business and government. Secondary beliefs and values are more open to change. Believing in marriage is a core belief; believing that people should get married early in life is a secondary belief. Marketers have some chance of changing secondary values but little chance of changing core values. For example, family-planning marketers could argue more effectively that people should get married later, rather than not getting married at all. cultural environment Institutions and other forces that affect a society’s basic values, perceptions, preferences and behaviours. Shifts in secondary cultural values Although core values are fairly persistent, cultural swings do take place. Consider the impact of popular music groups, movie personalities and other celebrities on young people’s hairstyling and clothing norms. Marketers want to predict cultural shifts in order to spot new opportunities or threats. Several firms offer ‘futures’ forecasts in this connection. For example, Trendwatching.com has tracked consumer value trends for years – its annual Trend Report analyses and interprets the forces that shape consumers’ lifestyles and their marketplace interactions. The main cultural values of a society are expressed in people’s views of themselves and others, as well as in their views of organisations, society, nature and the universe. People’s views of themselves People vary in their emphasis on serving themselves versus serving others. Some people seek personal pleasure, wanting fun, change and escape. Others seek self-realisation through religion, recreation or the Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 88 Part 2 Understanding the marketplace and consumers avid pursuit of careers or other life goals. Some people see themselves as sharers and joiners; others as individualists. People use products, brands and services as a means of self-expression, and they buy products and services that match their views of themselves. Marketers can target their products and services based on such selfviews. For example, Shoes of Prey appeals to those women who want to express their individualism. The online shoe store invites the designer in everyone to create their perfect shoe by personalising the shape, colour and heel height. Appealing to people’s desires for self-expression and individualism, the website exhorts: ‘Our passion is handcrafting quality, customized shoes that are as unique as you are.’40 People’s views of others People’s attitudes towards, and interactions with, others shift over time. In recent years, some analysts have voiced concerns that the internet age would result in diminished human interaction, as people buried their heads in their computers or emailed and texted rather than interacting personally. Instead, today’s digital technologies seem to have launched an era of what one trend watcher calls mass mingling. Rather than interacting less, people are using online social media and mobile communications to connect more than ever. The more people meet, network, message and socialise online, the more likely they are to eventually meet up with friends and followers in the real world.41 However, these days, even when people are together, they are often ‘alone together’. Groups of people may sit or walk in their own little ‘bubbles’, intensely connected to tiny screens and keyboards. One expert describes the latest communication skill as ‘maintaining eye contact with someone while you text someone else; it’s hard but it can be done,’ she says. ‘Technology-enabled, we are able to be with one another, and also elsewhere, connected to wherever we want to be.’42 Thus, whether the new technologydriven communication is a blessing or a curse is a matter of much debate. This new way of interacting strongly affects how companies market their brands and communicate with customers. Consumers increasingly connect to friends and online brand communities to learn about and buy products and to shape and share brand experiences. As a result, it is important for brands to participate in these networks, too. (See Chapter 13 for more on digital marketing.) Mass mingling: Rather than diminishing human interaction, today’s social media and mobile communications are causing people to increasingly tap into their networks of friends. © Africa Studio/Shutterstock.com People’s views of organisations People vary in their attitudes towards corporations, government agencies, trade unions, universities and other organisations. By and large, people are willing to work for major organisations and expect them, in turn, to carry out society’s work. The past two decades have seen a sharp decrease in confidence in and loyalty towards business and political organisations and institutions. In the workplace, there has been an overall decline in organisational loyalty. Company downsizing and restricted hours combined with excessively high senior-management salary packages have bred cynicism and distrust. In just the last decade, rounds of layoffs resulting from the global recession, along with corporate scandals and other unsettling activities, have resulted in a further loss of confidence in big business. Many people today see work not as a source of satisfaction but as a required chore to earn money with which to enjoy their non-work hours. This trend suggests that organisations need to find new ways to win consumer and employee confidence. People’s views of society People vary in their attitudes towards their society – patriots defend it, reformers want to change it, malcontents want to leave it. People’s orientation to their society influences their consumption patterns and attitudes towards the marketplace. Australian attitudes to patriotism became polarised in the 1990s as the debate over whether Australia should become a republic became politicised. And, in the recent decade, Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment 89 concerns over terrorism, asylum seekers, refugees, business failures and general disquiet have served to raise the level of patriotism in Australia, sometimes at the expense of other cultural groups. Whichever country we examine, people’s orientation to their society influences their consumption patterns, level of savings and attitudes towards the marketplace. Marketers need to monitor consumers’ changing social orientations and adapt their strategies accordingly. Many companies have responded to renewed consumer patriotism with ‘Made in Australia’ themes and flag-waving promotions. However, marketers must take care when responding to such strong national emotions. People’s views of nature People vary in their attitudes towards the natural world – some feel ruled by it, others feel in harmony with it and still others seek to master it. A long-term trend has been people’s growing mastery over nature through technology and the belief that nature is bountiful. More recently, however, people have recognised that nature is finite and fragile, and that it can be destroyed or spoiled by human activities. This renewed love of things natural has created a market of consumers who seek out everything from natural, organic and nutritional products to fuel-efficient cars and alternative medicines. These consumers make up a sizable and growing market. For example, Thunderpants, a New Zealand clothing company, produces locally made organic cotton clothing. The company website explains that their business model is based on slow growth principles: ‘family before business and lifestyle over work’. They aim to make quality clothing from organic cotton, locally produced fabric and locally produced garments. The range includes everything from undies, socks, swimwear and leisure wear, and they even have items that can be hand-coloured. Committed to keeping it real, the company has a test kitchen where new product ideas are road-tested by customers. They also support many charities with a special range called ‘Sausage Sizzle Philanthropants’, where $1 from every purchase is donated to the current month’s charity. Customers can pick a condiment to go with their purchase, and so add an extra dollar or ten to the order as a donation: tomato sauce for $1, mustard for $2 – right on up to ‘The Works’ for $10.43 Food producers have also found fast-growing markets for natural and organic products. In Australia, The Raw Food Store sells a range of raw and organic foods and sustainable products. ‘We wanted to share this passion with other families who want to make conscious choices not only for their health, their children but for the planet,’ the company’s website states.44 Research shows that the Australian organic industry is worth over $1.7 billion each year. The market is growing at a phenomenal rate of 15 per cent each year. Today, buyers of organic products are not a great deal different from other consumers – their age, income and education are similar to those of other buyers; what is different, however, is their attitudes. They have strong feelings for the wellbeing of the planet, their communities and themselves. Niche marketers have sprung up to serve this market, and traditional food chains, such as Woolworths and New World, have added separate natural and organic food sections. Over the next few years, we can expect to see organic produce become increasingly mainstream.45 People’s views of the universe Finally, people vary in their beliefs about the origin of the universe and their place in it. Although most Australians follow a particular set of religious beliefs, religious conviction and practice have been declining through the years and church attendance has fallen steadily. Over 22 per cent of Australians now say they have no religious affiliation.46 However, the fact that People’s view of nature: Responding to concerns about the health of the planet, Thunderpants produce high-quality, locally made organic clothing. The company sets family before business and lifestyle over work. Thunderpants Ltd Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 90 Part 2 Understanding the marketplace and consumers people are dropping out of organised religion does not mean they are abandoning their faith. Research conducted by the Australian Centre on Quality of Life at Deakin University to investigate quality of life shows a general increasing level of satisfaction with spirituality or religion.47 Some futurists have noted a renewed interest in spirituality, perhaps as a part of a broader search for a new inner purpose. People have been moving away from materialism and ‘dog-eat-dog’ ambition to seek more permanent values – family, community, Earth, faith – and a more certain grasp of right and wrong. This changing spiritualism affects consumers in everything from the television shows they watch and the books they read to the products and services they buy. Linking the concepts Pause for a moment and consider that, beyond the demographic factors, the other parts of the macroenvironment also affect our lives and shape marketing strategies. ● Take a moment to consider how the economic environment, the natural environment, the technological environment and the political and social environment have shaped the decisions you have made about a recent purchase. Which part of the macroenvironment most impacted your decision? ● Reflect on your views of yourself, others, organisations, society and nature. How are they shaping your purchasing decisions? What brands most align, and least align, with your views? What marketing strategies seem to particularly resonate with you in relation to these views? Responding to the marketing environment (p. 90) Someone once observed, ‘There are three kinds of companies: those who make things happen, those who watch things happen, and those who wonder what’s happened.’48 Many companies view the marketing environment as an uncontrollable element to which they must react and adapt. They passively accept the marketing environment and do not try to change it. They analyse the environmental forces and design strategies that will help the company avoid the threats and take advantage of the opportunities the environment provides. Other companies take a proactive stance towards the marketing environment. Rather than assuming that strategic options are bounded by the current environment, these firms develop strategies to change the environment. Companies and their products often create and shape new industries and their structures – products such as Uber’s ride, Apple’s iPad and iPhone, and Google’s search engine. Even more, rather than simply watching and reacting to environmental events, proactive companies take aggressive actions to affect the publics and forces in their marketing environment. Such companies hire lobbyists to influence legislation affecting their industries and stage media events to gain favourable press coverage. They take to the social media and run blogs to shape public opinion. They instigate legal actions and file complaints with regulators to keep competitors in line, and they form contractual agreements to better control their distribution channels. By taking action, companies can often overcome seemingly uncontrollable environmental events. For example, whereas some companies view the seemingly ceaseless online rumour mill as something over which they have no control, others work proactively to prevent or counter negative word of mouth. Marketing management cannot always control environmental forces. In many cases, it must settle for simply watching and reacting to the environment. For example, a company would have little success in trying to influence geographic population shifts, the economic environment or major cultural values. It also pays to remember that the other organisations that make up part of a business’s microenvironment will also be trying to control their own environment – which makes things even more unpredictable and uncontrollable for the marketing business. Despite this unpredictability, smart marketing managers will take a proactive – rather than a reactive – approach to the marketing environment. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment Student Learning Centre Reviewing the learning objectives 91 resource management. Environmental concerns create marketing opportunities for alert companies. The technological environment creates both opportunities and challenges. Companies that fail to keep up with technological change will miss out on new-product and marketing opportunities. Learning Objective 4. Explain the key changes in the political and cultural environments. (pp. 83–90) The political environment consists of laws, agencies and groups that influence or In this chapter and in Chapters 4 and 5, we examine the environments of limit marketing actions. The political environment has undergone three changes marketing and how companies analyse these environments to better understand that affect marketing worldwide: increasing legislation regulating business, the marketplace and consumers. Companies must constantly monitor and manage strong government agency enforcement and greater emphasis on ethics and the marketing environment in order to seek opportunities and ward off threats. socially responsible actions. The cultural environment is made up of institutions The marketing environment consists of all the actors and forces influencing the and forces that affect a society’s values, perceptions, preferences and behaviours. company’s ability to transact business effectively with its target market. The environment shows trends towards new technology-enabled communication, Learning Objective 1. Describe the environmental forces that affect the company’s ability to serve its customers. (pp. 68–90) a lessening trust of institutions, greater appreciation for nature, a changing spiritualism and the search for more meaningful and enduring values. The company’s microenvironment consists of other actors close to the company Learning Objective 5. Discuss how companies can react to the marketing environment. (p. 90) that combine to form the company’s value delivery network or that affect its Companies can passively accept the marketing environment as an uncontrollable ability to serve its customers. It includes the company’s internal environment element to which they must adapt, avoiding threats and taking advantage of – its several departments and management levels – as it influences marketing opportunities as they arise. Or they can take a proactive stance, working with decision making. Marketing channel firms – suppliers and marketing environmental changes rather than simply reacting to them. Whenever possible, intermediaries, including resellers, physical distribution firms, marketing services companies should try to be proactive, rather than reactive. agencies and financial intermediaries – cooperate to create customer value. Five types of customer markets include consumer, business, reseller, government and international markets. Competitors vie with the company in an effort to serve Discussion questions customers better. Finally, various publics have an actual or potential interest in or ❶ Suppliers, marketing organisations and marketing intermediaries. impact on the company’s ability to meet its objectives. It is evident that there are suppliers and marketing intermediaries who, The macroenvironment consists of larger societal forces that affect the together with the marketers they supply and support, must work together entire microenvironment. The six types of forces making up the company’s to satisfy customer needs, wants and demands. Is marketing more than macroenvironment are demographic, economic, natural, technological, political and promoting and selling a branded product produced by a single marketing cultural forces. These forces shape opportunities and pose threats to the company. organisation? If so, how is marketing undertaken? (Learning Objective 1) Learning Objective 2. Explain how changes in the demographic and economic environments affect marketing decisions. (pp. 72–80) Demography is the study of the characteristics of human populations. Today’s (AACSB: Reflective Thinking) ❷ Changing populations. Given that Australia and New Zealand’s populations are having children later, and are working longer and living longer, how might these changes affect the fortunes of marketing organisations in these countries? (Learning Objective 2) (AACSB: Reflective Thinking) demographic environment shows a changing age structure, shifting family profiles, ❸ Households, families and advertising content. There have been major shifts geographic population shifts, a better-educated and more white-collar population, in the composition of households in Australia. For one thing, there are fewer and increasing diversity. The economic environment consists of factors that affect households comprising a male and female with their biological young. buying power and patterns. The economic environment is characterised both by The modern family may take many different structures (not unlike the greater consumer concern for value and by shifting consumer spending patterns – television program, Modern Family). Do you think advertisers reflect these seeking just the right combination of good quality and service at a fair price. changes in their advertising? Do they need to? Justify your answer. What The distribution of income also is shifting. The rich have grown richer, the middle demographic changes should be reflected in advertising and marketing class has shrunk and the poor have remained poor, leading to a two-tiered market. Learning Objective 3. Identify the main trends in the firm’s natural and technological environments. (pp. 80–83) communications? (Learning Objective 2) (AACSB: Reflective Thinking) ❹ Nature and technology. The natural and technological environments of business present some of the biggest opportunities and challenges for marketers of the future. Resources are constrained; we are reaching peak oil; water and energy costs are increasing; and there is considerable pressure for businesses and The natural environment shows three main trends: shortages of certain raw marketers to be more sustainable. Yet, at the same time, technology presents materials, higher pollution levels and more government intervention in natural promises of solutions through innovation. However, innovation is expensive Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 92 Part 2 Understanding the marketplace and consumers and changes are occurring at such a fast pace that most businesses can barely ❷ In a small group, discuss cultural trends in Australia or New Zealand. keep up. Some businesses are responding by simplifying and reducing costs, and Research one of these trends in depth and create an infographic illustrating others are innovating and increasing costs. What are the advantages of each the trend’s impact on marketing. Present your infographic and discuss the approach? What market segments might find each approach attractive? What implications of these factors for marketers. (Learning Objective 2) (AACSB: can marketers do to be proactive about managing these changes? (Learning Objectives 3 and 5) (AACSB: Reflective Thinking) Teamwork; Use of IT; Diversity) ❸ The Communications Council provides a list of many of the advertising ❺ Cause-related marketing. Opportunities abound for businesses to connect codes and regulations affecting marketing in Australia and New Zealand. with their publics and relate to the social and political changes taking place Visit the Communications Council website <www.communicationscouncil. in their communities through cause-related marketing. Each year, companies org.au> and browse the resource centre to learn about these regulations invest millions of dollars in sponsoring charities, sporting events, cultural and codes. Write a brief report on one code or regulation and how it impacts groups, health organisations and the arts. There is an immense social benefit businesses and consumers. (Learning Objective 4) (AACSB: Communication; that comes from this; however, there are both advantages and disadvantages Use of IT, Application of Knowledge) for the marketer and, sometimes, for the sponsored organisation. The benefits are more obvious but what are some of the drawbacks of cause-related marketing for the business and the sponsored organisation? In what cultural Navigating the key terms contexts (if any) would cause-related marketing be inappropriate? (Learning Learning Objective 1 Generation Z (p. 75) Objective 4) (AACSB: Reflective Thinking) marketing intermediaries (p. 69) Millennials (Generation Y) (p. 74) public (p. 70) Learning Objective 3 Critical thinking exercises Learning Objective 2 environmental sustainability (p. 82) ❶ A small online retailer sells high-quality organic children’s clothing made baby boomers (p. 73) natural environment (p. 80) technological environment (p. 83) in New Zealand to customers in Asia. Identify the microenvironments demography (p. 72) and macroenvironments for this business. What are the main issues that economic environment (p. 79) Learning Objective 4 the company should monitor closely over the next decade? (Learning Engel’s laws (p. 80) cultural environment (p. 87) Objective 1) (AACSB: Communication; Application of Knowledge) Generation X (p. 73) political environment (p. 83) Mini cases 3.1 Microeconomic environment Connecting with the network Running a small business is pretty lonely sometimes. The owner is not only ❶ Conduct an online search and find the local Chamber of Commerce or the CEO, but also the chief financial officer, production manager, distribution business networking organisation in your area. What benefits do they manager, sales coordinator and marketing manager all rolled into one. With all list for being part of the network? What challenges do you foresee these responsibilities it is no wonder that small-business owners have a few for the small-business owner joining the network? What would things keeping them awake at night. Among their top-10 concerns are cashflow be the benefits of connecting with competitors from a marketing and profitability – hardly a revelation. You might be surprised to learn that making perspective? (Learning Objective 1) (AACSB: Information Technology; connections is on that list, too. Connections are important – they represent new customers, distributors, suppliers and the marketing intermediaries that can make a difference between a successful business and one that fails. Reflective Thinking) ❷ Business Chambers or Chambers of Commerce often take on an advocacy role – raising concerns on behalf of business owners – with Chambers of Commerce are run the world over and provide support different political and government groups. Imagine you own a to members, aiming to inspire business vitality and growth. They provide small business. What are the issues you would like to raise with networking opportunities for members, free resources and often have the government? What marketing concerns that are particularly mentoring services as well. The Auckland Chamber of Commerce is one such relevant to various publics would you like to have voiced by your organisation. At its regular events and training sessions, a small-business owner local Chamber of Commerce from a business owner’s perspective? is likely to connect with many different business owners, some competitors, (Learning Outcome 1) (AACSB: Reflective Thinking; Application of suppliers, other marketing intermediaries and perhaps even some customers. Knowledge) Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 3 The marketplace and customers: Analysing the environment 3.2 Technological environment Uber and the sharing economy Changes in the technological environment have created amazing attacked, of kidnappings and driver accidents, questioning the thoroughness opportunities for new business models while, at the same time, threatened of background checks of the 160 000-plus Uber drivers around the world. traditional models. For example, Airbnb has shaken up the hospitality industry Some countries have banned Uber because of these issues. by allowing people to rent out spare rooms or their entire homes to strangers, ❶ Describe how Uber’s business model works and the role technology and Uber’s ride-sharing business allows consumers to hire a ride from drivers has played in its success. What are the arguments in favour of banning looking to earn extra money with their vehicles. And with Uber, the consumer these types of businesses? What are the arguments in favour of does not have to worry about having enough cash or giving their credit card defending them? (Learning Outcome 3) (AACSB: Communication; Use to the driver – payments are all done through the Uber app. Traditional hotel of IT; Reflective Thinking) and cab companies are crying foul, claiming that these businesses are not ❷ Describe examples of two other businesses based on the sharing playing by the same regulatory rules to which they themselves are subject. economy model and create a new business idea based on this concept. Others are concerned about safety amid reports of riders allegedly being (Learning Outcome 3) (AACSB: Communication; Reflective Thinking) 3.3 Marketing analytics at work Exploring demographic trends Marketers are interested in demographic trends related to such variables Statistics, as presented in the following table. The table shows the income as age, ethnicity and population. The Australian Census Bureau provides share (%) and the mean weekly income ($) for all households in Australia. considerable demographic information that is useful for marketers. The quintiles show households grouped into five equally sized bands. Take For example, Figure 3.3 is based on data from the Australian Bureau of a close look at the data. Gross household income, Australia: 1994–95 and 2013–14 1994–95 Income share (%) Lowest quintile Second quintile 2013–14 Mean income per week ($) 3.9 253 Income share (%) 4.2 Mean income per week ($) 435 9.4 604 8.9 922 Third quintile 16.1 1037 15.0 1552 Fourth quintile 24.9 1604 23.3 2403 Highest quintile 45.8 2954 48.5 5002 Source: Australian Bureau of Statistics, Household Income and Wealth, Australia 2013–14, Cat. No. 6523, Table 1.2 Gross household income, <www.abs.gov.au>. ❶ In 1994–95, the third quintile (the middle 20 per cent of all households) For example, in 1994–95, the mean weekly household income of the had a 16.1 per cent income share but, by 2013–14, this quintile had second quintile was 2.4 times greater than that of the lowest quintile dropped to a 15.0 per cent income share. Calculate the percentage in the same year. The mean weekly household income of the highest change in share of income for this group. In real terms, what do you quintile was a massive 11.7 times more than that of the lowest think this change means for families in this middle-class group? quintile. Calculate the relative differences in mean weekly income for (AACSB: Communication; Analytical Thinking; Reflective Thinking) all quintiles compared to the lowest quintile for each series. Prepare ❷ Notice how significantly the mean weekly income for each group has a short talk describing the differences and the changes in household changed between1994–95 and 2013–14. One way to evaluate the income between 1994–95 and 2013–14. What are the implications changes is to consider the relative differences between each group. for marketers? (AACSB: Communication; Analytical Thinking) Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 93 94 Part 2 Understanding the marketplace and consumers 3.4 Ethical reflection Greenwashing Index You might have heard about citizen science, where scientific investigation out or masks important information, making the green claim sound better is crowdsourced, with volunteers from all over the world working alongside than it is’.49 scientists to gather, evaluate and classify data. Together, the collective ❶ Working in a group, choose an ad that everyone has seen. First working achieves something that would take individual scientists years and decades individually, rate the ad using the Greenwashing Index criteria (rate to do. Crowdsourced projects and citizen watchdog groups are active in the ad out of five for each criterion). Now share your evaluations with marketing, too. The Greenwashing Index <http://greenwashingindex.com/> the group. How similar are your views? (Learning Objective 4) (AACSB: is a collaborative project between EnviroMedia (a social marketing business) Communication, Teamwork, Ethical Reasoning) and the University of Oregon. At the website, citizen marketers post details ❷ A small car-washing business prides itself on its green and socially of advertisements promoting the environmental qualities of a product or sustainable credentials. The company uses recycled water and company, they rate the ads and then other citizen marketers rate the ad, too. biodegradable detergents, and wastewater is recovered and reused to It is difficult for a business to fake sustainability when people from all over irrigate landscaping in the local shopping centre where the business is the world keep the business honest and each other informed. located. The business also works closely with social organisations to The Greenwashing Index uses five scoring criteria to rate each ad (high provide work for young adults with intellectual disabilities, paying fair scores are unfavourable), including ‘(1) the ad misleads with words, (2) the wages and offering an employee social-networking program. Prepare ad misleads with visuals and/or graphics, (3) the ad makes a green claim an ad storyboard that shares the green and social credentials of the that is vague or seemingly improbable, (4) the ad overstates or exaggerates business. Present your ad to the class. (Learning Objective 4) (AACSB: how green the product/company/service actually is, and (5) the ad leaves Communication; Ethical Reasoning; Application of Knowledge). 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See Airbnb and Uber websites at <www.airbnb.com.au/ > and <www.uber.com/en-AU/ cities/sydney>, respectively, both accessed November 2016; and also Ben Ice, ‘Mini goes after Gen Y with an Instagram popularity contest’, Marketing Magazine, 3 August 2016, <www.marketingmag.com.au/news-c/miniray29k-instagram-competition/>; Mini Ray website, <www.mini.com.au/models/special-editions/ray/>; both accessed November 2016. See the Generation Z website from McCrindle Research, <http://generationz.com.au/>, accessed November 2016. Compiled based on household and family statistics, <www.stats.govt.nz> and <www. abs.gov.au>, accessed November 2016; Statistics New Zealand, National Family and Household Projections, 29 October 2015, <www.stats.govt.nz>, accessed November 2016; and Australian Bureau of Statistics, Household and Family Projections, Australia 2011–2036, Cat. No. 3260, 19 March 2015. Australian Bureau of Statistics, Family Characteristics and Transitions, Australia 2012–13, Cat. 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No. 3412, 30 March 2016, <www. abs.gov.au>; both accessed November 2016. 20 ’Trentwood sales call for more in-fill sites in Melbourne’s Eastern Suburbs’, The Urban Developer, 29 November 2016, <www.theurbandeveloper.com/development-salesshow-demand-fill-sites-melbournes-eastern-suburbs/>, accessed November 2016. 21 Nick Toscano, ‘One in three Australian workers now regularly works from home’, Sydney Morning Herald, 21 September 2016, <www.smh.com.au/business/workplacerelations/one-in-three-australian-workers-now-regularly-work-from-home-20160921grl3a1.html>, accessed November 2016. 22 See company websites, including Officeworks, <www.officeworks.com.au>; Zoom, <https://zoom.us/>; Dropbox, <www.dropbox.com>; and Salesforce.com, <www. salesforce.com/au/>; all accessed November 2016. 23 OECD, Education at a Glance 2014: OECD Indicators, OECD Publishing, 2014, <www.oecd.org/education/>, accessed November 2016. 24 Australian Bureau of Statistics, Australian Labour Market Statistics, July 2014, Cat. 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No. 3412.0, 30 March 2016, <www.abs.gov.au>; both accessed November 2016. 26 See Pink Media Group, <www.pinkmediagroup.com/>; Pink Monitor 2014, <http:// pinkmediagroup.com/news/41/Pink-Monitor-Research->; see also ‘Thinking pink: The purchasing power of gay Aussies’, Roy Morgan Research, 29 June 2016, <www. roymorgan.com/findings/6866-power-of-the-pink-dollar-201606271639>; all accessed November 2016. 27 See LOTL and DNA magazine websites for readership information, <www.lotl.com/> and <www.dnamagazine.com.au/>, respectively; accessed November 2016; and also Media Information Pack, <www.pinkmediagroup.com/>, accessed November 2016; and ‘New Medibank ad features same-sex couples’, Gay News Network, 8 February 2016, <http://gaynewsnetwork.com.au/news/national/new-medibank-ad-featuressame-sex-couples-20293.html>, accessed November 2016. 28 Australian Bureau of Statistics, Disability, Ageing and Carers, Australia: First Results 2015, Cat. No. 4430.0, 29 April 2016; Statistics New Zealand, Disability Survey 2013, 17 June 2014, <www.stats.govt.nz>, accessed November 2016; ‘Dive into diversity’, BandT, 4 April 2013, <www.bandt.com.au>; and website for Link Disability Magazine, <http://linkonline.com.au/>, accessed November 2016. 29 Brand promises from Target website, <www.target.com.au/quality>; and also Sheils website, <www.shiels.com.au/the-shiels-365-promise>; both accessed November 2016. 30 Australian Bureau of Statistics, Household Income and Wealth, Australia, 2013–14, Cat. No. 6523.0, 4 September 2015; and also Ministry of Social Development, Household Incomes in New Zealand: Trends in Indicators of Inequality and Hardship 1982 to 2015, August 2016, <www.msd.govt.nz/about-msd-and-our-work/publicationsresources/monitoring/household-incomes/index.html>; accessed November 2016. 31 Prices from Ford Australia website, <www.ford.com.au>, accessed November 2016. 32 Dana McCauley, ‘How this crazy warm weather is wreaking havoc with Australia’s biggest retailers’, news.com.au, 28 April 2016, <www.news.com.au/finance/ 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 95 business/retail/how-this-crazy-warm-weather-is-wreaking-havoc-with-australiasbiggest-retailers/news-story/5c5c39ac8731cedd92e13890face00cc>, accessed November 2016. The 2030 Water Resources Group, <www.2030wrg.org>, accessed November 2016; and ‘The world’s water,’ Pacific Institute, <www.worldwater.org/data.html>, accessed November 2016. See Office of Environment and Heritage, ‘Sustainable practices on the rise at Goodman Fielder’, <www.environment.nsw.gov.au/resources/business/ sustainabilityadvantage/100022-cs-goodman-fielder.pdf>, accessed November 2016. See LUSH website, <https://au.lush.com/>, and The Australian Business Awards website, <www.australianbusinessawards.com.au/2016-winners/australian-businessaward-for-sustainability/lush-2/>, both accessed November 2016; and see also ‘Cemix’ Envirocrete awarded again’, Scoop Business, 17 August 2011, <www.scoop.co.nz/ stories/BU1108/S00557/cemix-envirocrete-awarded-again.htm>; and the Cemix website, <www.cemix.co.nz/envirocrete/>, accessed November 2016. ’3M library systems’, 3M, <http://solutions.3m.com.au/wps/portal/3M/en_AU/SSD_ Library/library-technologies/productivity-security/self-service-checkout/RFID-selfchecksystems/>, accessed November 2016. See ‘ABC privacy policy’, <http://about.abc.net.au/abc-privacy-policy/>, accessed November 2016. See Cancer Council website, <www.cancer.org.au/get-involved/corporate-partnerships/ inspirational-partner-stories/coles.html >, and also Qantas website <www.qantas.com/ travel/airlines/community-initiatives/global/en>; both accessed November 2016. ’How Fortune’s “Change the World” companies profit from doing good’, Fortune, 18 August 2016, <http://fortune.com/2016/08/18/change-world-companies-profit/>, accessed November 2016. See Shoes of Prey website, <www.shoesofprey.com/>, accessed November 2016. ’Mass mingling’, trendwatching.com, July 2010, <www.trendwatching.com/trends/ massmingling/>, accessed November 2016. Sherry Turkle, ‘The flight from conversation’, New York Times, 22 April 2012, p. SR1. See Thunderpants website, <www.thunderpants.co.nz/>, accessed December 2016. See The Raw Food Store website, <www.therawfoodstore.com.au/>, accessed December 2016. ’Australian organic market report 2014’, Australian Organic, <http://austorganic.com/ ao-market-report/>, accessed December 2016. Australian Bureau of Statistics, ‘B14 religious affiliation by sex’, <http://stat.data.abs. gov.au>, accessed December 2016. Robert A Cummins, Jacqui Woerner, Melissa Weinberg, James Collard, Linda Hartley-Clark, Krystine Horfiniak & Charini Perera, Australian Unity Wellbeing Index Survey 29.0: The Wellbeing of Australians – Two Extra Hours, Mothers and Mothers-inLaw, Deakin University: Melbourne, 2013, <www.deakin.edu.au/research/acqol/auwbi/ survey-reports/>, accessed December 2016. See Philip Kotler, Kotler on Marketing, Free Press: New York, NY, 1999, p. 3; and Philip Kotler, Marketing Insights from A to Z, John Wiley & Sons: Hoboken, NJ, 2003, pp. 23–4. The scoring criteria are from ‘Greenwashing Index scoring criteria’, <http:// greenwashingindex.com/about-greenwashing/#score>, accessed January 2017. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights In this chapter, we continue our exploration of how marketers gain insights into consumers and the marketplace. We look at how companies develop and manage information about important marketplace elements: customers, competitors, products and marketing programs. To succeed in today’s marketplace, companies must know how to turn mountains of marketing information into fresh customer insights that will help them deliver greater value to customers. As we will see from the discussion in this chapter, good products and marketing programs begin with good customer information. Companies also need an abundance of information on competitors, resellers, and other actors and forces in the marketplace. But more than just gathering information, marketers must use the information to gain powerful customer and market insights. For a visual representation of the chapter, please see the concept map on the following page. Learning Objectives Learning Objective 1 Explain the importance of information in gaining insights about the marketplace and customers. Marketing information and customer insights pp. 98–102 Learning Objective 2 Define the marketing information system and discuss its parts. Assessing marketing information needs pp. 102–3 Developing marketing information pp. 103–5 Learning Objective 3 Outline the steps in the marketing research process. Marketing research pp. 105–19 Learning Objective 4 Explain how companies analyse and use marketing information. Analysing and using marketing information pp. 119–21 Learning Objective 5 Discuss the special issues some marketing researchers face, including public policy and ethics issues. Other marketing information considerations pp. 121–24 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights LO 1 Explain the importance of information in gaining insights about the marketplace and customers. (pp. 98–102) LO 2 Define the marketing information system and discuss its parts. (pp. 102–5) Marketing insights provide valuable information for marketing decisions MARKETING INFORMATION SYSTEM Developing needed information Assessing information needs Marketing intelligence Marketing research Analysing and using information THE MARKETING RESEARCH PROCESS LO 3 Outline the steps in the marketing research process. (pp. 105–19) Internal databases Defining the problem and research objectives Implementing the research plan: collecting and analysing the data Developing the research plan for collecting information Interpreting and reporting the findings Marketing insights must be used to make better marketing decisions to realise the value of information LO 4 Explain how companies analyse and use marketing information. (pp. 119–21) SPECIAL ISSUES LO 5 Discuss the special issues some marketing researchers face, including public policy and ethics issues. (pp. 121–24) Matching the research plan to available resources Understanding the global context when planning and conducting research Considering public policy, privacy legislation and codes of conduct when conducting research Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 97 98 Part 2 Understanding the marketplace and consumers Marketing information and customer insights (pp. 98–102) To create value for customers and build meaningful relationships with them, marketers must first gain fresh, deep insights into what customers need and want. Such customer insights come from good marketing information. Companies use these customer insights to develop a competitive advantage. For example, when it began in 2010, social media site Pinterest needed to differentiate itself from the dozens, even hundreds, of existing social networking options. Pinterest’s research uncovered a key customer insight: Many people want more than just Twitter- or Facebook-like places to swap messages and pictures. They want a way to collect, organise, and share things on the Internet related to their interests and passions. So Pinterest created a social scrapbooking site, where people can create and share digital pinboards – themebased image collections on things that inspire them. ‘Pinterest is your own little Internet of only the things you love,’ says the company. Thanks to this unique customer insight, Pinterest has been wildly popular. Today, more than 70 million Pinterest users collectively pin more than 5 million articles a day and view more than 2.5 billion Pinterest pages a month. In turn, more than a half-million businesses use Pinterest to engage and inspire their customer communities.1 Although customer and market insights are important for building customer value and engagement, these insights can be very difficult to obtain. Customer needs and buying motives are often anything but obvious – consumers themselves usually cannot tell you exactly what they need and why they buy. To gain good customer insights, marketers must effectively manage marketing information from a wide range of sources. Key customer insights have helped make social scrapbooking site Pinterest wildly successful with its 70 million users. In turn, more than a half-million brands use Pinterest to engage and inspire their customer communities. Pinterest big data The huge and complex data sets generated by today’s sophisticated information generation, collection, storage and analysis technologies. Marketing information and today’s ‘big data’ With the recent explosion of information technologies, companies can now generate and find marketing information in great quantities. The marketing world is filled to the brim with information from innumerable sources. Consumers themselves are now generating vast amounts of marketing information. Through their smartphones, microcomputers and tablets, via online browsing and blogging, apps and social media interactions, texting and video, and geolocation data, consumers volunteer a tidal wave of bottom-up information to companies and to each other. Far from lacking information, most marketing managers are overloaded with data and often feel overwhelmed by it. This problem is summed up in the concept of big data. The term big data refers to the huge and complex data sets generated by today’s sophisticated information generation, collection, storage and analysis technologies. Every year, the people and systems of the world generate about a trillion gigabytes of information. That is enough data to fill 2.47 trillion good old CD-ROMs, a stack tall enough to go to the moon and back four times. A full 90 per cent of all the data in the world has been created in just the past two years.2 Big data presents marketers with both big opportunities and big challenges. Companies that tap this glut of big data effectively can gain rich, timely customer insights. However, accessing and sifting through so much data is a daunting task. For example, when a large consumer brand, such as Coca-Cola or Apple, monitors online discussions about its brand in tweets, blogs, social media posts and other sources, its servers might take in a stunning 6 million public conversations a day, more than 2 billion a year. That is far more information than any manager can digest. Thus, marketers do not need more information; they need better information. And they need to make better use of the information they already have. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights 99 Marketing analytics Today’s big data can yield big results. But simply collecting and storing huge amounts of data has little value. Marketers must sift through the mountains of data to mine the gems – the bits that yield customer insights. As one marketing executive puts it, ‘It’s actually [about getting] big insights from big data. It’s throwing away 99.999 percent of that data to find things that are actionable.’ Says another data expert, ‘right data trumps big data’.3 That’s the job of marketing analytics. Marketing analytics involves tools and technologies used in making sound marketing decisions that lead to effective outcomes and return on marketing investment. This process requires data collection and analysis from all channels in the physical and digital arenas, including big data, over a time span.4 Marketers apply marketing analytics to the large and complex sets of data they collect from their own databases, marketing research, and web, mobile and social media tracking; customer transactions and engagements; and other data sources. For example, Netflix maintains a bulging customer database and uses sophisticated marketing analytics to gain insights, which it then uses to fuel recommendations to subscribers, to decide what programming to offer and even to develop its own exclusive content in the quest to serve its customers better (see Marketing in action 4.1). Another good example of marketing analytics, and why it matters, comes from food products giant Kraft, whose classic brands – from Vegemite to Philadelphia Cream Cheese and Planters nuts – are found in most Australian and New Zealand homes: Kraft has a treasure trove of marketing data, gathered from years of interactions with customers and from its social media monitoring hub called Looking Glass. Looking Glass tracks consumer trends, competitor activities, and more than 100,000 brand-related conversations daily in social media and on blogs. Kraft also reaps data from customer interactions with its Kraft Food & Family magazine, email communications, and the more than 100 Web and social media sites that serve its large brand portfolio. In all, Kraft has 18 years’ worth of customer data across 22,000 different attributes.5 Managing marketing information The real value of marketing research and marketing information lies in how they are used – in the customer insights they provide. Based on such thinking, many companies are now restructuring their marketing research and information functions. They are creating customer insights teams, headed by a customer insights manager and composed of representatives from all of the firm’s functional areas. For example, Coca-Cola’s US marketing research group is headed by a vice president of marketing strategy and insights. And, at Unilever, marketing research is done by the Consumer and Market Insight division, which helps brand teams harness information and turn it into customer insights. Customer insights groups collect customer and market information from a wide variety of sources – ranging from traditional marketing research studies, to mingling with and observing marketing analytics Involves tools and technologies used in making sound marketing decisions that lead to effective outcomes and return on marketing investment. This process requires data collection and analysis from all channels in the physical and digital arenas, including big data, over a time span. customer insights Fresh understandings of customers and the marketplace derived from marketing information that become the basis for creating customer value and relationships. Competitive marketing intelligence: MasterCard’s digital intelligence command centre – called the Conversation Suite – monitors, analyses and responds in real-time to millions of brand-related conversations across 56 markets and 27 languages around the world. MasterCard Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 100 Part 2 Understanding the marketplace and consumers Marketing in Action 4.1 Netflix streams success with big data and marketing analytics Australians and New Zealanders now watch more movies and television programs Netflix supplements this already-massive database with consumer information streamed online than they watch on DVDs and Blu-ray discs. And with its rotating purchased from Nielsen, Facebook, Twitter and other sources. Finally, the library of more than 60 000 titles in its US database, Netflix streams more movie company employs experts to classify each video on hundreds of characteristics, and program content by far than any other video service. Netflix’s 62 million paid such as talent, action, tone, genre, colour, volume, scenery and many, many subscribers watch more than 3.3 billion hours of movies and television programs others. Using this rich base of big data, Netflix builds detailed subscriber profiles every month. During peak hours on any given day, a remarkable one-third of all based on individual viewing habits and preferences. It then uses these profiles to downloads on the non-mobile internet are devoted to streamed programming personalise each customer’s viewing experience. According to Netflix, there are from Netflix. 53 million different versions of Netflix, one for each individual subscriber worldwide. All of this comes as little surprise to avid Netflixers. But members might be For example, Netflix uses data on viewing history to make personalised startled to learn that while they are busy watching Netflix videos, Netflix is busy recommendations. Wading through 60 000 titles to decide what to watch can be watching them – watching them very, very closely. Netflix tracks and analyses overwhelming. So when new customers sign up, Netflix asks them to rate their a great deal of customer data in excruciating detail. Then it uses the big data interest in movie and television genres and to rate specific titles they have already insights to give customers exactly what they want. Netflix knows in depth what seen. It then cross-references what people like with other similar titles to predict its audience wants to watch, and it uses this knowledge to fuel recommendations additional movies or programs customers will enjoy. to subscribers, to decide what programming to offer and even to develop its own exclusive content. But that is just the beginning. As customers watch and rate more and more video content, and as Netflix studies the details of their viewing behaviour, Few companies know their customers better than Netflix. The company the predictions become more and more accurate. Netflix often comes to know has mind-boggling access to real-time data on member viewing behaviour and individual customer viewing preferences better than customers themselves do. sentiments. Every day, Netflix tracks and parses member data on tens of millions How accurate are Netflix’s recommendations? Seventy-five per cent of viewing of searches, ratings and ‘plays’. Netflix’s bulging database contains every viewing activity results from these suggestions. That is important. The more subscribers detail for each individual subscriber – what shows they watch, at what time of watch, the more likely they are to stay with Netflix – viewers who watch at day, on what devices, at what locations and even when they hit the pause, rewind least 15 hours of content each month are 75 per cent less likely to cancel their or fast-forward buttons during programs. membership. Accurate recommendations increase average viewing time, keeping subscribers in the fold. Increased viewing also depends on offering the right content in the first place. But adding new programming is expensive – content licensing fees constitute the lion’s share of Netflix’s cost of goods sold. With so many new and existing movies and television programs on the market, Netflix must be very selective in what it adds to its content inventory. Once again, it is big data and marketing analytics to the rescue. Just as Netflix analyses its database to come up with subscriber recommendations, it uses the data to assess what additional titles customers might enjoy and how much each is worth. The goal is to maximise subscriber ‘happiness-per-dollar-spent’ on new titles. ‘We always use our in-depth knowledge about what our members love to watch to decide what’s available on Netflix,’ says a Netflix marketer. ‘If you keep watching, we’ll keep adding more of what you love.’ To get even more viewers watching even more hours, Netflix uses its extensive Marketing analytics and big data: While subscribers are busy watching Netflix videos, Netflix is busy watching them. Then it uses the big data insights to give customers exactly what they want. big data insights to add its own exclusive video content – things you can see only Chris Ryan/OJO Images Ltd/PSL Images/Alamy air the first two seasons of House of Cards, a US version of a hit British political on Netflix. In its own words, Netflix wants ‘to become HBO faster than HBO can become Netflix’. For example, Netflix stunned the media industry when it outbid both HBO and AMC by paying a stunning US$100 million for exclusive rights to drama produced by Hollywood bigwigs, David Fincher and Kevin Spacey. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights To outsiders, the huge investment in House of Cards seemed highly risky. However, using its powerful database, Netflix was able to predict accurately 101 producing content, have earned Netflix the nickname ‘The Red Menace’ among competitors. which and how many existing members would watch House of Cards regularly As more and more high-quality video streams out of Netflix, more success and how many new members would sign up because of the show. Netflix also streams in. Netflix’s sales have surged 53 per cent during the past two years. used its viewer knowledge to pinpoint and personalise promotion of the exclusive Last year alone, membership grew by more than 20 per cent. Netflix thrives new series to just the right members. Before House of Cards premiered, based on using big data and marketing analytics to know and serve its customers. on their profiles, selected subscribers saw one of 10 different trailers of the show The company excels at helping customers figure out just what they want to watch aimed at their specific likes and interests. and offering just the right content profitably. Says Netflix’s chief communications Thanks to Netflix’s big data and marketing analytics prowess, House of Cards was a smash hit. It brought in 3 million new subscribers in only the officer, ‘Because we have a direct relationship with consumers, we know what people like to watch, and that helps us [immeasurably].’ first three months. These new subscribers alone covered almost all of the US$100 million investment. More importantly, a Netflix survey revealed that, for the average House of Cards viewer, 86 per cent were less likely to cancel because of the new program. Such success came as no surprise to Netflix. Its data had predicted that the program would be a hit before the director ever shouted ‘action’. Since then, House of Cards has become Netflix’s hottest program. Based on its success, Netflix developed a number of other original series, including Hemlock Grove, Lillyhammer, Orange Is the New Black, Bad Samaritans, Marco Polo and the animated series, BoJack Horseman. For traditional broadcast networks, the average success rate for new television shows is 35 per cent. In contrast, Netflix is batting almost 70 per cent. To continue the momentum, Netflix has committed US$300 million a year to developing new original content. The digital video giant now has 12 exclusive or original shows on the air, with another 24 scheduled for the next two years, including drama series, comedy specials, movies and documentaries. Netflix’s success has thrown a scare into competitors, such as leading Sources: Dominic White, ‘Stan is on clear path to profitability’, Australian Financial Review, 12 May 2016, p. 45; Mark Serrels, ‘Netflix just hit 1 million subscribers in Australia’, Kotaku, 20 January 2016, <www.kotaku.com.au/2016/01/netflix-just-hit-1-million-subscribersin-australia>; Nicole Laporte, ‘Netflix: The red menace,’ Fast Company, 7 January 2014, <www.fastcompany.com/3024158/netflix-the-red-menace>; Anders Bylund, ‘Netflix, Inc. is paying huge sums to produce original shows,’ Motley Fool, 6 October 2014, <www.fool. com/investing/general/2014/10/06/netflix-inc-is-paying-huge-sums-to-produce-origina. aspx>; David Carr, ‘Giving viewers what they want,’ New York Times, 25 February 2013, p. B1; Zach Bulygo, ‘How Netflix uses analytics to select movies, create content, and make multimillion dollar decisions’, Kissmetrics, 6 September 2013, <blog.kissmetrics.com/hownetflix-uses-analytics/>; Craig Smith, ‘By the numbers: 40 amazing Netflix statistics and facts,’ Expanded Ramblings, 24 October 2014, <http://expandedramblings.com/index. php/netflix_statistics-facts/>; Marcus Wohlsen, ‘Netflix is beating HBO in revenue, but it’s still the underdog,’ Wired, 7 August 2014, <www.wired.com/2014/08/netflix-is-beatinghbo-in-revenue-but-its-still-the-underdog/>; Lisa Richwine, ‘Netflix beats forecasts with 62 million streaming subscribers,’ Reuters, 15 April 2015, <www.reuters.com/ article/2015/04/15/us-netflix-results-idUSKBN0N62HC20150415>; Catherine Knowles, ‘Competition heats up for Netflix in ANZ’, NetGuide, 21 January 2015, <https://netguide. co.nz/story/competition-heats-up-for-netflix-anz>, and <www.netflix.com>, accessed September 2015. Questions US cable-subscription network HBO, and Australasian competitors Foxtel, ❶ What is marketing analytics? Quickflix, Lightbox, Neon and Stan. Although Netflix still lags HBO in profits, ❷ What is big data? its US online-only membership has reached 36 million compared with HBO’s ❸ What benefits does a company like Netflix gain from marketing 30 million cable subscribers, and Netflix recently passed HBO in US revenues. It is no surprise, then, that HBO began selling online-only subscriptions in 2015. By early 2016, Netflix had over 1 million subscribers in Australia, and reached nearly 3 million people. Such numbers, along with its unconventional methods for analytics? Might this translate into increased customer lifetime value and, if so, why? ❹ Based on your research, what strengths and weaknesses does Netflix exhibit over the competitors mentioned in the vignette? consumers, to monitoring consumer online conversations about the company and its products. Then, they use this information to develop important customer insights from which the company can create more value for its customers. Thus, companies must design effective marketing information systems that give managers the right information, in the right form, at the right time – and then help them to use this information to create customer value and stronger customer relationships. A marketing information system (MIS) consists of people and procedures dedicated to assessing information needs, developing the needed information and helping decision makers use the information to generate and validate actionable customer and market insights. Figure 4.1 shows that the MIS begins and ends with information users – marketing managers, internal and external partners, and others who need marketing information. First, it interacts with these marketing information system (MIS) People and procedures dedicated to assessing information needs, developing the needed information and helping decision makers use the information to generate and validate actionable customer and market insights. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 102 Part 2 Understanding the marketplace and consumers Marketing managers and other information users Obtaining customer and market insights from marketing information MARKETING INFORMATION SYSTEM Developing needed information Assessing information needs Internal databases Marketing intelligence Marketing research Analysing and using information MARKETING ENVIRONMENT Target markets Marketing channels Competitors Publics Macroenvironment forces Figure 4.1 The marketing information system information users to assess information needs. Next, it interacts with the marketing environment to develop needed information through internal company databases, marketing intelligence activities and marketing research. Finally, the MIS helps users to analyse and use the information to develop customer insights, make marketing decisions and manage customer relationships. Assessing marketing information needs (pp. 102–3) The marketing information system primarily serves the company’s marketing and other managers. However, it may also provide information to external partners, such as suppliers, resellers or marketing services agencies. For example, retailers’ systems often give key suppliers access to information ranging from customers’ buying patterns and store inventory levels to how many items they have sold in which stores in the past 24 hours.6 A good MIS balances the information users would like to have against what they really need and what is feasible to offer. The company begins by interviewing managers to find out what information they would like. Some managers will ask for whatever information they can get without thinking carefully about what they really need. Too much information can be as harmful as too little. Other managers may omit things they ought to know, or they may not know to ask for some types of information they should have. For example, managers might need to know about surges in favourable or unfavourable consumer discussions about their brands on blogs or online social networks. Because they do not know about these discussions, they fail to ask about them. The MIS must monitor the marketing environment to provide decision makers with information they should have in order to better understand customers and make key marketing decisions. Table 4.1 lists questions for assessing marketing information needs. The costs of obtaining, analysing, storing and delivering information can mount quickly. The company must decide whether the value of insights gained from additional information is worth the Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights 103 Table 4.1 Questions for assessing marketing information needs 1 What types of decisions are you regularly called upon to make? 2 What types of information do you need in order to make these decisions? 3 What types of information do you regularly get? 4 What types of special studies do you periodically request? 5 What types of information would you like to get that you are not now getting? 6 What information would you want daily? Weekly? Monthly? Yearly? 7 What magazine and trade reports would you like to see on a regular basis? 8 What specific topics would you like to be kept informed of? 9 What types of data analysis programs would you like to see made available? 10 What do you think would be the four most helpful improvements that could be made in the present marketing information system? costs of providing it, and both value and cost are often difficult to assess. By itself, information has no worth; its value comes from its use – from the customer insights it provides and their impact on decision making. Rather, companies should weigh carefully the costs of getting more information against the benefits resulting from it. Developing marketing information (pp. 103–5) Marketers can obtain the needed information from internal data, marketing intelligence and marketing research. Internal data Many companies build extensive internal databases – electronic collections of consumer and market internal databases information obtained from data sources within the company’s network. Information in the database can Electronic collections of consumer and market come from many sources. The marketing department furnishes information on customer characteristics, information obtained sales transactions and website visits. The customer service department keeps records of customer from data sources within satisfaction or service problems. The accounting department provides detailed records of sales, costs the company’s network. and cashflows. Operations reports on production, shipments and inventories. The salesforce reports on reseller reactions and competitor activities, and marketing-channel partners provide data on pointof-sale transactions. Harnessing such information can provide powerful customer insights and a competitive advantage. Consider this example of the use of internal information by a typical global pharmaceutical company. This company uses its internal information system to analyse daily sales performance. Each day, via notebooks and smartphones, sales consultants report their day’s efforts with chemists and doctors, as well as competitive activity, into head office. In addition, pharmacy cash registers are connected Internal databases: Access to data when in the field allows salespeople to be to wholesalers, such as Sigma Pharmaceuticals, more effective. which has a comprehensive logistics system, and sales © Mint Images RF/Shutterstock.com 7 are updated daily. Almost the next day, marketing Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 104 Part 2 Understanding the marketplace and consumers managers have a complete report analysing the previous day’s sales through chemists and supermarkets. The system helps marketing managers make better decisions and makes the salespeople more effective. Pharmaceutical sales consultants work mostly from home, and the aim is to reduce the number of hours they spend filling out reports and thereby give them extra time for selling. Internal databases usually can be accessed more quickly and cheaply than other information sources, but they also present some problems. Because internal information is often collected for other purposes, it may be incomplete or in the wrong form for making marketing decisions. Data also age quickly; keeping the database current requires a major effort. Finally, managing the mountains of information that a large company produces requires highly sophisticated equipment and techniques. competitive marketing intelligence Competitive marketing intelligence Competitive marketing intelligence is the systematic monitoring, collection and analysis of The systematic monitoring, collection and analysis of publicly available information about consumers, competitors and developments in the marketing environment. publicly available information about consumers, competitors and developments in the marketplace. The goal of competitive marketing intelligence is to improve strategic decision making by understanding the consumer environment, assessing and tracking competitors’ actions, and providing early warnings of opportunities and threats. Marketing intelligence gathering has grown dramatically as more and more companies are now busily eavesdropping on the marketplace and snooping on their competitors. Techniques range from observing consumers first-hand to quizzing the company’s own employees, benchmarking competitors’ products, conducting online research and monitoring social media buzz. Good marketing intelligence can help marketers to gain insights into how consumers talk about and connect with their brands. Many companies send out teams of trained observers to mix and mingle with customers as they use and talk about the company’s products. Other companies – such as Dell, PepsiCo, Kraft and MasterCard – have set up sophisticated digital command centres that routinely monitor brand-related online consumer and marketplace activity. Sentiment analysis might help a digital reconnaissance team to gather relevant customer data, and may have the potential to automate, augment and/or reduce the cost of some traditional approaches to customer segmentation, such as qualitative and quantitative analysis. Companies also need to actively monitor competitors’ activities. They can monitor competitors’ websites and social media sites. For example, Amazon’s Competitive Intelligence arm routinely purchases merchandise from competing websites to analyse and compare their product assortment, speed of delivery and service quality. Companies can use the internet to search specific competitor names, events or trends and see what turns up. Firms use competitive marketing intelligence to gain early insights into competitor moves and strategies and to prepare quick responses. For example, Samsung routinely monitors real-time social media activity surrounding the introduction of Apple’s latest iPhones to quickly shape marketing responses for its own Galaxy S smartphones and tablets.8 Competitors often reveal intelligence information through their annual reports, business publications, trade show exhibits, press releases, advertisements and web pages. The internet is an invaluable source of competitive intelligence. And tracking consumer conversations about competing brands is often as revealing as tracking conversations about the company’s own brands. Moreover, most competitors now place volumes of information on their websites, providing details of interest to customers, partners, suppliers, investors or franchisees. This can provide a wealth of useful information about competitors’ strategies, markets, new products, facilities and other happenings. Intelligence seekers can also pore through any of thousands of online databases. Some are free. For example, the Australian Securities and Investments Commission’s (ASIC’s) database provides a huge stockpile of financial information on public competitors, and the AusPat database (managed by IP Australia, a department of the Australian government) reveals patents competitors have filed. For a fee, companies Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights 105 Competitive marketing intelligence: General database services, such as LexisNexis, put an incredible wealth of information at the fingertips of marketing decision makers. © Copyright 2015 LexisNexis, a division of Reed Elsevier Inc. All rights reserved. LexisNexis and the Knowledge Burst logo are registered trademarks of Reed Elsevier Properties Inc. and are used with the permission of LexisNexis. can also subscribe to any of the more than 3000 online databases and information search services, such as Hoover’s, LexisNexis and Dun & Bradstreet. Today’s marketers have an almost overwhelming amount of competitor information only a few keystrokes away. The intelligence game goes both ways. Facing determined competitive marketing intelligence efforts by competitors, most companies take steps to protect their own information. One self-admitted corporate spy advises that companies should try conducting marketing intelligence investigations of themselves, looking for potentially damaging information leaks. They should start by ‘vacuuming up’ everything they can find in the public record, including job postings, court records, company advertisements and blogs, web pages, press releases, online business reports, social media postings by customers and employees, and other information available to inquisitive competitors.9 The World War II adage ‘Loose lips sink ships!’ is a constant reminder to personnel in many organisations to be mindful of those wishing to gather marketing intelligence. The growing use of marketing intelligence raises a number of ethical issues. Although most of the preceding techniques are legal, and some are considered to be shrewdly competitive, some may involve questionable ethics. Clearly, companies should take advantage of publicly available information. However, they should not stoop to snoop. With all the legitimate intelligence sources now available, a company does not need to break the law or accepted codes of ethics to get good intelligence. Marketing research (pp. 105–19) In addition to marketing intelligence information about general consumer, competitor and marketplace happenings, marketers often need formal studies that provide customer and market insights for specific marketing situations and decisions. For example, Nike wants to know what appeals will be most effective in its AFL, NRL and A-League advertising. Google wants to know how web searchers will react to a proposed redesign of its site. Perhaps Asus, HTC, LG and Samsung want to know what features smartphone and tablet users want from internet phones using the Android or the company’s proprietary operating system. (See Appendix 2 for more information.) Or LG wants to know how many and what kinds of people will buy its flat-screen and curved-screen OLED televisions. In such situations, marketing intelligence will not provide the detailed information needed. Managers will need marketing research. Marketing research is the systematic design, collection, analysis and reporting of data relevant to a specific marketing situation facing an organisation. Companies use marketing research in a wide variety of marketing research The systematic design, collection, analysis and reporting of data relevant to a specific marketing situation facing an organisation. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 106 Part 2 Understanding the marketplace and consumers Defining the problem and research objectives qualitative research Studies involving a small number of individuals, such as focus groups or in-depth one-to-one interviews. The primary tool in qualitative research is the focus group, but this includes modern variations such as online focus groups and teleconferences. One-on-one interviews are used to delve deeply into the topic. quantitative research Studies involving ‘a lot’ of people. Quantitative research uses statistical average techniques such as mean ratings, and statistical tools such as sampling error and standard error, to analyse data. There is no stated number of people who must be interviewed to make a study quantitative, but samples of 100 or more are usually considered quantitative. exploratory research Marketing research used to gather preliminary information that will help to define problems, and to suggest hypotheses. descriptive research Marketing research used to better describe marketing problems, situations or markets. causal research Marketing research used to test hypotheses about cause-and-effect relationships. Developing the research plan for collecting information Implementing the research plan– collecting and analysing the data Interpreting and reporting the findings Figure 4.2 The marketing research process situations. For example, marketing research gives marketers insights into customer motivations, purchase behaviour and satisfaction. It can help them to assess market potential and market share, or to measure the effectiveness of pricing, product, distribution and promotion activities. In addition, these companies – like their smaller counterparts – frequently hire outside research specialists to consult with management on specific marketing problems and to conduct marketing research studies. Sometimes, firms simply purchase data collected by outside firms to aid in their decision making. Nevertheless, almost any organisation can find informal, low-cost alternatives to the formal and complex marketing research techniques used by research experts in large firms, whether they undertake qualitative research with their main customers, or seek information from online sources. They may also undertake quantitative research across a broad range of consumers, using samples greater than 100 respondents and employing various statistical techniques in any analyses. The marketing research process has four steps (see Figure 4.2): (1) defining the problem and research objectives; (2) developing the research plan; (3) implementing the research plan; and (4) interpreting and reporting the findings. Defining the problem and research objectives Marketing managers and researchers must work closely together to define the problem and agree on research objectives. The manager best understands the decision for which information is needed; the researcher best understands marketing research and how to obtain the information. Defining the problem and research objectives is often the most difficult step in the research process. The manager may know that something is wrong, without knowing the specific causes. After the problem has been defined carefully, the manager and researcher must set the research objectives. A marketing research project might have one of three types of objectives. The objective of exploratory research is to gather preliminary information that will help define the problem and to suggest hypotheses. The objective of descriptive research is to describe things, such as the market potential for a product or the demographics and attitudes of consumers who buy the product. The objective of causal research is to test hypotheses about cause-and-effect relationships. For example, would a 10 per cent decrease in tuition fees at a private secondary college result in an enrolment increase sufficient to offset the reduced tuition revenue? Managers often start with exploratory research and then follow later with descriptive or causal research. The statement of the problem and research objectives guides the entire research process. The manager and researcher should put the statement in writing to be certain that they agree on the purpose and expected results of the research. Developing the research plan Once the research problems and objectives have been defined, researchers must determine the exact information needed, develop a plan for gathering it efficiently and present the plan to management. The research plan outlines sources of existing data and spells out the specific research approaches, contact methods, sampling plans and instruments that researchers will use to gather new data. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights 107 Research objectives must be translated into specific information needs. For example, suppose that Nando’s wants to know how consumers would react to the addition of drive-through service to its restaurants. In the United States, fast-food chains generate an estimated 24 per cent of sales through drive-throughs. However, Nando’s – home of the legendary butterfly-cut, flame-grilled PERiPERi ­chicken – does not offer drive-through service. Adding drive-throughs might help Nando’s leverage its strong brand position and attract new sales. The proposed research might call for the following specific information: • The demographic, economic and lifestyle characteristics of current Nando’s customers. Do current counter-service customers also use drive-throughs? Are drive-throughs consistent with their needs and lifestyles? Or would Nando’s marketers would need many types of information to decide Nando’s need to target a new segment of consumers? whether to introduce drive-through service and, if so, the best way to do it. • The characteristics and usage patterns of the broader Nando’s Australia population of fast-food and fast-casual diners. What do they need and expect from such restaurants? Where, when and how do they use them, and what existing quality, price and service levels do they value? secondary data The new Nando’s service would require strong, relevant and distinctive positioning in the crowded Information that already exists somewhere, fast-food market. having been collected • Impact on Nando’s customer experience. Would drive-throughs be consistent with a higher-quality for another purpose. fast-casual experience, like the one Nando’s offers? • Nando’s employee reactions to drive-through service. Would restaurant employees support drive-throughs? primary data Would adding drive-throughs disrupt operations and their ability to deliver high-quality food and Information collected for the specific purpose service to inside customers? at hand. • Forecasts of both inside and drive-through sales and profits. Would the new drive-through service create new sales and customers or simply divert sales away from current operations? Nando’s marketers would need answers to these questions and many other types of information in order to decide whether to introduce drive-through service and, if so, the best way to do it. The research plan should be presented in a written proposal. A written proposal is especially important when the research project is large and complex, or when an outside firm carries it out. The proposal should cover the management problems addressed, the research objectives, the information to be obtained and how the results will help management’s decision making. The proposal also should include estimated research costs. To meet the manager’s information needs, the research plan can call for gathering secondary data, primary data or both. Secondary data consists of information that already exists somewhere, having been collected for another purpose. Primary data consists of information collected for the specific purpose at hand. Gathering secondary data Researchers usually start by gathering secondary data. The company’s internal database provides a good starting point. However, the company can also tap into a wide assortment of external information sources, including commercial data services and government sources (see Table 4.2). Market growth: A decision by Red Bull to add a line of enhanced waters to its already successful mix of energy drinks would call for marketing research that provides a good deal of specific information. Red Bull GmbH Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 108 Part 2 Understanding the marketplace and consumers Table 4.2 Sources of secondary data Internal sources Internal sources include company profit and loss statements, balance sheets, sales figures, sales call reports, invoices, inventory records and prior research reports. Today, this information is usually stored and manipulated in digital form as part of a firm’s executive information system (EIS). Government publications The Year Book Australia (Cat. No. 1301.0), updated annually, provides summary data on the Australian economy, demography and society. A catalogue of publications is available from the Australian Bureau of Statistics as well as Australian Government Publishing Service offices in state capitals. Most of the time, marketers are interested in publications relating to population and population projections by state and local government area, as well as household income and expenditure. Today, such data can also be accessed directly via computer links where such a service is subscribed to – for example, 2011 Census: CDATA, available online from <www. abs.gov.au> and search on CDATA. Periodicals and books Business Periodicals Index, published monthly, lists business articles appearing in a wide variety of business publications, from newspapers to BRW. Marketing journals include Journal of Marketing, Journal of Marketing Research, The International Review of Retail, Distribution and Consumer Research and Journal of Consumer Research. Useful Australian trade magazines include Retail World, Foodweek and B&T, while US trade magazines include Advertising Age, Chain Store Age, Progressive Grocer, Sales and Marketing Management and Stores. Useful general business newspapers and magazines include the Australian Financial Review, Australian Business Monthly and BRW, which are published in Australia, and New Zealand Business and NZ Marketing in New Zealand. Useful US publications include BusinessWeek, Fortune, Forbes and Harvard Business Review. There are also many specialist publications relating to specific industries, such as APC for subscribers interested in microcomputers and tablets, which contain a wealth of marketing as well as technical information. Commercial data Here are just a few of the dozens of commercial research houses selling data to subscribers: •Nielsen Company provides data on household purchasing (NPD/Nielsen Electronic Household Panel), supermarket scanner data (Nielsen), data on television audiences (OzTAM, Nielsen and Roy Morgan Research Centre) and others. •Nielsen produces product movement reports based on warehouse withdrawals data from supermarkets, chemists and mass ­merchandisers, and supermarket scanner data. •The Roy Morgan Research Centre provides annual reports covering television markets, giving values and lifestyles typography and geodemographic data by sex, income, age and brand preferences (selective markets and media reaching them). •Specialist researchers, the Federal Chamber of Automotive Industries, provide data on motor vehicle sales in its VFACTS report, while IDC (International Data Corporation) provides feedback on such industries as information technology. •Others, such as BIS Shrapnel, undertake syndicated research on the food services industry and the construction industry, as well as general economic forecasting studies. •Firms such as Deloitte Access Economics undertake econometric studies of the type that governments and opposition parties use, for example, to model such inputs/outputs as the effects of a particular policy change (e.g. a goods and services tax) on household income and expenditure. commercial online databases Computerised collections of information available from online commercial sources or via the internet. Companies can buy secondary data reports from outside suppliers. For example, Nielsen sells buyer data from a consumer panel of more than 250 000 households in 25 countries worldwide, with measures of trial and repeat purchasing, brand loyalty and buyer demographics. Experian Australia sells information on brands in many product categories, including detailed consumer profiles that assess everything from the products consumers buy and the brands they prefer, to their lifestyles, attitudes and media preferences. Roy Morgan Single Source is a key offering by Roy Morgan Research and incorporates the Roy Morgan Readership Survey, Roy Morgan BrandPLANNER, MediaPLANNER, RadioPLANNER, TVPLANNER and CreativePLANNER. It also offers other decision-science products for various industries. These and other firms supply high-quality data to suit a wide variety of marketing information needs.10 Using commercial online databases, marketing researchers can conduct their own searches of secondary data sources. General database services, such as ProQuest and LexisNexis, put an incredible wealth of information within easy reach of marketing decision makers. Beyond commercial websites offering information for a fee, almost every industry association, government agency, business publication and news medium offers free information to those tenacious enough to find their websites or apps. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights 109 Internet search engines can also be a big help in locating relevant secondary information sources. However, they can also be very frustrating and inefficient. For example, a Nando’s marketer googling ‘fast-food drivethrough’ from Australia would come up with more than 1.5 million results. Still, well-structured, welldesigned online searches can be a good starting point to any marketing research project. Secondary data can usually be obtained more quickly and at a lower cost than primary data. Also, secondary sources can sometimes provide data an individual company cannot collect on its own – information that either is not directly available or would be too expensive to collect. For example, it would be too expensive for Nando’s marketers to conduct a continuing retail store audit to find out about the market shares, prices and displays of competitors’ brands. But it can buy household panel data and the Panorama service from Nielsen, which provides information on media habits, lifestyles, attitudes and product consumption at a local market level, as well as offering an Asia-Pacific level through Nielsen Media Index. Secondary data can also present problems. The needed information may not exist – researchers can rarely obtain all the data they need from secondary sources. For example, Nando’s will not find existing information about consumer reactions to a new drive-through service that it has not yet introduced to the market. Moreover, when data can be found, the information might not be very usable. In such cases, the researcher must evaluate secondary information carefully to make certain it is relevant (fits research project needs), accurate (reliably collected and reported), current (up-to-date enough for current decisions) and impartial (objectively collected and reported). Primary data collection Secondary data provide a good starting point for research and often help to define research problems and objectives. In most cases, however, the company must also collect primary data. Just as researchers must carefully evaluate the quality of secondary information, they also must take great care when collecting primary data. They need to make sure the data will be relevant, accurate, current and unbiased. Table 4.3 shows that designing a plan for primary data collection calls for a number of decisions on research approaches, contact methods, sampling plan and research instruments. Research approaches Research approaches for gathering primary data include observation, surveys and experiments. Here, we discuss each approach in turn. Observational research Observational research involves gathering primary data by observing relevant people, actions and situations. For example, a bank might evaluate possible new branch locations by checking traffic patterns, neighbourhood conditions and the location of competing branches. Researchers often observe consumer behaviour to glean customer insights they cannot obtain by simply asking customers questions. For instance, Fisher-Price has set up an observation lab in which it can observe the reactions of young children to new toys. The Fisher-Price Play Lab is a sunny, toy-strewn space where lucky kids get to test Fisher-Price prototypes, under the watchful eyes of designers who hope to learn what will get kids worked up into a new-toy frenzy. Similarly, in its research labs, using high-tech cameras and other equipment, Gillette observes women shaving and uses the insights to design new razors and shaving products. observational research Gathering primary data by observing relevant people, actions and situations. Table 4.3 Planning primary data collection Research approaches Contact methods Sampling plan Research instruments Observation Survey Experiment Mail Telephone Personal Online Sampling unit Sample size Sampling procedure Questionnaire Mechanical instruments Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 110 Part 2 Understanding the marketplace and consumers Marketers not only observe what consumers do but also what they are saying. As discussed earlier, marketers now routinely listen in on consumer conversations on social media and feedback provided on websites. Observing such naturally occurring feedback can provide inputs that simply cannot be gained through more structured and formal research approaches. A wide range of companies now use ethnographic research. Ethnographic research involves sending trained observers to watch and interact with consumers in their ‘natural habitats’. Global branding firm, Landor, launched Landor Families, an ongoing ethnographic study that has followed 11 French families intensely for the past seven years. Landor researchers visit the families twice a year in their homes, peeking into their refrigerators and diving deeply into their food-shopping behaviours and opinions. The researchers also shop with the families at their local supermarkets and look over their shoulders while they shop online. The families furnish monthly online reports detailing their shopping behaviours and opinions. The Landor Families study provides rich behavioural insights for Landor clients, such as Danone, Kraft Foods and Procter & Gamble. Ethnographic research: The Landor Families ongoing ethnographic study has followed 11 French families intensely for the past seven years, diving Today’s big data analytics can provide important insights deeply into both their refrigerators and their food-shopping behaviours. into the whats, whens and wheres of consumer buying. Says Landor, ‘There is no better way to understand people than to The Landor Families program is designed to explore the observe them in real life.’ whys. According to Landor, ‘There is no better way to Landor understand people than to observe them in real life.’11 ethnographic Observational and ethnographic research will often yield the kinds of details that are not possible using research traditional research questionnaires or focus groups. For example, focus groups told the Best Western hotel A form of observational chain that it is men who decide when to stop for the night and where to stay; however, videotapes of couples research that involves on cross-country journeys showed it was usually the women who made these decisions. sending trained observers to watch and ‘The beauty of ethnography,’ says a research expert, is that it ‘allows companies to zero in on their interact with consumers customers’ unarticulated desires.’ Agrees another researcher, ‘Classic market research doesn’t go far enough. in their ‘natural habitats’. It can’t grasp what people can’t imagine or articulate.’12 For this reason, Disney sends its executives into the field at theme parks. Kimberley-Clark even runs a program to give its executives a first-hand experience of what it is like to be elderly, with poor vision and arthritis – the company puts its executives into retail outlets wearing vision-blurring glasses, unpopped popcorn in their shoes and bulky rubber gloves. Participants come back from these experiences bursting with ideas for elderly-friendly store changes, such as bigger typefaces and more eye-friendly colours on packaging and flyers, new store lighting and clearer signage, and instant call buttons near heavy merchandise such as bottled water and laundry detergent.13 Survey research survey research Gathering primary data by asking people questions about their knowledge, attitudes, preferences and buying behaviour. Survey research, the most widely used method for primary data collection, is the approach best suited for gathering descriptive information. A company that wants to know about people’s knowledge, attitudes, preferences or buying behaviour can often find out by asking them directly. The major advantage of survey research is its flexibility – it can be used to obtain many different kinds of information in many different situations. Surveys addressing almost any marketing question or decision can be conducted by telephone or mail, in person or online. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights 111 However, survey research also presents some problems. Sometimes, people are unable to answer survey questions because they cannot remember or have never thought about what they do or why. People may be unwilling to respond to unknown interviewers or about things they consider to be private. Respondents may answer survey questions even when they do not know the answer in order to appear smarter or more informed. Or they may try to help the interviewer by giving pleasing answers. Finally, busy people may not take the time, or they might resent the intrusion into their privacy. Experimental research Whereas observation is best suited for exploratory research and surveys best suited for descriptive research, experimental research is best suited for gathering causal information. Experiments involve selecting matched groups of subjects, giving them different treatments, controlling unrelated factors and checking for differences in group responses. Thus, experimental research tries to explain cause-and-effect relationships. For example, before adding a new sandwich to its menu, McDonald’s might use experiments to test the effects on sales of two different prices it might charge. It could introduce the new sandwich at one price in one city and at another price in another city. If the cities are similar, and if all other marketing efforts for the sandwich are the same, then differences in sales in the two cities could be related to the price being charged. experimental research Gathering primary data by selecting matched groups of subjects, giving them different treatments, controlling related factors and checking for differences in group responses. Contact methods Information can be collected by mail, telephone, personal interview or online. Table 4.4 shows the strengths and weaknesses of each of these contact methods. Mail, telephone and personal interviewing Mail questionnaires can be used to collect large amounts of information at a low cost per respondent. Respondents may give more honest answers to more personal questions on a mail questionnaire than to an unknown interviewer in person or over the telephone. Also, no interviewer is involved to bias the respondent’s answers. However, mail questionnaires are not very flexible – all respondents answer the same questions in a fixed order, or may skip over pertinent questions. Mail surveys usually take longer to complete, and the response rate – the number of people returning completed questionnaires – is often very low. Finally, the researcher often has little control over the mail questionnaire sample. Even with a good mailing list, it is difficult to control who at the mailing address fills out the questionnaire. As a result of these shortcomings, more and more marketers are now shifting to faster, more flexible and lower-cost online surveys. Telephone interviewing can be one of the best methods for gathering information quickly, and it provides greater flexibility than mail questionnaires. Interviewers can explain difficult questions and, depending on the answers they receive, skip some questions or probe on others. Response rates tend to be higher than with mail questionnaires, and interviewers can ask to speak to respondents with the desired characteristics or even by name. However, with telephone interviewing, the cost per respondent is higher than with mail or online questionnaires. Also, people may not want to discuss personal questions with an interviewer. The method introduces interviewer bias – the way interviewers talk, how they ask questions and other differences may affect respondents’ answers. Finally, in this age of do-not-call lists and promotion-harassed consumers, Table 4.4 Strengths and weaknesses of contact methods Mail Telephone Personal Online Flexibility Poor Good Excellent Good Quality of data that can be collected Good Fair Excellent Good Control of interviewer effects Excellent Fair Poor Fair Control of sample Fair Excellent Good Excellent Speed of data collection Poor Excellent Good Excellent Response rate Poor Poor Good Fair Cost Good Fair Poor Excellent Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 112 Part 2 Understanding the marketplace and consumers focus group interviewing potential survey respondents are increasingly hanging up on telephone interviewers rather than talking with them. This raises the costs as it is necessary to make many calls in order to reach sufficient numbers of respondents willing to be interviewed, in order to achieve a valid sample size. Personal interviewing takes two forms – individual interviewing and group interviewing. Individual interviewing involves talking with people in their homes or offices, on the street or in shopping malls. Such interviewing is flexible. Trained interviewers can guide interviews, explain difficult questions and explore issues as the situation requires. They can show subjects actual products, advertisements or packages, and observe reactions and behaviour. However, individual personal interviews may cost three to four times as much as telephone interviews. Group interviewing consists of inviting small groups of people to meet with a trained moderator to talk about a product, service or organisation. Participants normally are paid a small sum for attending. The moderator encourages free and easy discussion, hoping that group interactions will bring out actual feelings and thoughts. At the same time, the moderator ‘focuses’ the discussion – hence the name focus Personal interviewing that involves inviting small groups of people to gather for a few hours with a trained interviewer to talk about a product, service or organisation. The interviewer ‘focuses’ the group discussion on important issues. group interviewing. Researchers and marketers watch the focus group discussions from behind one-way glass and record comments in writing or on video for later study. Today, focus group researchers can use videoconferencing and online technology to connect marketers in distant locations with live focus-group action. Using cameras and two-way sound systems, marketing executives in a far-off boardroom can look in and listen, using remote controls to zoom in on faces and pan the focus group at will. Along with observational research, focus group interviewing has become one of the main qualitative marketing research tools for gaining fresh insights into consumer thoughts and feelings. However, focus group studies present some challenges. They usually employ small samples to keep time and costs down, and it may be difficult to generalise from the results. Moreover, consumers in focus groups are not always open and honest about their real feelings, behaviour and intentions in front of other people. To overcome these problems, many researchers are tinkering with the focus group design. Some companies are changing the environments in which they conduct focus groups to help consumers relax and to elicit more authentic responses. For example, Lexus hosts ‘An Evening with Lexus’ dinners in customers’ homes with groups of luxury-car buyers to learn up close and personal why they did or did not buy a Lexus. Other companies use immersion groups – small groups of consumers who interact directly and informally with product designers without a focus group moderator present. Consider this example: Volvo equals safety. In focus group after focus group, participants said the same thing. But to check these findings, Volvo called in a hypnotist. Members of Volvo focus groups were asked to test-drive a car. Immediately afterwards, they were hypnotised and asked their true feelings about the brand. It was not pretty: Many revealed that Volvo also equals being middle-aged. That idea ‘for some people was suffocating,’ says a Volvo researcher. ‘Hypnosis helped get past the clichés. We needed the conversation taken to a deeper, more emotional place.’14 Focus groups: These are often conducted in congenial settings so that customers open up and share their experiences with products and communicate any changes they might like made. Photos To Go Individual and focus group interviews can add a personal touch as opposed to more numbers-oriented, big data research. They can provide rich insights into the motivations and feelings behind the numbers and analytics. ‘Focus groups are the most widely used qualitative research tool,’ says one analyst, ‘and with Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights 113 good reason. They foster fruitful discussion and can provide unique insight into customers’ and potential customers’ needs, wants, thoughts, and feelings.’ Things really come to life when you hear people say them.15 Online marketing research The internet has had a dramatic impact on how marketing research is conducted. Increasingly, researchers are collecting primary data through online marketing research – internet surveys, online panels, experiments, content analysis, online focus groups and brand communities. Online research can take many forms. A company can use the internet or mobile technology as a survey medium. It can include a questionnaire on its website or social media sites or use email or mobile devices to invite people to answer questions. It can create online panels that provide regular feedback or conduct live discussions or online focus groups. Researchers can also conduct online experiments. They can experiment with different prices, headlines or product features on different websites or mobile sites or at different times, to learn the relative effectiveness of their offers. They can set up virtual shopping environments and use them to test new products and marketing programs. Or a company can learn about the behaviour of online customers by following their clickstreams as they visit the online site and move to other sites. To capture appropriate samples using the web, marketing organisations increasingly find it necessary to use multiframe surveys involving a combination of computer-assisted telephone interviewing (CATI) and mobile technologies together with the internet.16 As we have already seen, the things that customers write about in different forms of social media can be captured and analysed by way of content analysis.17 The internet is especially well suited to quantitative research – conducting marketing surveys and collecting data. Over three-quarters of all Australian households now have access to the web, making it a fertile channel for reaching a broad cross-section of consumers.18 As response rates for traditional survey approaches decline and costs increase, the web is quickly replacing mail and the telephone as the dominant data collection methodology. The use of online panels has had a marked effect on the marketing research industry, and online research now accounts for about 50 per cent of all survey research done in the United States, and probably for a higher percentage in Australia and New Zealand given that some 80 per cent of the population accesses the internet.19 Internet-based survey research offers some real advantages over traditional telephone and mail approaches. The most obvious advantages are speed and low costs.20 Using the internet eliminates most of the postage, telephone, interviewer and data-handling costs associated with the other approaches. Moreover, sample size and location have little impact on costs. By going online, researchers can quickly and easily distribute internet surveys to thousands of respondents simultaneously via email or by posting them on selected websites. Once the questionnaire is set up, there is little difference in cost between 10 respondents and 10 000 respondents on the internet, or between local or globally distant respondents. Responses can be almost instantaneous and, because respondents themselves enter the information, researchers can tabulate, review and share research data as they arrive. Large organisations, such as Telstra, employ real-time data for management decision making, using a dashboard approach to predictive analytics in making best use of customer insights. Customer data is at the heart of predictive analytics, which differs from forecasting as it offers the ability to generate predictions for each individual customer or prospect. Commenting on the necessary links between IT and the company’s one-to-one marketing division in predictive analytics, Telstra’s Director of Research, Insights and Analytics stated: ‘This helps us move more effectively from insight generation to insight action within our one-to-one marketing team.’21 online marketing research Collecting primary data online through internet surveys, online panels, experiments, content analysis, online focus groups and brand communities. predictive analytics Extracting information from data and using it to generate predictions for each individual customer or prospect. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 114 Part 2 Understanding the marketplace and consumers Thus, online research is well within the reach of almost any business, large or small. In fact, with the internet, practically anybody can use it for research purposes. Even smaller, less-sophisticated researchers can use online survey services, such as Qualtrics (<www. qualtrics.com>) and SurveyMonkey (<www. surveymonkey.com>), to create, publish and distribute their own custom surveys in minutes. Beyond their speed and cost advantages, web-based surveys also tend to be more interactive and engaging, easier to complete and less intrusive than traditional telephone or mail Online marketing research: Thanks to survey services such as SurveyMonkey, almost surveys. As a result, they usually garner higher any business, large or small, can create, publish and distribute its own custom online response rates. The internet can be an excellent or mobile surveys in minutes. medium for reaching the hard-to-reach – for SurveyMonkey example, the often-elusive teen, single, affluent or well-educated audiences. It is also good for reaching working parents and other people who lead busy lives. Such people are well represented online, and they can respond in their own space and at their own convenience. Just as marketing researchers have rushed to use the internet for quantitative surveys and data collection, they are now also adopting qualitative web-based research approaches – such as online depth interviews, focus groups, blogs and social networks. The internet can provide a fast, low-cost way to gain qualitative customer insights. A primary qualitative web-based research approach is online focus groups. Such focus groups offer online focus groups many advantages over traditional focus groups. Participants can log in from anywhere – all they need is a Gathering a small group laptop and a web connection. Thus, the internet works well for bringing together people from different of people online with a parts of the country or world, especially those in higher-income groups who cannot spare the time to trained moderator to travel to a central location. Also, researchers can conduct and monitor online focus groups from just about chat about a product, service or organisation, anywhere, eliminating travel, lodging and facility costs. Finally, although online focus groups require some and gain qualitative advance scheduling, results are almost immediate. insights about consumer Online focus groups can take any of several formats. Most occur in real-time, in the form of online chatattitudes and behaviour. room discussions in which participants and a moderator sit around a virtual table exchanging comments. Alternatively, researchers might set up an online message board on which respondents interact over the course of several days or a few weeks. Participants log in daily and comment on focus group topics. Although low in cost and easy to administer, online focus groups can lack the real-world dynamics of more personal approaches. The online world is devoid of the eye contact, body language and direct personal interactions found in traditional focus group research. And the internet format – running, typed commentary and online ‘emoticons’ (punctuation marks that express emotion, such as :-) to signify happiness, or :-o to signify surprise) – greatly restricts respondent expressiveness. The impersonal nature of the internet can prevent people from interacting with each other in a normal way and getting excited about a concept. To overcome these shortcomings, some researchers are now adding real-time audio and video to their online focus groups. For example, online research firms can put the human touch back into online research by assembling focus group participants in people-friendly ‘virtual interview rooms’. At the appointed time, participants sign on via their webcam-equipped computer, view live video of other participants and interact in real-time. Researchers can monitor the focus group from anywhere, seeing and hearing every respondent. Although the use of online marketing research is growing rapidly, both quantitative and qualitative web-based research do have some drawbacks. One major problem is controlling who is in the online Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights 115 sample. Without seeing respondents, it is difficult to know who they really are. To overcome such sample and context problems, many online research firms use opt-in communities and respondent panels. For example, Research Now offers online consumer and business panels profiled on many more attributes.22 Alternatively, many companies are now developing their own custom social networks and using them to gain customer inputs and insights. Online behavioural and social tracking and targeting The internet has become an important tool for conducting research and developing customer insights. But today’s marketing researchers are going even further – well beyond online surveys, focus groups and internet communities. Increasingly, they are listening to and watching consumers by actively mining the rich veins of unsolicited, unstructured, ‘bottom-up’ customer information already coursing around the internet. Whereas traditional marketing research provides more logical consumer responses to structured and intrusive research questions, online listening provides the passion and spontaneity of unsolicited consumer opinions. Tracking consumers online might be as simple as scanning customer reviews and comments on the company’s brand site or on shopping sites, such as Amazon.com or productreview.com.au. Or it might mean using sophisticated online-analysis tools to deeply analyse the mountains of consumer brand-related netnographic research comments and messages found in blogs or on social media sites, such as Facebook, Yelp, YouTube, Instagram Like ethnographic or Twitter. Listening to and engaging customers online can provide valuable insights into what consumers research, which are saying or feeling about a brand. It can also provide opportunities for building positive brand experiences observes people in natural settings, and relationships. netnographic research Many companies now excel at listening online and responding quickly and appropriately by conducting involves monitoring what is termed netnographic research, which involves monitoring online communities of interest, online communities such as Bimmerpost.com, productreview.com.au and Whirlpool.net.au, in order to gain customer insights of interest to gain customer insights from from posts to online forums, blogs and social media generally. In these relatively natural environments, posts to online forums, customers make frank disclosures about their experiences and attitudes towards brands and companies. blogs and social media Researchers use such tools as Leximancer to analyse the communications and graphically present their generally. findings as themes and concepts.23 Observational netnographic research often yields the kinds of details that do not emerge from traditional research questionnaires or focus groups. Whereas traditional quantitative research approaches seek to test known hypotheses and obtain answers to well-defined product or strategy questions, observational research can generate fresh customer and market insights that people are unwilling or unable to provide. It provides a window into customers’ unconscious actions and unexpressed needs and feelings. However, some things simply cannot be observed, such as attitudes, motives or private behaviour. Longterm or infrequent behaviour is also difficult to observe. Finally, observations can be very difficult to interpret. Because of these limitations, researchers often use observation along with other data collection methods. Netnographic research: To better understand the views of members of communities of interest, the content of posts, blogs and social media Information about what consumers do while generally can be analysed by such specialised software as Leximancer. trolling the vast digital expanse – what searches they Concept Map generated by Leximancer Pty Ltd make, the online and mobile sites they visit, how Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 116 Part 2 Understanding the marketplace and consumers they shop and what they buy – is pure gold to marketers. And today’s marketers are busy mining that gold. Then, in a practice called online behavioural targeting, marketers use the online data to target ads and offers to specific consumers. For example, if you place an Apple iPad in your Amazon.com shopping cart but do not buy it, you might expect to see some ads for that very type of tablet the next time you visit your favourite sports website to catch up on the latest sports scores. The newest wave of web analytics and targeting takes online eavesdropping even further – from behavioural targeting to social targeting. Whereas behavioural targeting tracks consumer movements across online sites, social targeting also mines individual online social connections and conversations from social networking sites. Research Behavioural targeting: Marketers watch and analyse shows that consumers shop a lot like their friends do and are much more what consumers do online, then use the resulting insights to personalise online shopping experiences. Is it likely to respond to ads from brands friends use. So, instead of having sophisticated online research or ‘just a little creepy’? a Brooks.com.au ad for running shoes pop up just because you have Andresr/Shutterstock.com recently searched online for running shoes (behavioural targeting), an ad for a specific pair of running shoes pops up because a friend you are connected to via Twitter bought online behavioural those shoes last week (social targeting). targeting Online listening, behavioural targeting and social targeting can help marketers to harness the Using online data to massive amounts of consumer information swirling around the internet. However, as marketers get target ads and offers to more adept at trolling blogs, social networks and other internet and mobile domains, many critics specific consumers. worry about consumer privacy. At what point does sophisticated online research cross the line into consumer stalking? Proponents claim that behavioural and social targeting benefit more than abuse consumers by feeding back ads and products that are more relevant to their interests. But to many consumers and public advocates, following consumers online and stalking them with ads feels more than just a little creepy. Regulators and others are stepping in due to consumer concerns. There may soon be a ‘Do Not Track’ system (the online equivalent to the ‘Do Not Call’ registry) – which would let people opt out of having their actions monitored online. So far, many major internet browsers and social media have heeded the concerns by adding extended privacy features to their services.24 For example, the Google browser has this tracking feature turned off by default – other than in iPhones and iPads, where it is not possible for technical reasons.25 Thus, privacy is an explosive issue facing online researchers. Failure to address such privacy issues could result in angry, less cooperative consumers and increased government intervention. Despite these concerns, most industry insiders predict healthy growth for online marketing research.26 Sampling plan sample A segment of the population selected for marketing research to represent the population as a whole. Marketing researchers usually draw conclusions about large groups of consumers by studying a small sample of the total consumer population. A sample is a segment of the population selected for marketing research to represent the population as a whole. Ideally, the sample should be representative so that the researcher can make accurate estimates of the thoughts and behaviours of the larger population. Designing the sample requires three decisions. First, who is to be studied (what sampling unit)? The answer to this question is not always obvious. For example, to learn about the decision-making process for a new family motor-vehicle purchase, should the subject be the husband, wife, other family members, dealership salespeople or all of these? The researcher must determine what information is needed and who is most likely to have it. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights Second, how many people should be included (what sample size)? Large samples give more reliable results than small samples. However, larger samples usually cost more, and it is not necessary to sample the entire target market or even a large portion to get reliable results. If well chosen, samples of less than 1 per cent of a population can often give good reliability. Finally, how should the people in the sample be chosen (what sampling procedure)? Table 4.5 describes different kinds of samples. Using probability samples, each population member has a known chance of being included in the sample, and researchers can calculate confidence limits for sampling error. But when probability sampling costs too much or takes too much time, marketing researchers often take non-probability samples, even though their sampling error cannot be measured. These varied ways of drawing samples have different costs and time limitations, as well as different accuracy and statistical properties. Which method is best depends on the needs of the research project. Table 4.5 Types of samples Probability sample Simple random sample Every member of the population has a known and equal chance of selection. Stratified random sample The population is divided into mutually exclusive groups (such as age groups) and random samples are drawn from each group. Cluster (area) sample The population is divided into mutually exclusive groups (such as blocks) and the researcher draws a sample of the groups to interview. Non-probability sample Convenience sample The researcher selects the easiest population members from which to obtain information. Judgment sample The researcher uses his or her judgment to select population members who are good prospects for accurate information. Quota sample The researcher finds and interviews a prescribed number of people in each of several categories. Research instruments In collecting primary data, marketing researchers have a choice of two main research instruments – the questionnaire and mechanical devices. Questionnaires The questionnaire is by far the most common instrument, whether administered in person, by phone or online. Questionnaires are very flexible – there are many ways to ask questions. Closed-end questions include all the possible answers, and subjects make choices among them. Examples include multiple-choice questions and scale questions. Open-end questions allow respondents to answer in their own words. In a survey of airline users, an airline might simply ask, ‘What is your opinion of the Qantas–Emirates alliance?’. Or it might ask people to complete a sentence: ‘When I fly to London, the most important consideration is . . .’. These and other kinds of open-end questions often reveal more than closed-end questions because they do not limit respondents’ answers. Open-end questions are especially useful in exploratory research, when the researcher is trying to find out what people think but not measuring how many people think in a certain way. The number of sentences used is one measure of the quality of responses to online surveys. Closed-end questions, on the other hand, provide answers that are easier to interpret and tabulate. Researchers should also use care in the wording and ordering of questions. They should use simple, direct, unbiased wording. Questions should be arranged in a logical order. The first question should create interest, if possible, and difficult or personal questions should be asked last so that respondents do not become defensive. Mechanical instruments Although questionnaires are the most common research instrument, researchers also use mechanical instruments to monitor consumer behaviour. Nielsen Media Research attaches people meters to television Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 117 118 Part 2 Understanding the marketplace and consumers sets, cable boxes and satellite systems in selected homes to record who watches which programs. Retailers use checkout scanners to record shoppers’ purchases. Still other researchers are applying ‘neuromarketing’, measuring brain activity to learn how consumers feel and respond. Marketing scientists using MRI scans and EEG devices have learned that tracking brain electrical activity and blood flow can provide companies with insights into what turns consumers on and off regarding their brands and marketing. Companies ranging from PepsiCo and Disney to Google and Microsoft now hire neuromarketing research companies, such as Neurons Inc and Nielsen NeuroFocus, to help figure out what people are really thinking.27 For example, eBay’s PayPal began pitching its online payment service as ‘fast’ after brain-wave research showed that speed appeals to consumers more than security and safety, earlier themes used in eBay ad campaigns. Although neuromarketing techniques can measure consumer involvement and emotional responses second by second, such brain responses can be difficult to interpret. Thus, neuromarketing is usually used in combination with other research approaches to gain a more complete picture of what goes on inside consumers’ heads. Implementing the research plan The third step in the marketing research process (see Figure 4.2) is putting the marketing research plan into action. This involves Mechanical instruments: To find out what ads work and why, collecting, processing and analysing the information. Data collection Disney researchers have developed an array of devices to can be carried out by the company’s marketing research staff or by track eye movement, monitor heart rates and measure other outside firms. Researchers should watch closely to make sure the physical responses. plan is implemented correctly. They must guard against problems Erich Schlegel/Head Press with data collection techniques and technologies, data quality and timeliness. Researchers must also process and analyse the collected data to isolate important information and insight. They need to check data for accuracy and completeness and code it for analysis. The researchers then tabulate the results and calculate statistical measures. Interpreting and reporting the findings As the final step in the marketing research process, the market researcher must now interpret the findings, draw conclusions and report them to management. The researcher should not try to overwhelm managers with numbers and fancy statistical techniques. Rather, the researcher should present important findings and insights that are useful in the major decisions faced by management. However, interpretation should not be left only to the researchers. Researchers are often experts in research design and statistics, but the marketing manager knows more about the problem and the decisions that must be made. The best research means little if the manager blindly accepts faulty interpretations from the researcher. Similarly, managers may be biased – they might tend to accept research results that show what they expected and to reject those they did not expect or hope for. In many cases, findings can be interpreted in different ways, and discussions between researchers and managers will help point to the best interpretations. Thus, managers and researchers must work together closely when interpreting research results, and both must share responsibility for the research process and resulting decisions. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights 119 Linking the concepts We have covered a lot of territory. Let’s take a breather and see if you can apply the marketing research process you’ve just studied. ● What specific kinds of research might Nando’s marketing management use to learn more about its customers’ preferences and buying behaviours? Sketch out a brief research plan for assessing potential reactions to a new drive-through service. ● Could you use the marketing research process to analyse your career opportunities and job possibilities? (Think of yourself as a ‘product’ and employers as potential ‘customers’.) If so, what would your research plan look like? Analysing and using marketing information (pp. 119–21) Information gathered in internal databases and through competitive marketing intelligence and marketing research usually requires additional analysis. Managers may need help applying the information to gain customer and market insights that will improve their marketing decisions. This help may include advanced statistical analysis to learn more about the relationships within a set of data. Information analysis might also involve the application of analytical models that will help marketers make more-informed decisions. Once the information has been processed and analysed, it must be made available to the right decision makers at the right time. In the following sections, we take a closer look at analysing and using marketing information. Customer relationship management The question of how best to analyse and use individual customer data presents special problems. Most companies are awash in information about their customers, particularly due to the advent of big data. In fact, smart companies capture information at every possible customer touch point. These touch points include customer purchases, salesforce contacts, service and support calls, website and social media site visits, satisfaction surveys, credit and payment interactions, market research studies – every contact between the customer and the company. Unfortunately, this information is usually scattered widely across the organisation. It is buried deep in the separate databases and records of different company departments. To overcome such problems, many companies are now turning to customer relationship management (CRM) to manage detailed information about individual customers and carefully manage customer touch points in order to maximise customer loyalty. CRM consists of sophisticated software and analytical tools from such companies as Oracle, Microsoft, Salesforce.com and SAS that integrate customer information from all sources, analyse it in depth and apply the results to build stronger customer relationships. CRM integrates everything that a company’s sales, service and marketing teams know about individual customers, providing a 360-degree view of the customer relationship. CRM analysts develop data warehouses and use sophisticated data mining techniques to unearth the riches hidden in customer data. A data warehouse is a company-wide electronic database of finely detailed customer information that needs to be sifted through for gems. The purpose of a data warehouse is not just to gather information, but to pull it together into a central, accessible location. Then, once the data warehouse brings the data together, the company uses high-powered data mining techniques to sift through the mounds of data and dig out interesting findings about customers. customer relationship management (CRM) Managing detailed information about individual customers and carefully managing customer touch points in order to maximise customer loyalty. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 120 Part 2 Understanding the marketplace and consumers These findings often lead to marketing opportunities, as company databases, particularly retailer databases, provide deep insights for marketing decisions. For example, FlyBuys is Australia’s largest shopping rewards program, involving Coles Supermarkets and other major retailers. The program enables participating stores to dig deeply into data obtained from customer loyalty cards. It uses the customer insights gained for everything from targeting coupons to locating and stocking its stores. 28 Thus, a marketing organisation is able to integrate information from Roy Morgan Single Source with their own customer database information and use this for modelling and predictive purposes.29 By using CRM to understand customers better, organisations can provide higher levels of customer service and develop deeper customer relationships. They can use CRM to pinpoint high-value customers, target them more effectively, cross-sell the company’s products and create offers tailored to specific customer requirements. Distributing and using marketing information Marketing information has no value until it is used to gain customer insights and make better marketing decisions. Thus, the marketing information system must make the information readily available to the managers and Roy Morgan Single Source: Through detailed evaluation and correlation across hundreds others who need it. In some cases, this means providing managers with of measures, Single Source helps marketers regular performance reports, intelligence updates and reports on the results understand individual consumers, target markets of research studies. and populations. But marketing managers may also need non-routine information for special Roy Morgan Research situations and on-the-spot decisions. For example, a sales manager having trouble with a large customer may want a summary of the account’s sales and profitability over the past year. Perhaps a retail store manager who has run out of a best-selling product may want to know the current inventory levels in the chain’s other stores. Or a brand manager may want to get a sense of the amount of the social media buzz surrounding the recent launch of a new product. These days, therefore, information distribution involves entering information into databases and making it available in a timely, user-friendly way. Many firms use a company intranet and internal CRM systems to facilitate this process. The intranet provides ready access to research information, reports, shared work documents, contact information for employees and other stakeholders, and more. For example, catalogue and web retailers integrate incoming customer service calls with up-to-date database information about customers’ web purchases and email inquiries. By accessing this information on the intranet while speaking with the customer, the companies’ service representatives can get a well-rounded picture of each customer’s purchasing history and previous contacts with the company. In addition, companies are increasingly allowing key customers and value-network members to access account, product and other data on demand through extranets. Suppliers, customers, resellers and select other network members may access a company’s extranet to update their accounts, arrange purchases and check orders against inventories to improve customer service.30 Thanks to modern technology, today’s marketing managers can gain direct access to a company’s information system at any time and from virtually anywhere. They can tap into the system from a home office, hotel room or the local Starbucks – any place they can connect on a laptop, smartphone or tablet. Such systems allow managers to get the information they need directly and quickly, and tailor it to their own needs. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights Linking the concepts Let’s stop here, think back and be certain you have the ‘big picture’ concerning marketing information systems. ● What is the overall goal of a marketing information system? How are the individual components linked, and what does each contribute? Take another look at Figure 4.1 – it provides a good organising framework for the entire chapter. ● Apply the MIS framework to Converse (a Nike company). How might Converse go about assessing marketing managers’ information needs, developing the needed information and helping managers to analyse and use the information to gain actionable customer and market insights? Other marketing information considerations (pp. 121–24) This section discusses marketing information in two special contexts: (1) marketing research in small businesses and not-for-profit organisations, and (2) international marketing research. Finally, we look at public policy and ethics issues in marketing research. Marketing research in small businesses and not-for-profit organisations Just like larger firms, small organisations need market information and the customer and market insights it can provide. Start-up businesses need information about their potential customers, industries, competitors, unfilled needs and reactions to new market offers. Existing small businesses must track changes in customer needs and wants, reactions to new products and changes in the competitive environment. Managers of small businesses and not-for-profit organisations often think that marketing research can be done only by experts in large companies with big research budgets. True, large-scale research studies are beyond the budgets of most small businesses. However, many of the marketing research techniques discussed in this chapter can also be used by smaller organisations in a less formal manner and at little or no expense. Thus, small businesses and not-for-profit organisations can obtain good marketing insights through observation or informal surveys using small convenience samples. Also, many associations, local media and government agencies provide special help to small organisations. For example, organisations such as VECCI (Victorian Employers’ Chamber of Commerce and Industry), the New South Wales state government’s Small Business Development Corporation and Western Australia’s Small Business Development Corporation offer dozens of free publications from their websites that give advice on topics ranging from starting, financing and expanding a small business, to ordering business cards. Finally, small businesses can collect a considerable amount of information online at very little cost by scouring competitor and customer websites and using internet search engines to research specific companies and issues. In summary, secondary data collection, observation, surveys and experiments can all be used effectively by small organisations with small budgets. However, although these informal research methods are less complex and less costly, they still must be conducted with care. Managers must think carefully about the objectives of the research, formulate questions in advance, recognise the biases introduced by smaller samples and less-skilled researchers, and conduct the research systematically.31 International marketing research International marketing research has grown tremendously over the past decade. International researchers follow the same steps as domestic researchers, from defining the research problem and developing a research plan to interpreting and reporting the results. However, these researchers often face more and different problems. Whereas domestic researchers deal with fairly homogeneous markets within a single Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 121 122 Part 2 Understanding the marketplace and consumers country, international researchers deal with diverse markets in many different countries. These markets often vary greatly in their levels of economic development, cultures and customs, and buying patterns. In many overseas markets, the international researcher may have a difficult time finding good secondary data. Whereas Australian and New Zealand marketing researchers can obtain reliable secondary data from dozens of domestic research services, many countries have almost no research services at all. Some of the largest international research services do operate in many countries. For example, the Nielsen Company (the world’s largest marketing research company) has offices in more than 100 countries, from Schaumburg in the US state of Illinois, to Hong Kong, to Nicosia in Cyprus.32 However, most research firms operate in only a relative handful of countries. Thus, even when secondary information is available, it usually must be obtained from many different sources on a country-by-country basis, making the information difficult to combine or compare. Because of the scarcity of good secondary data, international researchers often must collect their own primary data. For example, they may find it difficult simply to develop good samples. Australasian Global marketing research: Some of the largest research researchers can use current telephone directories, email lists, census services firms operate on a worldwide scale. Nielsen has offices data and any of several sources of socioeconomic data to construct in more than 100 countries. samples. However, such information is largely lacking in many Copyrighted information © 2016 of The Nielsen Company, licensed for use herein. countries. Once the sample is drawn, the Australasian researcher usually can reach most respondents easily by telephone, by mail, on the internet or in person. Reaching respondents is often not so easy in other parts of the world where telephone and internet cater only to the major cities, if they are available at all. In some countries, few people have phones or personal computers. For example, in Kenya, there are only nine internet users per 100 people. In some countries, the postal system is notoriously unreliable. In Brazil, for instance, an estimated 30 per cent of the mail is never delivered. In many developing countries, poor roads and transportation systems make certain areas hard to reach, making personal interviews difficult and expensive.33 Cultural differences from country to country cause additional problems for international researchers. Language is the most obvious obstacle. For example, questionnaires must be prepared in one language and then translated into the languages of each country researched. Responses then must be translated back into the original language for analysis and interpretation. This adds to research costs and increases the risks of error. Even within a given country, language can be a problem. For example, in India, English is the language of business, but consumers may use any of 14 ‘first languages’, with many additional dialects. Translating a questionnaire from one language to another is anything but easy. Many idioms, phrases and statements mean different things in different cultures. For example, a Danish executive noted, ‘Check this out by having a different translator put back into English what you’ve translated from English. You’ll get the shock of your life. I remember [an example in which] “out of sight, out of mind” had become “invisible things are insane”.’34 Consumers in different countries also vary in their attitudes towards marketing research. People in one country may be very willing to respond; in other countries, non-response can be a major problem. Customs in some countries may prohibit people from talking with strangers. In certain cultures, research Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights questions often are considered too personal. For example, in many Latin American countries, people may feel embarrassed to talk with researchers about their choices of shampoo, deodorant or other personal-care products. Similarly, in many Muslim countries, mixed-gender focus groups are taboo, as is videotaping female-only focus groups. And, even when respondents are willing to respond, they may not be able to because of high functional illiteracy rates. Despite these problems, as global marketing grows, global companies have little choice but to conduct such international marketing research. Although the costs and problems associated with international research may be high, the costs of not doing it – in terms of missed opportunities and mistakes – might be even higher. Once recognised, many of the problems associated with international marketing research can be overcome or avoided. Public policy and ethics in marketing research Most marketing research benefits both the sponsoring company and its consumers. Through marketing research, companies learn more about consumers’ needs, resulting in more satisfying products and services and stronger customer relationships. However, the misuse of marketing research can also harm or annoy consumers. Two major public policy and ethics issues in marketing research are intrusions on consumer privacy and the misuse of research findings, which we discuss next. Intrusions on consumer privacy Many consumers feel positive about marketing research and believe it serves a useful purpose. Some actually enjoy being interviewed and giving their opinions. However, others strongly resent or even mistrust marketing research. They do not like being interrupted by researchers. They worry that marketers are building huge databases full of personal information about customers. Or they fear that researchers might use sophisticated techniques to probe our deepest feelings, peek over our shoulders as we shop or eavesdrop on our conversations and then use this knowledge to manipulate our buying. There are no easy answers when it comes to marketing research and privacy. For example, is it a good thing or a bad thing that marketers track and analyse consumers’ web clicks and target ads to individuals based on their browsing behaviour? Should we applaud or resent companies that monitor consumer discussions on YouTube, Facebook, Twitter or other public social networks in an effort to be more responsive?35 Many companies view tracking and responding to social media conversations as opportunities to engage consumers in helpful two-way conversations. For example, users of the information and communications technologies-focused Whirlpool Forums realise that the major telecommunications companies (telcos) monitor and reply to questions and correct erroneous posts, even though the telco employees do not necessarily identify themselves. This is in contrast to Productreview.com.au forums where responding companies do identify themselves.36 However, some disconcerted users might see these as an intrusion of privacy. Companies such as Dell track only public forums but, like most, Dell does not inform consumers or obtain their consent. Interestingly, many consumers do not seem to mind. Consumers often moan that companies do not listen to them. Perhaps the monitoring of online discussions can provide an answer to that problem. Consumers may also have been taken in by previous ‘research surveys’ that actually turned out to be attempts to sell them something. Still other consumers confuse legitimate marketing research studies with promotional efforts and say ‘no’ before the interviewer can even begin. Most, however, simply resent the intrusion. They dislike mail, telephone or web surveys that are too long or too personal, or that interrupt them at inconvenient times. Increasing consumer privacy concerns have become a major problem for the marketing research industry. Companies face the challenge of unearthing valuable but potentially sensitive consumer data while also maintaining consumer trust. At the same time, consumers wrestle with the trade-offs between Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 123 124 Part 2 Understanding the marketplace and consumers personalisation and privacy. ‘The debate over online [privacy] stems from a marketing paradox,’ says a privacy expert. ‘Internet shoppers want to receive personalised, timely offers based on their wants and needs but they resent that companies track their online purchase and browsing histories.’ The key question is: Where is the line between questionable and acceptable customer data-gathering activities? Failure to address such privacy issues could result in angry, less-cooperative consumers and increased government intervention. Most major companies – including IBM, Microsoft, Facebook, Citigroup, American Express – and even some governments have now appointed a chief privacy officer (CPO), whose job is to safeguard the privacy of consumers who do business with the company. In the end, if researchers provide value in exchange for information, customers will gladly provide it. For example, Amazon.com’s customers accept that the firm is building a database of products they buy as a way to provide future product recommendations. This saves time and provides value. The best approach is for researchers to ask only for the information they need, use it responsibly to provide customer value and avoid sharing information without the customer’s permission. Misuse of research findings Research studies can be powerful persuasion tools; companies often use study results as claims in their advertising and promotion. Today, however, many research studies appear to be little more than vehicles for pitching the sponsor’s products. In fact, in some cases, the research surveys appear to have been designed just to produce the intended effect. Few advertisers openly rig their research designs or blatantly misrepresent the findings; most abuses tend to be subtle ‘stretches’. In the end, however, unethical or inappropriate actions cannot simply be regulated away. Each company must accept responsibility for policing the conduct and reporting of its own marketing research to protect consumers’ and its own best interests. Codes of practice The marketing research industry is considering several options for responding to this problem. One example is the ‘Your Opinion Counts’ and ‘Respondent Bill of Rights’ initiatives by the US Council for Marketing and Opinion Research to educate consumers about the benefits of marketing research and to distinguish it from telephone selling and database building. The industry in the United States also has considered adopting broad standards, perhaps based on the International Chamber of Commerce’s International Code of Marketing and Social Research Practice. This code outlines researchers’ responsibilities to respondents and to the general public. For example, it states that researchers should make their names and addresses available to participants. It also bans companies from representing such activities as database compilation or sales and promotional pitches as research. In Europe, the ICC/ESOMAR International Code of Marketing and Social Research Practice regulates the professional activities of marketing researchers. The code sets out what is meant by ‘marketing and social research, including opinion research’ and emphasises that such research must always be clearly distinguished from other forms of marketing activities (many of which are regulated by their own separate code of practice and, in certain cases, by legislative controls). The code outlines researchers’ responsibilities to the general public, states that researchers should make their names and addresses available to participants, and bans companies from misrepresenting their database compilation activities as marketing research. So, too, the Australian Market and Social Research Society (AMSRS) maintains its code of practice in the light of strengthened privacy legislation and other factors.37 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights Student Learning Centre 125 Learning Objective 3. Outline the steps in the marketing research process. (pp. 105–19) The first step in the marketing research process involves defining the problem and setting the research objectives, which may be exploratory, descriptive or causal research. The second step consists of developing a research plan for collecting data from primary and secondary sources. The third step calls for implementing Reviewing the learning objectives To create value for customers and build meaningful relationships with them, marketers must first gain fresh, deep insights into what customers need and want. Such insights come from good marketing information. As a result of the recent explosion of ‘big data’ and marketing technology, companies can now obtain great quantities of information, sometimes even too much. Consumers themselves are now generating a tidal wave of bottom-up information through their smartphones, computers and tablets via online browsing and blogging, apps and social media interactions, and texting and video. The challenge is to transform today’s vast volume of consumer information into actionable customer and market insights. Learning Objective 1. Explain the importance of information in gaining insights about the marketplace and customers. (pp. 98–102) The marketing process starts with a complete understanding of the marketplace and consumer needs and wants. Thus, the company needs sound information in order to produce superior value and satisfaction for customers. The company also requires information on competitors, resellers, and other actors and forces in the marketplace. Increasingly, marketers are viewing information not only as an input for making better decisions but also as an important strategic asset and marketing tool. Learning Objective 2. Define the marketing information system and discuss its parts. (pp. 102–5) The marketing information system (MIS) consists of people and procedures for assessing information needs, developing the needed information and helping decision makers to use the information to generate and validate actionable customer and market insights. A well-designed information system begins and ends with users. The MIS first assesses information needs. The marketing information system primarily serves the company’s marketing and other managers, but it may also provide information to external partners. Then, the MIS develops information from internal databases, marketing intelligence activities and marketing research. Internal databases provide information on the company’s own operations and departments. Such data can be obtained quickly and cheaply but often needs to be adapted for marketing decisions. Marketing intelligence activities supply everyday information about the marketing research plan by gathering, processing and analysing the information. The fourth step consists of interpreting and reporting the findings. Additional information analysis helps marketing managers apply the information and provides them with sophisticated statistical procedures and models from which to develop more rigorous findings. Both internal and external secondary data sources often provide information more quickly and at a lower cost than primary data sources, and they can sometimes yield information that a company cannot collect by itself. However, needed information might not exist in secondary sources. Researchers must also evaluate secondary information to ensure that it is relevant, accurate, current and impartial. Primary research must also be evaluated for these features. Each primary data collection method – observational, survey and experimental – has its own advantages and disadvantages. Similarly, each of the various research contact methods – mail, telephone, personal interview and online – also has its own advantages and drawbacks. Learning Objective 4. Explain how companies analyse and use marketing information. (pp. 119–21) Information gathered in internal databases and through marketing intelligence and marketing research usually requires more analysis. This may include advanced statistical analysis or the application of analytical models that will help marketers make better decisions. To analyse individual customer data, many companies have now acquired or developed special software and analysis techniques – called customer relationship management (CRM) – that integrate, analyse and apply the mountains of individual customer data contained in their databases. Marketing information has no value until it is used to make better marketing decisions. Thus, the marketing information system must make the information available to the managers and others who make marketing decisions or deal with customers. In some cases, this means providing regular reports and updates; in other cases, it means making non-routine information available for special situations and on-the-spot decisions. Many firms use company intranets and extranets to facilitate this process. Thanks to modern technology, today’s marketing managers can gain direct access to the information system at any time and from virtually any location. Learning Objective 5. Discuss the special issues some marketing researchers face, including public policy and ethics issues. (pp. 121–24) developments in the external marketing environment. Market research consists Some marketers face special marketing research situations, such as those of collecting information relevant to a specific marketing problem faced by the conducting research in small business, not-for-profit or international situations. company. Lastly, the MIS helps users in their marketing analytics whereby they Marketing research can be conducted effectively by small businesses and non- analyse and use the information to develop customer insights, make marketing profit organisations with limited budgets. International marketing researchers decisions and manage customer relationships. follow the same steps as domestic researchers, but often face more and different Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 126 Part 2 Understanding the marketplace and consumers problems. All organisations need to act responsibly in terms of the public policy ❷ Want to earn a little extra cash? Businesses use focus groups and surveys to and ethical issues surrounding marketing research, including issues of intrusions make better marketing decisions, and they might pay for your participation. on consumer privacy and misuse of research findings. Visit <www.PaidFocusGroups.com.au> and <www.myopinions.com.au>, then review the opportunities available for research participation. Find Discussion questions ❶ Marketing analytics. Why are marketing analytics important? Are marketing analytics only applicable in the case of big data or does the term apply to all marketing data? Justify your answer. (Learning Objectives 1 and 5) (AACSB: Communication; Reflective Thinking) ❷ Marketing information system. What is a marketing information system? What characteristics should it possess? (Learning Objectives 1, 2 and 3) (AACSB: Communication) ❷ Marketing intelligence. Take the situation where, in an endeavour to conduct marketing intelligence, a company employs a service agency to sort through its competitors’ rubbish after hours. Is this ethical behaviour? Is it illegal? Either way, what do you think the general public would make of such activities if they came across a newspaper report on a well-known company undertaking such activities? (Learning Objective 5) (AACSB: Communication) ❹ Netnographic research. What might be the advantages and/or disadvantages of netnographic research over traditional survey research? (Learning Objectives 3 and 4) (AACSB: Communication) ❺ The internet in marketing analytics. What impact has the internet had on how marketing analytics are conducted? What advantages does the internet provide over traditional marketing data collection and analytical methods? (Learning Objective 2) (AACSB: Communication; Reflective Thinking) ❻ International marketing research. Identify and report the similarities and differences when conducting research in another country versus the Australian–New Zealand market. (Learning Objective 5) (AACSB: Communication) Critical thinking exercises ❶ In a small group, identify a problem faced by a local business or not-for- two more websites that recruit research participants. Write a brief report of what you found, and discuss the implications for companies conducting marketing research when researchers recruit participants this way. (Learning Objectives 2 and 3) (AACSB: Communication; Use of IT; Reflective Thinking) ❷ Go to the Strategic Business Insights (SBI) website and take the VALS survey (<www.strategicbusinessinsights.com/vals/presurvey.shtml>). What type of research is being conducted – exploratory, descriptive or causal? How can marketers use this information? (Learning Objectives 2 and 3) (AACSB: Communication; Use of IT; Reflective Thinking) Navigating the key terms Learning Objective 1 exploratory research (p. 106) big data (p. 98) focus group interviewing (p. 112) customer insights (p. 99) marketing research (p. 105) marketing analytics (p. 99) netnographic research (p. 115) marketing information system observational research (p. 109) (MIS) (p. 101) Learning Objective 2 competitive marketing intelligence (p. 104) internal databases (p. 103) Learning Objective 3 causal research (p. 106) commercial online databases (p. 108) online behavioural targeting (p. 116) online focus groups (p. 114) online marketing research (p. 113) predictive analytics (p. 113) primary data (p. 107) qualitative research (p. 106) quantitative research (p. 106) sample (p. 116) secondary data (p. 107) survey research (p. 110) profit organisation and propose a research project addressing that problem. descriptive research (p. 106) Learning Objective 4 Develop a research proposal that implements each step of the marketing ethnographic research (p. 110) customer relationship management research process. Discuss how the research results will help the business experimental research (p. 111) (CRM) (p. 119) or not-for-profit organisation. (Learning Objectives 1, 2 and 4) (AACSB: Communication; Analytical Thinking; Reflective Thinking) Mini cases 4.1 Gathering data Measuring marketing communication impact The Nielsen Company has expanded globally with its marketing home-based barcode-scanning unit that uploads home purchase data research services. In Australia, the company uses its Nielsen Television weekly to Nielsen. Nielsen refers to this consumer panel service as Audience Measurement (Nielsen TAM) to monitor free-to-air (FTA) and Homescan. Such information can be supplemented with psychographic subscriber television viewing on behalf of OzTAM (currently owned data by using depth interviews and focus groups when necessary. by commercial networks Nine, Seven and Ten). Through a separate The latter probing would involve consumers with the same demographic service and using a separate panel, household composition and profile as those in the Homescan panel, but would not involve the same geodemographic and behavioural information can be obtained via a respondents. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights Using point-of-sale store scan data, Nielsen is able to provide a Other companies, such as Roy Morgan, also offer single-source data good picture of sales and market share by unit and dollar volumes research.38 for packaged goods using this retailer-supplied ScanTrack service. ❶ Visit Nielsen Australia at <nielsen.com/au/en.html#1> to learn more Fresh produce and chilled meats from the butchery and deli sections about its customer insight services and the types of analyses performed are not tracked via scan data unless individual retailers provide this by this company. Investigate and list the services on offer to clients, giving information. A separate retail audit service involving butchers and a short explanation for each. Conduct a similar investigation by visiting supermarket butchery and deli departments is available to obtain this Roy Morgan Research at <roymorgan.com.au>. (Learning Objectives 1 information. and 2) (AACSB: Communication; Analytical Thinking; Use of IT) ❷ What is syndicated single-source research as the term is used by Nielsen detailed analysis of market segments and sub-segments. Nielsen has Research and Roy Morgan Research? Do these companies refer to invested heavily in client services executives whose job is to analyse data the same thing? Explain your answer. (Learning Objective 2) (AACSB: and make recommendations to their clients. Communication; Analytical Thinking; Reflective Thinking) © OzTAM Nielsen also provides syndicated single-source research that allows Television audience measurement: OzTAM is the official source of television audience measurement, covering the five city metropolitan areas and nationally for subscription TV (pay-TV). 4.2 Customer insights Online, mobile and social media marketing: Social data People have been using Twitter’s social media platform to tweet short bursts at the bottom of the foothills in terms of the kind of global demand for social of information in 140 characters or less since 2006 and now average 500 data.’ In 2014, Twitter alone earned more than US$70 million from licensing million tweets a day. The full stream of tweets is referred to as Twitter’s fire its data.39 Clearly there is gold in such data mining. hose. Various firms analyse data from the fire hose and sell the information ❶ Discuss the value of social data for marketers. (Learning Objectives 1 gleaned from that analysis to other companies. Twitter recently purchased and 2) (AACSB: Communication; Reflective Thinking) Gnip, the world’s largest social data provider and one of the few companies ❷ A ‘dark social channel’ refers to a private channel or a channel difficult that had access to the fire hose. Gnip also mines public data from Facebook, to match with other digital channels. An example of a dark channel is Google+, Tumblr and other social media platforms. Analysing social data has email. However, Google routinely mines its roughly half-billion Gmail become a big business because companies such as PepsiCo, Warner Brothers users’ emails. Research how Google scans email data and the fallout and General Motors pay to learn about consumers’ sentiments toward them. from those actions, then summarise your findings. (Learning Objectives According to the CEO of social media analysis company BrandWatch, ‘We’re 1, 4 and 5) (AACSB: Communication; Use of IT; Reflective Thinking) 4.3 Marketing analytics at work The value of information Conducting research is costly, and the costs must be weighed against the value reduce price in order to maintain market share, or should the company of the information gathered. Consider a hypothetical company – QuickParts maintain its current price? The company has conducted some preliminary Online – faced with a competitor’s price reduction on a three-month parts research showing the financial outcomes of each decision under two supply contract to motor repair customer groups. Should QuickParts also competitor responses: the competition maintains its price or the competition Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 127 128 Part 2 Understanding the marketplace and consumers 4.3 Marketing analytics at work continued lowers its price further. The company feels pretty confident that the competitor acquiring it? One way to assess the value of additional information is to cannot lower its price further and assigns that outcome a probability (p) of determine the expected value of perfect information (EMVPI), calculated 0.7, which means the other outcome would have only a 30 per cent chance using the following equation: of occurring (1 − p = 0.3). These outcomes are shown in the table below: Competitive response QuickParts action Maintain price p • 0.7 Reduce price (1 • p) • 0.3 Reduce price $160 000 $120 000 Maintain price $180 000 $100 000 For example, if QuickParts reduces its price and the competitor maintains its price, the company would realise $160 000 and so on. From this information, the expected monetary value (EMV) of each company action (reduce price or maintain price) can be determined using the following EMVPI = EMVcertainty − EMVbest alternative where EMVcertainty = ( p) (highest financial outcomep) + (1 − p) (highest financial outcome(1 − p)) If the value of perfect information is more than the cost of conducting the research, then the research should be undertaken (that is, EMVPI > cost of research). However, if the value of the additional information is less than the cost of obtaining more information, the research should not be conducted. ❶ Calculate the expected monetary value (EMV) of both company actions. Which action should QuickParts take? (Learning Objectives 1 to 5) equation: EMV = ( p) (financial outcomep) + (1 − p) (financial outcome(1 − p)) The company would select the action expected to deliver the greatest EMV. More information might be desirable, but is it worth the cost of (AACSB: Communication; Analytical Reasoning) ❷ What is the expected value of perfect information (EMVPI)? Should QuickParts conduct the research? (Learning Objectives 1 to 5) (AACSB: Communication; Analytical Reasoning) 4.4 Ethical reflection Might SMS promotions break the law? The makers of DeepBlueIce soft drink, DBICorp (DBIC), have used use the mobile phone numbers to send bulk SMS messages promoting the advertising to build membership of the DeepBlueIce Dance Club. dance club events and offering incentives so that people will interact with The marketing manager, Spike Torn, convinced the company’s directors that the company via SMS, including forwarding the SMS to their friends. the dance club strategy would enable DBIC to penetrate the youth market Take on the role of a member of Spike Torn’s marketing management using a one-to-one communication strategy. The company plans to sponsor team. Do you agree with Spike Torn’s plans for the use of the data gathered DJs, such as Dirty South, at events where it will run competitions in which in the proposed marketing research? If so, why is this an appropriate plan? consumers will suggest mixer drinks based on DeepBlueIce. It plans to build If not, what alternatives might the company consider, and why? Might the membership base and gather such information as email addresses, Spike Torn’s planned approach breach the Australian Spam Act 2003 (Cth) mobile phone numbers and other demographic details under the guise and/or the Do Not Call Register Act 2006 (Cth), or are there steps that the of conducting marketing research at these events. The company plans to marketers can take to comply with such legislation? References 1 See Craig Smith, ‘By the numbers: 175 amazing Pinterest statistics’, Digital Marketing Ramblings, 2 January 2015, <http://expandedramblings.com/index.php/pintereststats/>; and Kerry Flynn, ‘Get ready to see more ads on Pinterest in 2015’, Huffington Post, 29 December 2014, <www.huffingtonpost.com/2014/12/29/pinterestads_n_6390662.html>. 2 See ‘Big data’, Wikipedia, <http://en.wikipedia.org/wiki/Big_data>, accessed February 2015; and Michael Lev-Ram, ‘What’s the next big thing in big data? Bigger data’, Fortune, 16 June 2014, pp. 233–40. 3 Andrew Nusca, ‘Despite high tech, the future of marketing is exactly the same: Focus on customers’, Fortune, 15 July 2014, <http://fortune.com/2014/07/15/big-data-futuremarketing-customer-focus/>; and Phani Nagarjuna, ‘Seven steps to understanding your business and monetizing analytics’, Sales & Marketing Management, 9 January 2015, <http://salesandmarketing.com/content/seven-steps-understanding-your-business-andmonetizing-analytics>. 4 For more discussion, see Elizabeth A Sullivan, ‘Analytics in action’, Marketing News, December 2014, pp. 24–33; and Jayson DeMers, ‘2014 is the year of digital marketing analytics: What it means for your company’, Forbes, 2 February 2014, <www.forbes.com/ sites/jaysondemers/2014/02/10/2014-is-the-year-of-digital-marketing-analytics-what-itmeans-for-your-company/>. Also see ‘Marketing analytics: What it is and why it matters’, SAS, <sas.com/en_ph/insights/marketing/marketing-analytics.html>, accessed May 2016. 5 Avi Dan, ‘How data nourishes agile marketing at Kraft’, Forbes, 26 October 2014, <www.forbes.com/sites/avidan/2014/10/26/how-data-nourishes-agile-marketing-atkraft-foods/>; and Jack Neff, ‘Kraft says content delivers four times better ROI than ads’, Advertising Age, 15 September 2014, p. 8. 6 See ‘Retail Link 2.0’, 8th & Walton, <http://blog.8thandwalton.com/2014/08/retaillink-2-0/>, accessed September 2015. 7 See Sigma Pharmaceuticals and the retail banner groups involved at <www.sigmaco. com.au>, accessed May 2016. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 4 Marketing analytics: Gaining customer insights 8 Example based on information from Michal Lev-Ram, ‘Samsung’s road to mobile domination’, Fortune, 4 February 2013, pp. 99–101; Jason Gilbert, ‘Samsung mocks iPhone 5, Apple fanboys again in new Galaxy S3 commercial’, Huffington Post, 1 September 2012, <www.huffingtonpost.com/2012/09/20/samsung-mocks-iphone5-commercial_n_1898443.html>; Suzanne Vranica, ‘Tweets spawn ad campaigns’, Wall Street Journal, 22 October 2012, p. B5; and Luke Villapaz, ‘Samsung mocks Apple iPhone 6 and Apple Watch in new series of ads’, International Business Times, 11 September 2014, <www.ibtimes.com/samsung-mocks-apple-iphone-6-apple-watchnew-series-ads-video-1685612>. 9 George Chidi, ‘Confessions of a corporate spy’, Inc., February 2013, pp. 72–7. 10 For more on research firms that supply marketing information, see Laurence N Gold, ‘The 2015 AMA gold global top 50 report’, Marketing News, August 2015. Other information from <www.nielsen.com/us/en/solutions/measurement/retailmeasurement.html> and <http://thefuturescompany.com/what-we-do/us-yankelovichmonitor>, accessed May 2016. 11 See Christine Birkner, ‘C’est la vie’, Marketing News, <www.ama.org/publications/ MarketingNews/Pages/cest-la-vie.aspx>, accessed November 2016; and ‘Landor Families’, <landor.com/thinking/landor-families>, accessed May 2016. 12 Spencer E Ante, ‘The science of desire’, BusinessWeek, 5 June 2006, p. 100; Rhys Blakely, ‘You know when it feels like somebody’s watching you . . .’, The Times, 14 May 2007, p. 46; and Jack Neff, ‘Marketing execs: Researchers could use a softer touch’, Advertising Age, 27 January 2009. 13 See Brooks Barnes, ‘Disney expert uses science to draw boy viewers’, New York Times, 14 April 2009, p. A1; Linda Tischler, ‘Every move you make’, Fast Company, April 2004, pp. 73–5; Ellen Byron, ‘Seeing store shelves through senior eyes’, Wall Street Journal, 14 September 2009, p. B1; and Natasha Singer, ‘The fountain of old age’, New York Times, 6 February 2011, p. BU1. 14 Adapted from information in Kenneth Hein, ‘Hypnosis brings groups into focus’, Brandweek, 23 May 2008, p. 4. Also see G Svensson, G Wood & M D Callaghan, ‘Masochistic marketing: Volvo Australia’s “so safe” strategy’, Journal of Consumer Marketing, 23(7), 2006, pp. 438–44. 15 Molly Soat, ‘Everything in moderation’, Marketing News, April 2014, pp. 36–46, at p. 38. 16 See Roy Morgan Research, ‘Telephone interviewing’, <www.roymorgan.com/services/ telephone-interviewing>, accessed May 2016. 17 For more on content analysis in marketing research, see Harold H Kassarjian, ‘Content analysis in consumer research’, Journal of Consumer Research, 4(1), 1977, pp. 8–18; and Christina Goulding, ‘Grounded theory, ethnography and phenomenology: A comparative analysis of three qualitative strategies for marketing research’, European Journal of Marketing, 39(3/4), 2005, pp. 294–308. 18 See ‘Pew research internet project’, Pew Internet, 27 February 2014, <www.pewinternet.org/2014/02/27/part-1-how-the-internet-has-woven-itself-intoamerican-life>. 19 See ‘Internet world stats’, <www.internetworldstats.com/stats.htm>, accessed May 2016. 20 See Heath McDonald & Stewart Adam, ‘A comparison of online and postal data collection methods in marketing research’, Marketing Intelligence and Planning, 21(2), 2003, pp. 85–95; and Stewart Adam & Robin N Shaw, ‘Small business perceptions of online marketing research’, Australasian Journal of Market Research, 12(1), 2004, pp. 22–32. 21 Nadia Cameron, ‘How Telstra is applying data and analytics to customer experience’, CMO, 5 May 2016, <cmo.com.au/article/574112/how-telstra-applying-dataanalytics-customer-service>, accessed May 2016; also see Chris Riddell, ‘The top 3 directions predictive analytics will take in 2015’, CMO, 10 February 2015, cmo.com.au/ article/565924/top-3-directions-predictive-analytics-will-take-2015, accessed May 2016. 22 For examples, see Australia Online Research, <www.australiaonlineresearch.com/ content/panels.aspx>, accessed May 2016. 23 For more on netnography, see Robert Kozinets, ‘The field behind the screen: Using netnography for marketing research in online communities’, Journal of Marketing Research, 39(1), February 2002, pp. 61–72; Pradeep K Tyagi, ‘Webnography: A new tool to conduct marketing research’, Journal of American Academy of Business, March 2010, pp. 262–8; Robert V Kozinets, ‘Netnography: The marketer’s secret weapon’, March 2010, <info.netbase.com/rs/netbase/images/Netnography_WP.pdf>, accessed February 2013; and Michael Osofsky, ‘Turning online discussions into insight’, December 2010, <netbase.com/blog/turning-online-discussions-into-insight>. 24 For more discussion, see the US ‘Do-Not-Track Online Act of 2013’, <www.congress. gov/bill/113th-congress/senate-bill/418>; Fred B Campbell, Jr., ‘The slow death of 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 129 “Do Not Track”’, New York Times, 27 December 2014, p. A17; and ‘Do Not Track legislation’, <http://en.wikipedia.org/wiki/Do_Not_Track_legislation>, accessed September 2015. For more, see <https://support.google.com/chrome/answer/2790761?hl=en>, accessed May 2016. See the Australian Privacy Commissioner website, <www.privacy.gov.au>, accessed May 2016. See Adam L Penenberg, ‘NeuroFocus uses neuromarketing to hack your brain’, Fast Company, 8 August 2011, <www.fastcompany.com/magazine/158/ neuromarketing-intel-paypal>; and Carmen Nobel, ‘Neuromarketing: Tapping into the “pleasure center” of consumers’, Forbes, 2 February 2013, <www.forbes.com/ sites/hbsworkingknowledge/2013/02/01/neuromarketing-tapping-into-the-pleasurecenter-of-consumers/>. For other examples and discussion, see Roger Dooley, ‘Is Starbucks coffee too cheap?’, Forbes, 14 October 2013, <www.forbes.com/sites/ rogerdooley/2013/10/14/is-starbucks-coffee-too-cheap/>; and Thomas Zoega Ramsey, Neuromarketing & Consumer Neuroscience, Neurons Inc: Rorvig, Denmark, 2014. For more on Flybuys, see <www.flybuys.com.au/about#/>, accessed May 2016. For more on Roy Morgan Single Source, and how the data are collected and processed, see ‘How we collect and process Single Source data in Australia’, <www.roymorgan. com/~/media/files/fact-sheets/ozfactbrowebupdatedaugust2014.pdf?la=en>, accessed May 2016. See Daryl Travis, ‘The best omni-channel brands look more like a cause than a business’, The Hub, August 2014, <www.hubmagazine.com/the-hub-magazine/zapposomnivalues-082014>. For some good advice on conducting market research in a small business, see ‘Conducting market research’, <sba.gov/starting-business/how-start-business/ understand-your-market>, accessed May 2016. ‘Researching your market’, Entrepreneur, <www.entrepreneur.com/article/43024-1>, accessed September 2015. Also see James Y L Thong, ‘An integrated model of information systems adoption in small business’, Journal of Management Information Systems, 15(4), 1999, pp. 187–214. See Diane Bowers & Michael Brereton, ‘The 2015 AMA gold global top 25 report’, Marketing News, August 2015, pp. 34ff; and <www.nielsen.com/us/en/about-us.html> and <www.nielsen.com/us/en.html?worldWideSelected=true>, accessed August 2015. For these and other examples, see ‘From tactical to personal: Synovate’s tips for conducting marketing research in emerging markets’, Marketing News, 30 April 2011, pp. 20–2. Internet statistics are from <http://data.worldbank.org/indicator/IT.NET.USER. P2>, accessed May 2016. Subhash C Jain, International Marketing Management, 3rd edn, PWS-Kent: Boston, MA, 1990, p. 338. For more discussion on international marketing research issues and solutions, see Warren J Keegan & Mark C Green, Global Marketing, 8th edn, Prentice Hall: Upper Saddle River, NJ, 2015, pp. 170–201. See Andrew Roberts, ‘In some stores, all eyes are on you’, Bloomberg Businessweek, 10 December 2012, pp. 32–3; and ‘EyeSee mannequin’, <www.almax-italy.com/en-US/ ProgettiSpeciali/EyeSeeMannequin.aspx>, accessed September 2014. See Whirlpool Forums, where users seek and provide information on telcos’ mobile phone plans and internet service providers (ISPs), among other information, <www.whirlpool.net.au>, and also see <productreview.com.au>; accessed May 2016. ‘ICC/ESOMAR international code of marketing and social research practice’, <www.esomar.org/index.php/codes-guidelines.html>, accessed May 2016. Also see ‘Respondent bill of rights’, <www.mra-net.org/ga/billofrights.cfm>, accessed May 2016. Joanne Lipman, ‘Single-source ad research heralds detailed look at household habits’, Wall Street Journal, 16 February 1988, p. 39; Joe Schwartz, ‘Back to the source’, American Demographics, January 1989, pp. 22–6; Thomas Exter, ‘Advertising and promotion: The one-two punch’, American Demographics, March 1990, pp. 18–21; and Magid M Abraham & Leonard M Lodish, ‘Getting the most out of advertising and promotion’, Harvard Business Review, May–June 1990, pp. 50–60. See also OzTAM, <www.oztam.com.au>, and ACNielsen Australia, <www.nielsen.com/au/en.html#1>, accessed May 2016; and Roy Morgan, <roymorgan.com/products/single-source>, accessed May 2016. Juliette Garside, ‘Twitter puts trillions of tweets up for sale to data miners’, The Guardian, 19 March 2015, <theguardian.com/technology/2015/mar/18/twitter-puts-trillionstweets-for-sale-data-miners>, accessed November 2016. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers In Chapter 4, we considered how marketers obtain, analyse and use marketing information to gain customer and market insights as a basis for creating customer value and relationships. In this chapter, we continue our marketing journey with a closer look at the most important element of the marketplace – customers. The aim of marketing is to affect how customers think about and behave towards the organisation and its market offerings. But to affect the whats, whens and hows of buying behaviour, marketers must first understand the whys. We look first at final consumer buying influences and processes, and then at the buying behaviour of business customers. You will see that understanding buying behaviour is an essential, but very difficult, task. For a visual representation of the chapter, please see the concept map on the following page. Learning Objectives Learning Objective 1 Identify the consumer market and the main factors that influence consumer buyer behaviour. Consumer markets and consumer buyer behaviour pp. 132–45 Learning Objective 2 Identify and discuss the stages in the buyer decision process. The buyer decision process pp. 145–48 Learning Objective 3 Describe the adoption and diffusion process for new products. The buyer decision process for new products pp. 148–50 Learning Objective 4 Define the business market and identify the main factors that influence business buyer behaviour. Business markets and business buyer behaviour pp. 150–56 Learning Objective 5 List and define the steps in the business buying decision process. The business buying process pp. 156–59 E-procurement: Buying on the internet pp. 159–60 Business-to-business digital and social media marketing p. 160 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers LO 1 Identify the consumer market and the main factors that influence consumer buyer behaviour. (pp. 132–45) The environment Buyer decision process Marketing stimuli Other stimuli Product Price Placement logistics Promotion People Processes Economic Technological Social Cultural Buyer response Buyer’s black box Buying attitudes and preferences Buyer’s characteristics Buyer’s decision process Purchase behaviour Brand and company relationship behaviour LO 2 Identify and discuss the stages in the buyer design process. (pp. 145–48) Need recognition Information search Evaluation of alternatives Purchase decision Post-purchase behaviour CONSUMER BUYER BEHAVIOUR LO 3 Describe the adoption and diffusion process for new products. (pp. 148–50) Early majority Innovators Late majority Early adopters Laggards Time of adoption of innovations The environment LO 4 Define the business market and identify the main factors that influence buyer behaviour. (pp. 150–56) LO 5 List and define the steps in the business buying decision process. (pp. 156–60) Buyer decision process Marketing stimuli Other stimuli The buying organisation Product Price Placement logistics Promotion People Processes Economic Technological Social Cultural Competitive The buying centre Buying decision process Buyer response Product or service choice Supplier choice Order quantities Delivery terms and times Service terms Payment Problem recognition General need description Product specification Supplier search Proposal solicitation Supplier selection Order-routine specification Performance review BUSINESS BUYER BEHAVIOUR Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 131 132 Part 2 Understanding the marketplace and consumers Consumer markets and consumer buyer behaviour (pp. 132–48) consumer buyer behaviour The buying behaviour of final consumers – individuals and households – that buy goods and services for personal consumption. consumer market All the individuals and households that buy or acquire goods and services for personal consumption. Consumer buyer behaviour refers to the buying behaviour of final consumers – individuals and households that buy goods and services for personal consumption. All of these final consumers combine to make up the consumer market. The combined Australian and New Zealand consumer market consists of nearly 28 million people who consume more than $1 trillion worth of goods and services each year, making it one of the larger markets in the world. The world consumer market consists of more than 7.3 billion people who annually consume an estimated $50 trillion worth of goods and services.1 Consumers around the world vary tremendously in age, income, education level and tastes. They also buy an incredible variety of goods and services. How these diverse consumers relate with each other, and with other parts of the world around them, impacts their choices among various products, services and companies. Here, we examine the fascinating array of factors that affect consumer behaviour. Model of consumer behaviour Consumers make many buying decisions every day, and the buying decision is the focal point of the marketer’s effort. Most large companies research consumer buying decisions in great detail in order to answer questions about what consumers buy, where they buy, how and how much they buy, when they buy and why they buy. Marketers can study actual consumer purchases to find out what they buy, where and how much. But learning about the whys of consumer buying behaviour is not so easy – the answers are often locked deep within the consumer’s mind. Often, consumers themselves do not know exactly what influences their purchases. ‘The human mind doesn’t work in a linear way,’ says one marketing expert. ‘The idea that the mind is a computer with storage compartments where brands or logos or recognisable packages are stored in clearly marked folders that can be accessed by cleverly written ads or commercials simply doesn’t exist. Instead, the mind is a whirling, swirling, jumbled mass of neurons bouncing around, colliding and continuously creating new concepts and thoughts and relationships inside every single person’s brain all over the world.’ Another expert agrees: ‘There are a lot of black holes in what we observe people are doing, why they’re doing it, and what’s going on in the brain.’2 The central question for marketers is: How do consumers respond to various marketing efforts the company might use? The starting point is the stimulus–response model of buyer behaviour, shown in Figure 5.1. This figure shows that marketing and other stimuli enter the consumer’s ‘black box’ and produce certain responses. Marketers must work out what is in the buyer’s black box. Marketing stimuli consist of the marketing mix elements: product, price, placement logistics and promotion, together with the people, processes and physical evidence involved. Other stimuli include major forces and events in the buyer’s environment: economic, technological, political, social and cultural. All these inputs enter the buyer’s mind, a black box where they are turned into a set of observable buyer responses: buying attitudes and preferences, the buyer’s brand and company relationship behaviour, and what he or she buys, when, where and how often. The marketer wants to understand how the stimuli are changed into responses inside the consumer’s black box, which has two parts. First, the buyer’s characteristics influence how he or she perceives and reacts to the stimuli. Second, the buyer’s decision process itself affects the buyer’s behaviour. We look first at buyer characteristics as they affect buyer behaviour and then discuss the buyer decision process. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers THE ENVIRONMENT BUYER’S BLACK BOX BUYER RESPONSES Other Buyer’s characteristics Buyer’s decision process Buying attitudes and preferences Purchase behaviour: what the buyer buys, when, where and how much Brand and company relationship behaviour Marketing stimuli Product Price Placement logistics Promotion People Processes Physical evidence Economic Technological Social Cultural 133 Figure 5.1 Model of buyer behaviour Characteristics affecting consumer behaviour Consumer purchases are influenced strongly by cultural, social, personal and psychological characteristics, shown in Figure 5.2. For the most part, marketers cannot control such factors, but they must take them into account. We must also acknowledge influences such as marketing programs (which marketers can control). Cultural factors Cultural factors exert a broad and deep influence on consumer behaviour. The marketer needs to understand the role played by the buyer’s culture, cultural group and social class. Culture Culture is the most basic cause of a person’s wants and behaviours. Human behaviour is largely learned. Growing up in a particular society, children learn basic values, perceptions, wants and behaviours from their family and other important institutions. Global marketers must be fully aware of the cultures in each CULTURAL Culture Cultural group Social class SOCIAL Reference groups Family Roles and status PERSONAL Age and life-cycle stage Occupation Economic situation Lifestyle Personality and self-concept culture The set of basic values, perceptions, wants and behaviours learned by a member of society from family and other important institutions. PSYCHOLOGICAL Motivation Perception Learning Beliefs and attitudes BUYER Figure 5.2 Factors influencing consumer behaviour Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 134 Part 2 Understanding the marketplace and consumers market and adapt their marketing strategy accordingly. Failure to adjust to these differences can result in ineffective marketing or embarrassing mistakes. Marketers are always trying to identify cultural shifts in order to discover new products that might be wanted. For example, the cultural shift towards greater concern about health and fitness has created a huge industry for health-and-fitness services, exercise equipment and clothing, organic foods and a variety of diets. The shift towards informality has resulted in more demand for casual clothing and simpler home furnishings. Cultural group Each culture contains smaller cultural groups, or groups of people with shared value systems based on cultural group A group of people with common life experiences and situations. The cultures in Australia and New Zealand are diverse and shared value systems richly varied, comprising First Peoples, Anglo-Saxon/Celtic early immigrants (although there were based on common significant groups of migrants from China early in the histories of both countries) and, in the last 80 years life experiences and situations. or so, immigrants from throughout Europe, Asia and the South Pacific. Marketers must respond to the diversity of their market and design products and marketing programs tailored to the needs of these diverse groups. People with a similar ethnic background often have shared value systems. However, individuals may also share identities of gender, sexual preference, age, political affiliation, class and religious belief. These factors will affect food preferences, clothing choices, recreational pursuits and even aspirations, such as career goals. Different cultural groups place different values on marriage, for example. Young couples may or may not be encouraged to marry (and for gay and lesbian couples, such formalised recognition of their relationships may not be possible). Thus, cultural and sociopolitical factors may combine and affect individual interest in all manner of products, as well as brand preferences. Individuals may identify more or less strongly with their cultural groups at different times and in different contexts. So, while marketers may use membership of cultural groups as a convenient way of segmenting markets and as a focus for strategy development, they should take care to avoid oversimplification of a group. The First Peoples of both Australia and New Zealand are themselves very diverse.3 In New Zealand, Maoˉ ri share a common language, albeit with distinct regional dialects, and a common oral history and heritage. In contrast, ‘Indigenous Australia is multicultural, with over 350 distinct languages and nations and varied histories, traditions, laws and lifestyles. Apart from their traditional cultural heritage, Indigenous people today live complex and contemporary lifestyles that draw upon the customs, traditions and lifestyles of every subsequent immigrant group within their community. Therefore, Indigenous people, like all other Australians and New Zealanders, are diverse and fluid in their cultural group memberships.’4 As the world population ages, mature consumers are becoming a very attractive market. Mature consumers: Older consumers are tech-friendly and more socially active As of 2015, the entire ‘baby boomer’ generation, than ever. the largest and wealthiest demographic cohort SeniorMatch in the country, has moved into the 50-plus Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers 135 age bracket. They control a larger proportion of wealth, income and consumption than any current or previous generation. Despite some financial setbacks resulting from the global economic downturn, mature consumers remain an attractive market for companies in all industries, from pharmaceuticals, groceries, beauty products and clothing, to consumer electronics, travel and entertainment, and financial services.5 Contrary to popular belief, mature consumers are not ‘stuck in their ways’. A recent study showed that older consumers for products such as stereos, computers and mobile phones are more willing to shop around and switch brands than their younger Generation X counterparts.6 The growing cadre of mature consumers creates an attractive market for a wide range of services. For example, the social networking site ‘Older Dating Online’ targets older consumers who are interested in forming new relationships and friendships. And their desire to look as young as they feel also makes more-mature consumers good candidates for cosmetics and personal-care products, health foods, fitness products and other items that combat the effects of ageing. Marketers are also noticing that ‘It’s more powerful to promote shared and interesting experiences, over product ownership’ for these older consumers. For example, ‘There is a boom in mature women travelling and wanting safe and interesting experiences.’ Young at Heart Holidays has developed its service for just this market segment, with holidays in Australia and selected international destinations for couples, singles and friends travelling together. Its ‘Big Book of Holidays’ reassures travellers that they can ‘pack their bags, we’ll do the rest’, offering ‘escorted itineraries, relaxed pace, terrific companions, interesting places, quality accommodation, good meals and genuine personal attention’.7 Social class Almost every society has some kind of hierarchy or social class structure. India has a rigid caste system whereas Australia, New Zealand and South-East Asian countries have a class system that permits movement between the classes. Completing tertiary education may result in a better job and movement up the social scale; losing a prestigious position may cause a slide down the social scale. Social classes are relatively permanent and ordered divisions in a society, whose members share similar values, interests and behaviours. Social class is not determined by a single factor. A number of classification schemes have been developed, ranging from those using occupation and education to those based on a combination of occupation, income, education, wealth and other variables. Marketers are interested in social class when it is relevant, because people within a given social class tend to exhibit similar behaviour, including buying behaviour. Researchers, such as Mark McCrindle, have suggested that social class may not be a good basis for developing marketing strategies. Although there is a class system in Australia, Australians seem not to place themselves within such groups as ‘working class’ and, in any event, the groups are so large as to make them ineffective as market segments.8 social class Relatively permanent and ordered divisions in a society, whose members share similar values, interests and behaviours. Social factors A consumer’s behaviour also is influenced by social factors, such as the consumer’s small groups, family, social roles and social status. Groups and social networks Many small groups influence a person’s behaviour. Groups that have a direct influence and to which a person belongs are called membership groups. In contrast, reference groups serve as direct (face-to-face) or indirect points of comparison or reference in forming a person’s attitudes or behaviour. People often are influenced by reference groups to which they do not belong. For example, an aspirational group is one to group Two or more people who interact to accomplish individual or mutual goals. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 136 Part 2 Understanding the marketplace and consumers opinion leader Person within a reference group who, because of special skills, knowledge, personality or other characteristics, exerts social influence on others. online social networks Online social communities – blogs, social networking websites or even virtual worlds – where people socialise or exchange information and opinions. which the individual wishes to belong, such as when a young couple renting indicate a desire, regardless of how difficult it may be, to become home-owners.9 Marketers try to identify the reference groups of their target markets. Reference groups expose a person to new behaviours and lifestyles, influence the person’s attitudes and self-concept, and create pressures to conform that may affect the person’s product and brand choices. The importance of group influence varies across products and brands. It tends to be strongest when the product is visible to others whom the buyer respects. Marketers of brands subjected to strong group influence must work out how to reach opinion leaders – people within a reference group who, because of special skills, knowledge, personality or other characteristics, exert social influence on others. Some experts call these people the influentials or leading adopters. One study found that these influencers are ‘four times more likely than average consumers to belong to five or more organisations, four times more likely to be considered experts, and twice as likely to recommend a product they like’. Another survey found that when consumers are looking for advice about a decision they have to make, they are turning to trusted online sources for that advice, rather than to family.10 Marketers often try to identify opinion leaders for their products and to direct marketing efforts towards them. They use buzz marketing by enlisting or even creating opinion leaders to serve as ‘brand ambassadors’ who spread the word about their products. Many companies are now creating brand ambassador programs in an attempt to turn influential but everyday customers into brand evangelists. The Australian Red Cross has recently invited Soup to help increase blood donations by targeting new donors. Soup is a leading word-of-mouth agency with a membership base of more than 75 000 inf luencers who spread the word about brands in both Australia and New Zealand. Soup recruits ‘soupers’ – people who ‘love having their say’ and who are well connected and interested. Soup does not pay its members; instead, they are given free samples and asked for their ‘honest opinions’. In return, clients using this type of opinion leader service hope for positive recommendations for their brands.11 Over the past few years, a new type of social interaction has exploded on to the scene – online social networking. Online social networks are online communities where people socialise or exchange information and opinions. Social networking media range from blogs and social networking websites, such as Facebook, YouTube, Instagram and Reddit, to entire virtual worlds, such as Second Life, InWorldz, Eve, IMVU and Gaia Online. This new form of high-tech buzz has big implications for marketers and is being used more and more by consumers to provide advice in decision making.12 Marketers are working to harness the power of these new social networks to promote their products and build closer customer relationships. Instead of throwing more one-way commercial messages at ad-weary consumers, they hope to use social networks to interact with consumers and become a part of their conversations and lives. For example, Australian band Powderfinger used Twitter to organise ‘guerrilla’ gigs in Brisbane, Sydney and Melbourne. The number of the band’s online followers tripled in just one day. And companies such as AirAsia, Nike and Xbox have had great success in responding to customer questions on Facebook, Twitter, Weibo and other social media platforms. They use these platforms as a major component of their customer service strategy to engage with and service customers, whether things are positive or not. A company executive explains, ‘Social networks are tools that help build and leverage our relationship with the consumer. Ultimately, we are about connecting with the consumer where they are’ to listen and to help.13 Other companies post ads or custom videos on video-sharing sites such as YouTube. For example, when Yarra Valley Water launched its ‘Choose Tap’ campaign with a YouTube video, it received over 95 000 hits in just a few weeks. The video portrays customers in a fictional pop-up store – Dupé – which sells ‘Organic Fresh Air’ and ‘All Natural February Moonlight’. The store website displays the product range, and the shopping cart links to the campaign tagline, ‘Buying bottled air just doesn’t make sense. It’s just like buying bottled water.’14 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers 137 But marketers must be careful when tapping into online social networks. Results are difficult to measure and control. Ultimately, the users control the content, so social network marketing attempts can easily backfire. For example, the Taxi Council of Victoria used Twitter to try to fight the disruptive onslaught of Uber by asking people to share their taxi stories on Twitter with #YourTaxis. Within hours, this campaign that was designed to promote Victorian Taxis’ goodwill descended into horror for the industry body as consumers used the platform to vent their hatred for taxis. Their competitor, Uber, even used this as a promotional opportunity of their own by targeting stories covering this debacle.15 We look more closely at online social networks as a marketing tool in Chapter 13. Family Family members can strongly influence buyer behaviour. The family is the most important consumer/buying organisation in society, and it has been researched extensively. Marketers are interested in the roles and influence of the husband, wife and children on the purchase of different products and services. Online social networks: Yarra Valley Water’s YouTube campaign, which compared Husband–wife involvement varies widely selling bottled water to selling bottled air, had over 95 000 hits in just a few weeks. by product category and by stage in the buying Campaign creative by Ogilvy process. Buying roles change with evolving consumer lifestyles. In Australia and New Zealand, women have traditionally been the main purchasing agent for the family in the areas of food, household products and clothing. But with more women working, others are doing more of the family’s purchasing. One recent study found that at least half of all grocery shopping is being done by men. Another found that ‘not only do 79 per cent of men like shopping, but 29 per cent say they love it’. In the past, men have been more likely to be ‘mission shoppers’ – in and out as quickly as possible to get whatever it is they are searching for. But this new study found that ‘27 per cent of men would spend more with retailers who design and coordinate the online and in-store experience’, and ‘19 per cent would spend more if technology is used to enable them to shop with more confidence and ease’. These findings have very clear implications for how marketers design in-store experiences.16 Children may also have a strong influence on family buying decisions. One study found that children significantly influence family decisions about everything from where they take holidays to what cars and mobile phones they buy. Most children spend money on toys and sweets, but some also buy books and magazines, DVDs and music. In recognition of the power of child shoppers, many companies devote parts of their website to children. Sanitarium has a kids’ page on its Weet-Bix website, and broadcasters such as the ABC and TVNZ, and subscription services such as Netflix, have websites devoted to their young viewers.17 Roles and status A person belongs to many groups – family, clubs, organisations. The person’s position in each group can be defined in terms of both their role and their status. A role consists of the activities people are expected Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 138 Part 2 Understanding the marketplace and consumers to perform according to the persons around them. Each role carries a status reflecting the general esteem given to it by society. People usually choose products appropriate to their roles and status. Consider the various roles a working mother plays. In her company, she plays the role of a brand manager; in her family, she plays the role of wife and mother; at her favourite sporting events, she plays the role of avid fan. As a brand manager, she will buy the kind of clothing that reflects her role and status in her company; and as a fan, she supports her team by wearing the club’s colours to home games. Personal factors A buyer’s decisions also are influenced by personal characteristics, such as age and life-cycle stage, occupation, education, economic situation, lifestyle, personality and self-concept. Age and life-cycle stage People change the goods and services they buy over their lifetimes. Tastes in food, clothes, furniture and recreation are often age-related. Buying is also shaped by the stage of the family life cycle – the stages through which families might pass as they mature over time. Life-stage changes usually result from demographics and life-changing events – marriage, having children, purchasing a home, divorce, children going to university, changes in personal income, moving out of the house and retirement. Marketers often define their target markets in terms of life-cycle stage and develop appropriate products and marketing plans for each stage. Age and family life cycle are not the only time-related impacts of the way people consume goods and services. Major life events also shape consumption. These impacts may even be cross-generational: the early death of a parent impacts on people’s buying behaviour just as much as getting married does. These issues are explored further in Marketing in action 5.1. Occupation A person’s occupation affects the goods and services bought. Manual workers tend to buy rugged work clothes whereas executives tend to buy business suits. Marketers try to identify the occupational groups that have an above-average interest in their products and services. A company can even specialise in making products needed by a given occupational group. For example, Spear’s Specialty Shoes fills a tiny niche in the shoe world by making high-end shoes for – of all things – clowns (and some team mascots and even store Santas). Founder Gary Spear, a former clown himself, discovered a need for good, comfortable clown shoes with reasonable delivery times. Over the past 25 years, his company has built a worldwide reputation. At the company’s website (<www.spearshoes.com>), professional clowns can browse different colours and styles and design their own shoes. It is a fun niche, but these shoes are no joke. Made for professional clowning around, they are made with lightweight soles and serious padding, at a starting price of US$360 a pair.18 lifestyle Economic situation A person’s economic situation will affect his or her store and product choices. Marketers watch trends in personal income, savings and interest rates. Recent research shows that nearly half of all Australian consumers are prioritising saving and, when they do spend, many are buying from offshore online retailers. In the face of these trends, most companies are taking steps to redesign, reposition and reprice their products. For example, Budget Direct repositioned its brand with the ‘Captain Risky’ campaign. The discount insurer rolled out the campaign in the face of continued pressure on household finances as well as increased competition and complexity in the insurance market. It offered consumers a value proposition emphasising price and simplicity: ‘We don’t insure Captain Risky, to keep prices low.’19 A person’s pattern of living as expressed in his or her activities, interests and opinions. Lifestyle People coming from the same subculture, social class and occupation may have quite different lifestyles. Lifestyle is a person’s pattern of living as expressed in his or her psychographics. It involves measuring Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers Marketing in Action 5.1 139 Consumer behaviour: A whole life story Mature consumers behave very differently from teenagers. Marketers understand a change in hairstyle and a new wardrobe, and for others by excessive purchasing, this, so age is one of the ways markets are segmented. The markets for drinking or gambling. Why people respond differently to life events is not clear, entertainment, mobile communications and travel are often segmented by but researcher George Moschis, with his work on life course perspectives, has age. Breakfast cereals use age (among other factors) to segment their market. been throwing some light on the issue. Moschis suggests that the way life events But sometimes age segmentation does not work – for example, the market impact on consumption is moderated by a person’s ‘socialisation, stress and coping for luxury goods is not defined by age. Researchers have also found that some responses and development and growth’. Thus, a response to negative life events, behaviour of consumers seems to have less to do with age than with life events. such as the death of a parent, will depend on how a person handles stress and the Materialism and compulsive consumption appear to be orientations to buying coping strategies they employ. But it will also be affected by their socialisation and that are particularly affected by life events. their view of their new role in the family. So, contrary to traditional perspectives Materialism reflects a longing for material possessions rather than spiritual fulfilment. Some people are more materialistic than others. This orientation is with a simple ‘cause and effect’ view of consumer behaviour, Moschis’s work casts consumer behaviour as being much more complex. seen in a number of the lifestyle and values segments identified by companies Marketers are yet to establish just how to deal with this view of the consumer, such as SBI (<www.strategicbusinessinsights.com/vals/>) and Roy Morgan but there is no doubt that it is likely to change the way they think about their markets. (<www.roymorgan.com>). Research has shown that children’s responses to family disruptions (such as their parents’ divorce) may later impact on their own tendency towards materialistic consumption. We also know that people who have experienced considerable financial hardship often have conspicuous consumption patterns. Similar negative early life experiences are also linked to compulsive consumption – often of unhelpful products or services, such as cigarettes or gambling. However, it is not just negative consumption behaviour that develops as a result of earlier life events. These events may also affect how and when we get married, have children, the type of work we do, where we live and where we do our shopping – in fact, everything we do. So, what a person buys and how they consume should be seen as a result of their whole life story and not just a particular age or stage of their life cycle. Segmenting consumer markets by age or even life-cycle stage may need to be revised in light of this view of a consumer. The consumption patterns of a young mother whose husband has just died in the line of duty as a police officer may be much more like those of a 60-year-old woman whose husband recently died in a car accident than those of women her own age or stage in life (young mother). However, there is a great deal we do not know about how life events translate into differences in consumption. For some people, ending a relationship is marked by Research suggests that consumer behaviour is complex, and is shaped by the whole history of life events. Lucy Lambriex/Getty Sources: Excerpts from A Rindfleisch, J E Burroughs & F Denton, ‘Family structure, materialism and compulsive consumption’, Journal of Consumer Research, 23, 1997, pp. 312–25; J A Roberts, C Manolis & J Tanner, Jr, ‘Family structure, materialism, and compulsive buying’, Journal of the Academy of Marketing Science, 31(3), 2003, pp. 300–11; and George P Moschis, ‘Life course perspectives on consumer behaviour’, Journal of the Academy of Marketing Science, 35, 2007, pp. 295–307. Questions ❶ Reflect on your life. Draw a timeline and mark the main events in your life – for example, leaving home, starting your first job, your first serious relationship and so on. Have there been any major life events that you see playing out in the way you consume goods and services? Compare your experiences with the life events of a friend and their consumption patterns. ❷ Identify some goods and services that would benefit from market segmentation approaches based on life events rather than on other segmentation variables. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 140 Part 2 Understanding the marketplace and consumers consumers’ major AIO dimensions – activities (work, hobbies, shopping, sports, social events), interests (food, fashion, family, recreation) and opinions (about themselves, social issues, business, products). Lifestyle captures something more than the person’s social class or personality; it profiles his or her whole pattern of acting and interacting in the world. Leading lifestyle researchers, Roy Morgan Research Centre, provide lifestyle and values segmentation for the Australian market. This omnibus research has identified 10 Australian lifestyle groups (Morgan Values Segments™). Among other lifestyle differences, these groups are shown to have different media and entertainment consumption patterns, which is useful information for marketers keen to reach different parts of their potential market.20 When used carefully, the lifestyle concept can help marketers understand changing consumer values and how they affect buying behaviour. Consumers do not just buy products; they buy the values and lifestyles those products represent. For example, Harley Davidson does not just sell motorbikes; it sells adventure and freedom: ‘We fulfill dreams of personal freedom.’ And Driza-Bone sells more than just rugged clothing; it recognises individualism and invites customers to ‘make your own story’.21 personality The unique psychological characteristics that distinguish a person or group. brand personality The specific mix of human traits that may be attributed to a particular brand. Personality and self-concept Each person’s distinct personality influences his or her buying behaviour. Personality refers to the unique psychological characteristics that distinguish a person or group. Personality is usually described in terms of traits such as self-confidence, dominance, sociability, autonomy, defensiveness, adaptability and aggressiveness. Personality can be useful in analysing consumer behaviour for certain product or brand choices. The idea is that brands also have personalities, and that consumers are likely to choose brands with personalities that match their own. A brand personality is the specific mix of human traits that may be attributed to a particular brand. One researcher identified five brand personality traits: sincerity (down-to-earth, honest, wholesome and cheerful); excitement (daring, spirited, imaginative and up-todate); competence (reliable, intelligent and successful); sophistication (upper-class and charming); and ruggedness (outdoorsy and tough).22 Most well-known brands are strongly associated with one particular trait: IKEA with ‘functionality’, MTV with ‘youthfulness’ and Dove with ‘sincerity’. Hence, these brands will attract people who are high on the same personality traits. Many marketers use a concept related to personality – a person’s self-concept (also called self-image). The idea is that people’s possessions contribute to and reflect their identities – that is, ‘we are what we have’. Thus, in order to understand consumer behaviour, the marketer must first understand the relationship between consumer self-concept and possessions.23 Air New Zealand applies these concepts to engage with its customers in everything from its advertising, to its in-flight safety videos and its motion sickness bags. The airline brand personality has an ‘irreverent sense of fun’ according to a recent customer experience study. The airline is such a hit that bloggers all over the world post and re-post the engaging in-flight videos – search online for themed videos inspired by films such as The Hobbit, events such as the Rugby World Cup, celebrities such as Betty White and Bear Grylls, and a take-off (pardon the pun!) of life in Hollywood. One blogger said of an in-flight safety video from ‘Middle Earth’: ‘It captures everything I love about New Zealand, and about Air New Zealand – a sense of pride in what they do, but in a way that shows they have a sense of humor.’24 Psychological factors A person’s buying choices are further influenced by four main psychological factors: (1) motivation, (2) perception, (3) learning, and (4) beliefs and attitudes. Motivation A person has many needs at any given time. Some are biological, arising from states of tension, such as hunger, thirst or discomfort. Others are psychological, arising from the need for recognition, esteem or Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers 141 belonging. A need becomes a motive when it is aroused to a sufficient level of intensity. A motive (or drive) is a need that is sufficiently pressing to direct the person to seek satisfaction. Psychologists have developed theories of human motivation. Two of the most popular – the theories of Sigmund Freud and Abraham Maslow – have quite different meanings for consumer analysis and marketing. Sigmund Freud assumed that people are largely unaware of the real psychological forces shaping their behaviour. He saw the person as growing up and repressing many urges. These urges are never eliminated or under perfect control; they emerge in dreams, in slips of the tongue, in neurotic and obsessive Motivation: An ageing baby boomer who buys a sports car might explain behaviour or, ultimately, in psychoses. that he simply likes the feel of the wind in his (thinning) hair. At a deeper Freud’s theory suggests that a person’s buying level, he may be buying the car in order to feel young and independent again. decisions are affected by subconscious motives that © Monkey Business Images | Dreamstime.com even the buyer may not fully understand. Thus, an ageing baby boomer who buys a sporty BMW Z4 convertible might explain that he simply likes the feel of the wind in his (thinning) hair. At a deeper motive (drive) level, he may be trying to impress others with his success. At a still deeper level, he may be buying the A need that is sufficiently pressing to direct car in order to feel young and independent again. the person to seek The term motivation research refers to qualitative research designed to probe consumers’ hidden, satisfaction of the need. subconscious motivations. Consumers often do not know or cannot describe just why they act as they do. Thus, motivation researchers use a variety of probing techniques to uncover underlying emotions and attitudes towards brands and buying situations. Many companies employ teams of psychologists, anthropologists and other social scientists to carry out motivation research. One ad agency routinely conducts one-on-one, therapy-like interviews to delve into the inner workings of consumers. Another company asks consumers to describe their favourite brands as animals or cars (say, Holden versus Ford) in order to assess the prestige associated with various brands. Still others rely on hypnosis, dream therapy or soft lights and mood music to plumb the murky depths of consumer psyches. These approaches, included in the area of interpretive consumer research, allow marketers to dig deeper into consumer psyches and develop better marketing strategies by recognising the experiential, symbolic, ideological and sociocultural aspects of consumer behaviour.25 Abraham Maslow sought to explain why people are driven by particular needs at particular times. Why does one person spend much time and energy on personal safety and another on gaining the esteem of others? Maslow’s answer is that human needs are arranged in a hierarchy, as shown in Figure 5.3, from the most pressing at the bottom to the least pressing at the top.26 These needs include physiological needs, safety needs, social needs, esteem needs and self-actualisation needs. A person tries to satisfy the most important need first. When that need is satisfied, it will stop being a motivator and the person will then try to satisfy the next most important need. For example, starving people (physiological need) will not take an interest in the latest happenings in the art world (self-actualisation needs), nor in how they are seen or esteemed by others (social or esteem needs), nor even in whether they are breathing clean air (safety needs). But as each important need is satisfied, the next most important need will come into play. Of course, consumer motivations are complex and will not always be strictly hierarchical; and although Maslow’s work has been criticised, it suggests that marketers should reflect on the types of needs consumers may be satisfying when they buy goods and services. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 142 Part 2 Understanding the marketplace and consumers Selfactualisation needs Self-development and realisation Esteem needs Self-esteem, recognition, status Social needs Sense of belonging, love Safety needs Security, protection Physiological needs Hunger, thirst Figure 5.3 Maslow’s hierarchy of needs Source: Abraham H Maslow, Robert D Frager (Editor) & James Faidman (Editor), Motivation and Personality, 3rd edn, © 1987. Printed and electronically reproduced by kind permission of Pearson Education, Inc., Upper Saddle River, NJ. Perception A motivated person is ready to act. How the person acts is influenced by his or her own perception of the situation. All of us learn by the flow of information through our five senses: sight, hearing, smell, touch and taste. However, each of us receives, organises and interprets this sensory information in an individual way. Perception is the process by which people select, organise and interpret information to form a perception The process by meaningful picture of the world. which people select, People can form different perceptions of the same stimulus because of three perceptual processes: organise and interpret selective attention, selective distortion and selective retention. We are exposed to a great amount of information to form a meaningful picture of stimuli every day. For example, individuals are exposed to an estimated 3000 to 5000 ad messages daily. the world. The cluttered digital environment adds 30 billion online display ads shown each day, 500 million tweets sent daily, 144 000 hours of video uploaded daily on YouTube, and 4.75 billion pieces of content shared on Facebook every day.27 It is impossible to pay attention to all these stimuli. Selective attention – the tendency for people to screen out most of the information to which they are exposed – means that marketers must work especially hard to attract the consumer’s attention.28 Even noticed stimuli do not always come across in the intended way. Each person fits incoming information into an existing mindset. Selective distortion describes the tendency of people to interpret information in a way that will support what they already believe. For example, if you Selective perception: It is impossible for people to pay attention to the distrust a company, you might perceive even honest thousands of ads that they see every day, so they screen most of them out. ads from the company as being questionable. © Andrey Bayda/Shutterstock.com Selective distortion means that marketers must try Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers 143 to understand the mindsets of consumers and how these will affect interpretations of advertising and sales information. People also will forget much of what they learn. They tend to retain information that supports their attitudes and beliefs. Because of selective retention, consumers are likely to remember good points made about a brand they favour and to forget good points made about competing brands. Because of selective attention, distortion and retention, marketers must work hard to get their messages through. This fact explains why marketers use so much drama and repetition in sending messages to their market. Interestingly, although most marketers worry about whether their offers will be perceived at all, some consumers worry they will be affected by marketing messages without even knowing it – through subliminal advertising. More than 50 years ago, a researcher announced that he had flashed the phrases ‘Eat popcorn’ and ‘Drink Coca-Cola’ on a screen in a movie theatre in the United States every five seconds for 1/300th of a second. He reported that although viewers did not consciously recognise these messages, they absorbed them subconsciously and bought 58 per cent more popcorn and 18 per cent more Coke.29 Suddenly, advertisers and consumer-protection groups became intensely interested in subliminal perception. People voiced fears of being brainwashed, and California and Canada declared the practice illegal. Although the researcher later admitted to making up the data, the issue has not died. Some consumers still fear they are being manipulated by subliminal messages. Numerous studies by psychologists and consumer researchers have found little or no link between subliminal messages and consumer behaviour. Recent brain-wave studies have found that, in certain circumstances, our brains may register subliminal messages. However, it appears that subliminal advertising simply does not have the power attributed to it by its critics. Most advertisers scoff at the notion of an industry conspiracy to manipulate consumers through ‘invisible’ messages. Says one industry insider: [Some consumers believe we are] wizards who can manipulate them at will. Ha! Snort! Oh my sides! As we know, just between us, most of [us] have difficulty getting a 2 per cent increase in sales with the help of $50 million in media and extremely liminal images of sex, money, power, and other [motivators] of human emotion. The very idea of [us] as puppeteers, cruelly pulling the strings of consumer marionettes, is almost too much to bear.30 Learning When people act, they learn. Learning describes changes in an individual’s behaviour arising from experience. Learning theorists say that most human behaviour is learned. Learning occurs through the interplay of drives, stimuli, cues, responses and reinforcement. A drive is a strong internal stimulus that calls for action. A drive becomes a motive when it is directed towards a particular stimulus object. For example, a person’s drive for self-actualisation might motivate him or her to look into buying a camera. The consumer’s response to the idea of buying a camera is conditioned by the surrounding cues. Cues are minor stimuli that determine when, where and how the person responds. For example, the person might spot several camera brands in a shop window, hear of a special sale price or discuss cameras with a friend. These are all cues that might influence a consumer’s response to his or her interest in buying the product. Suppose the consumer buys a Nikon camera. If the experience is rewarding, the consumer will probably use the camera more and more, and his or her response will be reinforced. Then, the next time the consumer shops for a camera, or for binoculars or some similar product, the probability is greater that he or she will buy a Nikon product. The practical significance of learning theory for marketers is that they can build up demand for a product by associating it with strong drives, using motivating cues and providing positive reinforcement. learning Changes in an individual’s behaviour arising from experience. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 144 Part 2 Understanding the marketplace and consumers belief A descriptive thought that a person holds about something. attitude A person’s consistently favourable or unfavourable evaluations, feelings and tendencies towards an object or idea. Beliefs and attitudes People acquire beliefs and attitudes by doing and learning. These beliefs and attitudes, in turn, influence their buying behaviour. A belief is a descriptive thought that a person has about something. Beliefs may be based on real knowledge, opinion or faith, and may or may not carry an emotional charge. Marketers are interested in the beliefs that people formulate about specific products and services, because these beliefs make up product and brand images that affect buying behaviour. If some of the beliefs prevent purchase, the marketer will want to launch a campaign to correct them. People have attitudes regarding religion, politics, clothes, music, food and almost everything else. Attitude describes a person’s relatively consistent evaluations, feelings and tendencies towards an object or idea. Attitudes put people into a frame of mind of liking or disliking things, of moving towards or away from them. From the definition, we can see that attitudes are made up of three parts – our thoughts and beliefs (cognition), our feelings (affect) and an intention to behave in a certain way (conation). This understanding led to the development of the most common model marketers, psychologists, consumer researchers and others use to make sense of consumer attitudes – the tricomponent attitude model shown in Figure 5.4. As its name suggests, the tricomponent attitude model displays (models) our attitudes in terms of three (‘tri’) parts (‘components’). The cognitive component of our attitudes refers to our beliefs, thoughts and the attributes we associate with the attitude object. They develop through our experiences with, our observations of, and through information we have learned about, the actual object of the attitude. This component of our attitude is the one we are most likely to be aware of compared to the others. It is also more susceptible to change through logical persuasion. The affective component of our attitudes refers to our feelings and emotions linked to the attitude object. This component of our attitude is based on a personal judgment and can be positive (we like something), negative (we dislike something) or neutral (we are indifferent). The affective component of our attitude impacts on the other components of the attitude – it can represent how we evaluate our cognitive beliefs and also how we act in relation to the object. Further, the stronger our feelings and emotion in relation to the object, the stronger the attitude is likely to be. The conative component of our attitude refers to how we act, or would act, should the situation arise in relation to the attitude object. It can be difficult to separate from the other two components and is the only component of our attitude that is visible. Our camera buyer may hold attitudes such as ‘Buy the best’ (conative), ‘Japanese companies make the best electronics products in the world’ (cognitive) and ‘Creativity and self-expression are among Affect Conation Cognition Figure 5.4 A simple representation of the tricomponent attitude model Source: L Schiffman, A O’Cass, A Paladino & J Carlson, Consumer Behaviour, 6th edn, Pearson, Sydney, 2013. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers 145 the most important things in life’ (affective). If so, the Nikon camera would fit well into the consumer’s existing attitudes. Attitudes are difficult to change. A person’s attitudes fit into a pattern, and to change one attitude may require difficult adjustments in many others. Thus, a company should usually try to fit its products into existing attitudes rather than attempt to change attitudes. For example, today’s food marketers now cater to people’s new attitudes about health and wellbeing with a range of products offering alternatives to high-sugar treats. Wholeberry Folk has launched a new range of bake-at-home treats with these consumer attitudes Attitudes: Wholeberry Folk’s bake-at-home range taps into people’s in mind. The range of cupcakes and biscuits uses spelt attitudes about health and wellbeing. flour and real fruit. A company representative explains: ‘As Packaging designed for Wholeberry Folk by Vicki Nhieu parents we have a moral obligation to feed our children healthy food, so when it comes to sweet treats we created an alternative.’31 We can now appreciate the many forces acting on consumer behaviour. The consumer’s choice results from the complex interplay of cultural, social, personal and psychological factors. The buyer decision process (pp. 145–48) Now that we have looked at the influences that affect buyers, we are ready to look at how consumers make buying decisions. Figure 5.5 shows that the buyer decision process consists of five stages: (1) need recognition, (2) information search, (3) evaluation of alternatives, (4) purchase decision and (5) post-purchase behaviour. Clearly, the buying process starts long before the actual purchase and continues long after. Marketers need to focus on the entire buying process rather than on just the purchase decision. The figure suggests that consumers pass through all five stages with every purchase. But in more routine purchases, consumers often skip or reverse some of these stages. A woman buying her regular brand of toothpaste would recognise the need and go straight to the purchase decision, skipping information search and evaluation. However, we use the model in Figure 5.5 because it shows all the considerations that arise when a consumer faces a new and complex purchase situation. Stages in the buyer decision process Need recognition The buying process starts with need recognition – the buyer recognises a problem or need. The need can be triggered by internal stimuli when one of the person’s normal needs – hunger, thirst, sex – rises to a level high enough to become a drive. A need can also be triggered by external stimuli. For example, an advertisement or a discussion with a friend might get you thinking about buying a new car. At this stage in the buyer decision Need recognition Information search Evaluation of alternatives Purchase decision Post-purchase behaviour Figure 5.5 The buyer decision process Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 146 Part 2 Understanding the marketplace and consumers process, the marketer should research consumers to find out what kinds of needs or problems arise, what brought these about and how they led the consumer to this particular product. Information search An interested consumer may or may not search for more information. If the consumer’s drive is strong and a satisfying product is near at hand, the consumer is then likely to buy it. If not, he or she may store the need in memory or undertake an information search related to the need. For example, once you have decided you need a new car, at the very least, you will probably pay more attention to car ads, cars owned by friends and conversations about cars. Or you may actively search the web, talk with friends and gather information in other ways. The amount of searching you do will depend on the strength of your drive, the amount of information you start with, the ease of obtaining more information, the value you place on additional information and the satisfaction you get from searching. Consumers can obtain information from any of several sources. These include personal sources (family, friends, neighbours, acquaintances), commercial sources (advertising, salespeople, dealer websites, packaging, displays), public sources (mass media, consumer rating organisations, internet searches) and experiential sources (handling, examining, trialling/using the product). The relative influence of these information sources varies with the product and the buyer. Generally, the consumer receives the most information about a product from commercial sources – those controlled by the marketer. The most effective sources, however, tend to be personal. Commercial sources normally inform the buyer, but personal sources legitimise or evaluate products for the buyer. A recent study revealed that consumers find sources of user-generated content – discussion forums, blogs, online review sites and social networking sites – 20 per cent more influential, 35 per cent more memorable and 50 per cent more trusted than other types of media when making a purchase decision.32 As more information is obtained, the consumer’s awareness and knowledge of the available brands and features increase. In your car information search, you may learn about the several brands available. The information might also help you to drop certain brands from consideration. A company must design its marketing mix to make prospects aware of and knowledgeable about its brand. The company should carefully identify consumers’ sources of information and the importance of each source. Evaluation of alternatives We have seen how the consumer uses information to arrive at a set of final brand choices. How does the consumer choose among the alternative brands? The marketer needs to know about alternative evaluation – that is, how the consumer processes information to arrive at brand choices. Unfortunately, consumers do not use a simple and single evaluation process in all buying situations. Instead, several evaluation processes are at work. The consumer arrives at attitudes towards different brands through some evaluation procedure. How consumers go about evaluating purchase alternatives depends on the individual consumer and the specific buying situation. In some cases, consumers use careful calculations and logical thinking. At other times, the same consumers do little or no evaluating; instead, they buy on impulse and rely on intuition. Sometimes consumers make buying decisions on their own; sometimes they turn to friends, online reviews or salespeople for buying advice. Suppose you have narrowed your car choices to three brands. And suppose you are primarily interested in four attributes – price, style, fuel economy and performance. By this time, you have probably formed beliefs about how each brand rates on each attribute. Clearly, if one car rated best on all the attributes, the marketer could predict you would choose that brand. However, the brands will no doubt vary in appeal. You might base your buying decision mostly on one attribute, and your choice would be easy to predict. If you wanted style above everything else, you would buy the car that you think has the most style. But most buyers consider several attributes, each with different importance. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers 147 By knowing the importance you assigned to each attribute, the marketer could predict your car choice more reliably. Marketers should study buyers to find out how they actually evaluate brand alternatives. If they know what evaluative processes go on, marketers can take steps to assist buyers in their decision making. Purchase decision In the evaluation stage, the consumer ranks brands and forms purchase intentions. Generally, the consumer’s purchase decision will be to buy the most preferred brand, but two factors can come between the purchase intention and the purchase decision. The first factor is the attitudes of others. If someone important to you thinks you should buy the lowest-priced car, then the chances of your buying a more expensive car are reduced. The second factor is unexpected situational factors. The consumer may form a purchase intention based on such factors as expected income, expected price and expected product benefits. However, unexpected events may change the purchase intention. For example, the economy might take a turn for the worse, a close competitor might drop its price or a friend might report being disappointed in your preferred car. Thus, preferences – and even purchase intentions – do not always result in actual purchase choice. Post-purchase behaviour The marketer’s job does not end when the product is bought. After purchasing the product, the consumer will be satisfied or dissatisfied and will engage in post-purchase behaviour that is of interest to the marketer. What determines whether the buyer is satisfied or dissatisfied with a purchase? The answer lies in the relationship between the consumer’s expectations and the product’s perceived performance. If the product falls short of expectations, the consumer is disappointed; if the product meets expectations, the consumer is satisfied; if it exceeds expectations, the consumer is delighted. The larger the gap between expectations and performance, the greater the consumer’s dissatisfaction. This suggests that sellers should promise only what cognitive their brands can deliver so that buyers are satisfied. Almost all major purchases, however, result in cognitive dissonance, or discomfort caused by dissonance Buyer discomfort post-purchase conflict. After the purchase, consumers are satisfied with the benefits of the chosen caused by post-purchase brand and are glad to avoid the drawbacks of the brands not bought. However, every purchase conflict. involves compromise. So, consumers feel uneasy about acquiring the drawbacks of the chosen brand and about losing the benefits of the brands not purchased. Thus, consumers feel at least some post-purchase dissonance for every purchase.33 Why is it so important to satisfy the customer? Customer satisfaction is a key to building profitable relationships with consumers – to keeping and growing consumers and reaping their customer lifetime value. Satisfied customers buy a product again, talk favourably to others about the product, pay less attention to competing brands and advertising, and buy other products from the company. Many marketers go beyond merely meeting the expectations of customers – they aim to delight the customer. Cognitive dissonance: Steel Blue aims to reduce post-purchase conflict with a A dissatisfied consumer responds differently. comfort guarantee. Bad word of mouth often travels further and faster Steel Blue boots, www.steelblue.com.au than good word of mouth. It can quickly damage Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 148 Part 2 Understanding the marketplace and consumers consumer attitudes about a company and its products. But companies cannot simply rely on dissatisfied customers to volunteer their complaints when they are dissatisfied. Most unhappy customers never tell the company about their problem. Therefore, a company should measure customer satisfaction regularly. It should set up systems that encourage customers to complain. In this way, the company can learn how well it is doing and how it can improve. By studying the overall buyer decision, marketers may be able to find ways to help consumers move through it. For example, if consumers are not buying a new product because they do not perceive a need for it, marketing might launch advertising messages that trigger the need and show how the product solves customers’ problems. If customers know about the product but are not buying because they hold unfavourable attitudes towards it, the marketer must find ways either to change the product or to change consumer perceptions. Roles in the buying process Marketers need to know which people are involved in the buying decision and what role each person plays. Identifying the decision maker in many transactions is fairly easy. Men normally choose their own shoes, and women choose their own pantyhose. Other products, however, may involve group decisions. For example, choosing a movie to share with friends is usually a group decision. Five different roles can be identified in most buying processes: initiator, influencer, decider, buyer and user. The initiator is the person who first suggests or thinks of the idea of buying a particular product or service. For example, in your home this is the person who notices that you are out of breakfast cereal. The influencer is someone whose views or advice carry some weight in making the final buying decision. Continuing the breakfast cereal example, this could be any member of the family whose preferences are important, but it could also be the family doctor who has made dietary recommendations. The person who ultimately makes a buying decision or any part of it – whether to buy, what to buy, how to buy or where to buy – is the decider. But the decider may not be the actual buyer. The buyer is the person who makes an actual purchase, and the user is the person who consumes or uses a product or service. Knowing the main participants and the roles they play helps the marketer to fine-tune the marketing and communication program. The buyer decision process for new products (pp. 148–50) new product A good, service or idea that is perceived by some potential customers as new. We have looked at the stages buyers go through in trying to satisfy a need. Buyers may pass quickly or slowly through these stages, and some of the stages may even be reversed. Much depends on the nature of the buyer, the product and the buying situation. We now look at how buyers approach the purchase of new products. A new product is a good, service or idea that is perceived by some potential customers as new. It may have been around for a while, but our interest is in how consumers learn about products for the first time and make decisions on whether to adopt them. The adoption process is ‘the mental process through which an individual passes from first learning about an innovation to final adoption’, and adoption is the decision by an individual to become a regular user of the product.34 Stages in the adoption process Consumers go through five stages in the process of adopting a new product: • Awareness: The consumer becomes aware of the new product, but lacks information about it. • Interest: The consumer seeks information about the new product. • Evaluation: The consumer considers whether trying the new product makes sense. • Trial: The consumer tries the new product on a small scale to improve his or her estimate of its value. • Adoption: The consumer decides to make full and regular use of the new product. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers This model suggests that the new-product marketer should think about how to help consumers move through the adoption process stages. For example, car brands offer detailed and effusive information about their makes and models via various media, websites, personal selling and so on (interest); and car dealers commonly offer incentives to potential new car buyers – such as attractive finance deals, extended warranties and after-sales servicing (interest and evaluation), extended test-drive periods (trial) and so on – to move consumers to adopt a new car. Individual differences in innovativeness adoption process The mental process through which an individual passes from first hearing about an innovation to final adoption. People differ greatly in their readiness to try new products. In each product area, there are ‘consumption pioneers’ and early adopters. Other individuals adopt new products much later. People can be classified into the adopter categories shown in Figure 5.6. After a slow start, an increasing number of people adopt the new product. The number of adopters reaches a peak and then drops off as fewer non-adopters remain. Five groups of adopters have been identified. The five adopter groups have differing values. Innovators are venturesome – they try new ideas at some risk. Early adopters are guided by respect – they are opinion leaders in their communities and adopt new ideas early but carefully. The early majority are deliberate – although they rarely are leaders, they adopt new ideas before the average person. The late majority are sceptical – they adopt an innovation only after a majority of people have tried it. Finally, laggards are tradition bound – they are suspicious of changes and adopt the innovation only when it has become something of a tradition itself. This adopter classification suggests that an innovating firm should research the characteristics of innovators and early adopters in their product category and direct initial marketing efforts towards them. In general, innovators tend to be relatively younger, better educated and higher in income than later adopters and non-adopters. They are more receptive to unfamiliar things, rely more on their own values and judgment, and are more willing to take risks. They are less brand-loyal and more likely to take advantage of special promotions such as discounts, coupons and samples. Influence of product characteristics on rate of adoption The characteristics of the new product affect its rate of adoption. Some products catch on almost overnight – for example, the Apple iPad, which flew off retailers’ shelves at an astounding rate from the day the product Lagging adopters 16% % share of all adopters 100 Late majority 34% 75 Early majority 34% 50 25 Innovators 2.5% 149 Early adopters 13.5% 0 Time of adoption of innovation Figure 5.6 Adopter categorisation on the basis of relative time of adoption of innovations Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 150 Part 2 Understanding the marketplace and consumers was introduced. Other products take a longer time to gain acceptance. For example, digital television was first launched in Australia in 2001 and, in the first five years of transmission, fewer than one-third of Australian households were watching digital TV (the figure is now 89 per cent).35 Five characteristics are especially important in influencing an innovation’s rate of adoption (we will use high-definition television (HDTV) as an example as we work through these characteristics): • Relative advantage: the degree to which the innovation appears superior to existing products. HDTV offers substantially improved picture quality. This sped up its rate of adoption. • Compatibility: the degree to which the innovation fits the values and experiences of potential consumers. HDTV, for example, is highly compatible with the lifestyles of the television-watching public. However, in the early years, HDTV was not yet compatible with programming and broadcasting systems, slowing adoption. Now, as more and more high-definition programs and channels have become available, the rate of HDTV adoption has increased. • Complexity: the degree to which the innovation is difficult to understand or use. HDTVs are not very complex. Therefore, as more programming has become available and prices have fallen, the rate of HDTV adoption is increasing faster than that of more complex innovations. • Divisibility: the degree to which the innovation may be tried on a limited basis. Early HDTVs were very expensive, slowing the rate of adoption. As prices fall, adoption rates are increasing. • Communicability: the degree to which the results of using the innovation can be observed or described to others. HDTV is easy to demonstrate and describe, and this will enhance the uptake by consumers. Other characteristics influence the rate of adoption, such as initial and ongoing costs, risk and uncertainty, and social approval. The new-product marketer must research all these factors when developing the new product and its marketing program. Linking the concepts Here is a good place to pause and apply the concepts you have examined in the first part of this chapter. ● Think about a specific major purchase you have made recently. What buying process did you follow? What major factors influenced your decision? ● Pick a company or brand that we have discussed in a previous chapter – Amazon, Disney, Sass & Bide, ALDI, McDonald’s, Revlon or another (there are many to choose from). How does the company you chose use its understanding of customers and their buying behaviour to build better customer relationships? ● Think about a company, such as Intel, which sells its products to computer makers and other businesses rather than to final consumers. How would Intel’s marketing to business customers differ from Apple’s marketing to final consumers? The second part of the chapter deals with this issue. Business markets and business buyer behaviour (pp. 150–56) business buyer behaviour The buying behaviour of the organisations that buy goods and services for use in the production of other products and services or to resell or rent them to others at a profit. In one way or another, most large companies sell to other organisations. Companies such as Pacific Dunlop, Dell Computer, IBM, Caterpillar and countless others in various industries sell most of their products to other businesses. Even large consumer-product companies, which make products used by final consumers, must first sell their products to other businesses. For example, Nestlé makes many familiar consumer brands – beverages (Milo, Nesquik), baking products (Carnation, Choc Bits), snacks (Uncle Tobys, Roll-Ups, Le Snak) and others. But to sell these products to consumers, Nestlé must first sell them to its wholesaler and retailer customers, who in turn serve the consumer market. Nestlé also sells products directly to other businesses that use the products to make their own finished products. Business buyer behaviour refers to the buying behaviour of the organisations that buy goods and services for use in the production of other products and services that are sold, rented or supplied Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers 151 to others. It also includes the behaviour of retailing and wholesaling firms that acquire goods to resell or to rent to others at a profit. In the business buying process, business buyers determine which products and services their organisations need to purchase, and then find, evaluate and choose among alternative suppliers and brands. Business-to-business (B2B) marketers must do their best to understand business markets and business buyer behaviour. Then, like businesses that sell to final buyers, they must build profitable relationships with business customers by creating superior customer value. Business markets The business market is huge. In fact, business markets involve far more dollars and items than do consumer markets. For example, think about the large number of business transactions involved in the production and sale of a single set of Dunlop tyres. Various suppliers sell Dunlop the rubber, steel, equipment and other goods that it needs to produce tyres. Dunlop then sells the finished tyres to retailers, who in turn sell them to consumers. Thus, many sets of business purchases were made for only one set of consumer purchases. In addition, Dunlop sells tyres as original equipment to manufacturers who install them on new vehicles, and as replacement tyres to companies that maintain their own fleets of company cars, trucks, buses or other vehicles. Business marketing includes resellers (the reseller market) and manufacturers (the industrial market). We can also think of institutional and government markets as being part of this group, as much of the discussion on business marketing also applies to marketing to, and by, governments and institutions. In some ways, business markets are similar to consumer markets. Both involve people who assume buying roles and make purchase decisions to satisfy needs. However, business markets differ in many ways from consumer markets. The main differences are in market structure and demand, the nature of the buying unit, and the types of decisions and the decision process involved. Market structure and demand The business marketer normally deals with far fewer but far larger buyers than the consumer marketer does. Even in large business markets, a few buyers often account for most of the purchasing. For example, when Dunlop sells replacement tyres to final consumers, its potential market includes the owners of the millions derived demand of cars currently in use around the world. But Dunlop’s fate in the business market depends on getting orders Business demand that ultimately comes from from one of only a handful of large car makers. The smaller number of buyers creates greater dependencies (derives from) the and, as a result, closer relationships tend to develop between buyer and seller in business markets. demand for consumer goods. Further, business demand is derived demand – it ultimately comes from (derives from) the demand for consumer goods. Hewlett-Packard, Dell, Lenovo and others buy Intel microprocessor chips because consumers buy personal computers. If consumer demand for computers drops, so will the demand for microprocessors. Therefore, B2B marketers sometimes promote their products directly to final consumers to increase business demand. For example, Intel advertises heavily to personal computer buyers, selling them on the virtues of Intel and its microprocessors. Recent ads from Intel speak to users, asking them to ‘Look Inside’ – reminding us all to ask what is inside because it should be ‘Intel Inside’. The increased Derived demand: Intel advertises heavily to sell users on the virtues of the demand for Intel chips boosts demand for the PCs company and its microprocessors. containing them, and both Intel and its business Intel Corporation partners win. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 152 Part 2 Understanding the marketplace and consumers Many business markets have inelastic demand; that is, total demand for many business products is not affected much by price changes, especially in the short run. A drop in the price of leather will not cause shoe manufacturers to buy much more leather unless it results in lower shoe prices that, in turn, will increase consumer demand for shoes. Finally, business markets have more fluctuating demand. The demand for many business goods and services tends to change more – and more quickly – than the demand for consumer goods and services does. A small percentage increase in consumer demand can cause large increases in business demand. Sometimes a rise of only 10 per cent in consumer demand can cause as much as a 200 per cent rise in business demand during the next period. Nature of the buying unit Compared with consumer purchases, a business purchase usually involves more decision participants and a more professional purchasing effort. Often, business buying is done by trained purchasing agents who spend their working lives learning how to buy better. The more complex the purchase, the more likely it is that several people will participate in the decision-making process. Buying committees made up of technical experts and top management are common in the buying of major goods. Beyond this, B2B marketers now face a new breed of higher-level, better-trained supply managers. Therefore, companies must have well-trained marketers and salespeople to deal with these welltrained buyers. Types of decisions and the decision process supplier development Systematic development of networks of supplier– partners to ensure an appropriate and dependable supply of products and materials for use in making products or reselling them to others. Business buyers usually face more complex buying decisions than do consumer buyers. Business purchases often involve large sums of money, complex technical and economic considerations, and interactions among many people at many levels of the buyer’s organisation. Because the purchases are more complex, business buyers may take longer to make their decisions. The business buying process also tends to be more formalised than the consumer buying process. Large business purchases usually call for detailed product specifications, written purchase orders, careful supplier searches and formal approval. Rather than make outright purchases, businesses will often lease products. Leasing is common with computers, shop machinery, packaging equipment, heavy-construction equipment, delivery trucks, machine tools and company motor vehicles. The lessee gains many advantages, including conserving capital, getting the seller’s latest products, receiving better service and gaining some tax advantages. The lessor often ends up with a larger net income and the chance to deal with customers who could not afford outright purchase. For example, ORIX Australia is a company that specialises in the financing and management of commercial and passenger vehicles, and provides finance for manufacturing and construction plant and equipment. It supplies commercial finance, leasing, property finance, business finance and specialist fleet-management leasing services. Finally, in the business buying process, the buyer and seller are often much more dependent on each other. B2B marketers may roll up their sleeves and work closely with their customers during all stages of the buying process – from helping customers to define problems, to finding solutions, to supporting after-sale operation. They often customise their offerings to individual customer needs. In the short run, sales go to suppliers who meet buyers’ immediate product and service needs. In the long run, however, B2B marketers keep a customer’s sales, and create customer value by meeting current needs and by partnering with customers to help them solve their problems. In recent years, relationships between customers and suppliers have been changing from downright adversarial to close and friendly. In fact, many customer companies are now practising supplier development – that is, systematically developing networks of supplier–partners to ensure an Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers 153 appropriate and dependable supply of products and materials that they will either use in making their own products or resell to others. For example, Caterpillar no longer calls its buyers ‘purchasing agents’ – they are managers of ‘purchasing and supplier development’. Giant Swedish furniture retailer IKEA does not just buy from its suppliers; it involves them deeply in the process of delivering a stylish and affordable lifestyle to IKEA’s customers. Business buyer behaviour At the most basic level, marketers want to know how business buyers will respond to various marketing stimuli. Figure 5.7 shows a model of business buyer behaviour. In this model, marketing and other stimuli affect the buying organisation and produce certain buyer responses. These stimuli enter the organisation and are turned into buyer responses. In order to design good marketing strategies, the marketer must understand what happens within the organisation to turn stimuli into purchase responses. Within the organisation, buying activity consists of two main parts: the buying centre, made up of all the people involved in the buying decision, and the buying decision process. The model shows that the buying centre and the buying decision process are influenced by internal organisational, interpersonal and individual factors, as well as by external environmental factors. The model in Figure 5.7 suggests four questions about business buyer behaviour: What buying decisions do business buyers make? Who participates in the buying process? What are the main influences on buyers? How do business buyers make their buying decisions? Main types of buying situations There are three main types of buying situations.36 At one extreme is the straight rebuy, which is a fairly routine decision. At the other extreme is the new task, which may call for thorough research. In the middle is the modified rebuy, which requires some research. In a straight rebuy, the buyer reorders something without any modifications. It is usually handled on a routine basis by the purchasing department. Based on past buying satisfaction, the buyer simply chooses from the various suppliers on its list. ‘In’ suppliers try to maintain product and service quality. They often propose automatic reordering systems so that the purchasing agent will save reordering time. ‘Out’ suppliers try to find new ways to add value or exploit dissatisfaction so that the buyer will consider them. In a modified rebuy, the buyer wants to modify product specifications, prices, terms or suppliers. The modified rebuy usually involves more decision participants than does the straight rebuy. The ‘In’ suppliers may become nervous and feel pressured to put their best foot forward to protect an account. THE ENVIRONMENT Marketing stimuli Other stimuli Product Price Placement logistics Promotion People Processes Economic Technological Political Cultural Competitive THE BUYING ORGANISATION BUYER RESPONSES The buying centre Product or service choice Supplier choice Order quantities Delivery terms and times Service terms Payment Buying decision process (Interpersonal and individual influences) straight rebuy A business buying situation in which the buyer routinely reorders something without any modifications. modified rebuy A business buying situation in which the buyer wants to modify product specifications, prices, terms or suppliers. (Organisational influences) Figure 5.7 A model of business buyer behaviour Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 154 Part 2 Understanding the marketplace and consumers new task A business buying situation in which the buyer purchases a product or service for the first time. systems selling (solutions selling) Buying a packaged solution to a problem from a single seller, thus avoiding all the separate decisions involved in a complex buying situation. ‘Out’ suppliers may see the modified rebuy situation as an opportunity to make a better offer and gain new business. A company buying a product or service for the first time faces a new-task situation. In such cases, the greater the cost or risk, the larger the number of decision participants and the greater their efforts to collect information. The new-task situation is the marketer’s greatest opportunity and challenge. The marketer not only tries to reach as many key buying influences as possible, but also provides help and information. The buyer makes the fewest decisions in the straight rebuy and the most in the new-task situation. In the new-task situation, the buyer must decide on product specifications, suppliers, price limits, payment terms, order quantities, delivery times and service terms. The order of these decisions varies with each situation, and different decision participants influence each choice. Many business buyers prefer to buy a complete solution to a problem from a single seller instead of buying separate products and services from several suppliers and putting them together. The sale often goes to the firm that provides the most complete system for meeting the customer’s needs and solving its problems. Such systems selling (or solutions selling) is often a key business marketing strategy for winning and holding accounts. Thus, Elders does more than offer trading options for farmers in Australia and New Zealand. It develops entire solutions for its primary producer clients. For example, Elders offers everything from farm supplies, such as seeds, chemicals and fencing, through to market reports, insurance, financial planning and banking solutions. But the company does not stop there; it also offers farm advice, export and real estate services – all this on top of the traditional trade in crops, livestock and wool. A farmer would be hard-pressed to find something that Elders could not do for his or her business.37 Participants in the business buying process buying centre All the individuals and units that play a role in the business purchase decision-making process. Who does the buying of the trillions of dollars’ worth of goods and services needed by business organisations? The decision-making unit of a buying organisation is called its buying centre and comprises all the individuals and units that play a role in the business purchase decision-making process. This group includes the actual users of the product or service, those who make the buying decision, those who influence the Solutions selling: Elders bundles a complete system of services for farmers, offering everything from farm supplies to finance. Elders Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers 155 buying decision, those who do the actual buying and those who control buying information. The buying centre is not a fixed and formally identified unit within the buying organisation. It is a set of buying roles assumed by different people for different purchases. Within the organisation, the size and makeup of the buying centre will vary for different products and for different buying situations. For some routine purchases, one person – say, a purchasing agent – may assume all the buying centre roles and serve as the only person involved in the buying decision. For more complex purchases, the buying centre may include 20 or 30 people from different levels and departments in the organisation. The buying centre concept presents a major marketing Buying centre: The buying centre for a company buying a corporate challenge. The business marketer must learn who participates jet will include obvious people, such as the pilot and the CEO, but in the decision, each participant’s relative influence, and may also include less obvious people. Martin Harvey | Getty Images what evaluation criteria each decision participant uses. This can be difficult. The buying centre usually includes some obvious participants who are involved formally in the buying decision. For example, the decision to buy a corporate jet will probably involve the company’s CEO, chief pilot, a purchasing agent, some legal staff, a member of top management and others formally charged with the buying decision. It may also involve less obvious, informal participants, some of whom may actually make or strongly affect the buying decision. Sometimes, even the people in the buying centre are not aware of all the buying participants. For example, the decision about which corporate jet to buy may actually be made by a corporate board member who has an interest in flying and who knows a lot about aircraft. This board member may work behind the scenes to sway the decision. Many business buying decisions result from the complex interactions of ever-changing buying centre participants. The main influences on business buyers Business buyers are subject to many influences when they make their buying decisions. Some marketers assume the main influences are economic. They think buyers will favour the supplier who offers the lowest price or the best product or the most service. They concentrate on offering strong economic benefits to buyers. However, business buyers actually respond to both economic and personal factors. Far from being cold, calculating and impersonal, business buyers are human and social as well. They react to both reason and emotion. Today, most B2B marketers recognise that emotion plays an important role in business buying decisions. For example, you might expect that an advertisement designed to help small businesses avoid fraud would stress the risks of fraud and the need to be vigilant. But Consumer Affairs Victoria ads appeal to business owners’ emotions by injecting humour into an otherwise uninteresting issue. The ‘Stevie’s Scam School’ online campaign introduces small business owners to some of the most common scams, using ‘Stevie’, a reformed ‘scam artist’. The series of six ‘quirky and entertaining’ videos certainly captured attention, with each one receiving thousands of ‘hits’.38 When suppliers’ offers are very similar, business buyers have little basis for a strictly rational choice. Because they can meet organisational goals with any supplier, buyers can allow personal factors to play a larger role in their decisions. However, when competing products differ greatly, business buyers are more accountable for their choices and tend to pay more attention to economic factors. Figure 5.8 lists various groups of influences on business buyers – environmental, organisational, interpersonal and individual.39 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 156 Part 2 Understanding the marketplace and consumers ENVIRONMENTAL Economic developments Supply conditions Technological change Political and regulatory developments Competitive developments Culture and customs ORGANISATIONAL Objectives INTERPERSONAL Authority Policies Procedures Organisational structure Systems Status Empathy Persuasiveness INDIVIDUAL Age Income Education Job position Personality Risk attitudes BUYERS Figure 5.8 Major influences on business buyer behaviour Business buyers are heavily influenced by environmental factors, such as economic, technological, political, competitive, and social and cultural developments. For example, during economic downturns, business buyers – just like final consumers – tighten their budgets and spending. Like final consumers, they are looking for greater value in everything they buy. During such times, even more so than normally, B2B marketers must sharpen their value propositions and help customers find effective and efficient solutions. ‘Anyone who says the economy is not a challenge is totally in denial,’ says one B2B marketing expert. Companies ‘need to look at the needs of customers. It’s customer, customer, and customer now.’40 Organisational factors are also important. Each buying organisation has its own objectives, policies, procedures, structure and systems, and the business marketer must understand these factors well. Questions such as these arise: How many people are involved in the buying decision? Who are they? What are their evaluative criteria? What are the company’s policies and limits on its buyers? The buying centre usually includes many participants who influence each other, so interpersonal factors also influence the business buying process. However, it is often difficult to assess such interpersonal factors and group dynamics. Buying centre participants do not wear tags that label them as ‘key decision maker’ or ‘not influential’. Nor do buying centre participants with the highest rank always have the most influence. Interpersonal factors are often very subtle. Whenever possible, business marketers must try to understand these factors and design strategies that take them into account. Finally, each participant in the business buying decision process brings in personal motives, perceptions and preferences. These individual factors are affected by personal characteristics, such as age, income, education, professional identification, personality and attitudes towards risk. Also, buyers have different buying styles. Some may be technical types who make in-depth analyses of competitive proposals before choosing a supplier. Other buyers may be intuitive negotiators who are adept at pitting the sellers against one another for the best deal. The business buying process (pp. 156–59) Figure 5.9 lists the eight stages of the business buying process.41 Buyers who face a new-task buying situation usually go through all stages of the buying process. Buyers making modified or straight rebuys may skip some of the stages. When examining business buying behaviour, it becomes clear that the buying situation has a greater impact than the type of product/service being purchased. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers Problem recognition General need description Product specification Supplier search Proposal solicitation Supplier selection Order-routine specification Performance review 157 Figure 5.9 Stages of the business buying process We now examine these eight stages for the typical new-task buying situation. The buying process begins with problem recognition – when someone in the company recognises a problem or need that can be met by acquiring a specific product or service. Problem recognition can result from internal or external factors. Business marketers use their salesforces or advertising to alert customers to potential problems and then show how their products provide solutions. For example, a Sharp ad notes that a multifunction printer (MFP) can present data security problems and asks, ‘Is your MFP a portal for identity theft?’ The solution? Sharp’s data security kits ‘help prevent sensitive information from falling into the wrong hands’. Having recognised a need, the buyer next prepares a general need description that describes the product or characteristics and quantity of the needed items or solutions. For standard purchases, this process service value presents few problems. For complex items, however, the buyer may need to work with others – analysis Carefully analysing a engineers, users, consultants – to define what is needed. The team may want to rank the importance product’s or service’s of reliability, durability, price and other attributes desired in the item. In this phase, the alert components to business marketer can help the buyers define their needs and provide information about the value determine if they can be redesigned and made of different product characteristics. more effectively and Once the buying organisation has defined the need, it develops the item’s technical product efficiently to provide specifications, often with the help of a value analysis engineering team. Product or service value greater value. analysis is an approach to cost reduction in which the company carefully analyses a product’s or service’s components to determine if they can be redesigned and made more effectively and efficiently to provide greater value. The team decides on the best product or service characteristics and specifies them accordingly. Sellers, too, can use value analysis as a tool to help secure new accounts and retain existing accounts. Especially in a weak economy, improving customer value and helping customers find more cost-effective solutions gives the business marketer an important edge both in keeping current customers loyal and in winning new business. By showing buyers a better way to make an object, outside sellers can turn straight rebuy situations into new-task situations that give them a chance to Problem recognition: Business marketers of office products, obtain new business. such as Sharp or HP, use their salesforce or advertising to In the next buying process step, the buyer conducts a supplier alert customers to potential data security problems with their search to find the best vendors. The buyer can locate qualified multifunction printers and then show how their products provide solutions. suppliers through trade directories, computer searches or © Mayuree Moonhirun/Shutterstock.com recommendations from others. Today, more and more companies Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 158 Part 2 Understanding the marketplace and consumers are turning to the internet to find suppliers. For marketers, this has levelled the playing field – the internet gives smaller suppliers many of the same advantages as larger competitors. The newer the buying task and the more complex and costly the item, the greater the amount of time the buyer will spend searching for suppliers. The supplier’s task is to get listed in major directories and build a good reputation in the marketplace. Salespeople should watch for companies in the process of searching for suppliers and make certain their firm is considered. In the proposal solicitation stage of the business buying process, the buyer invites qualified suppliers to submit proposals. When the purchase is complex or expensive, the buyer will usually require detailed written proposals or formal presentations from each potential supplier. In response, business marketers must be skilled in researching, writing and presenting proposals. The proposals should be marketing documents, not just technical documents. They should spell out how the seller’s solution creates greater value for the customer compared to competing solutions. The buyer next reviews the proposals and selects a supplier or suppliers. During supplier selection, the buyer will consider many supplier attributes and their relative importance. Such attributes include product and service quality, reputation, on-time delivery, ethical corporate behaviour, honest communication and competitive prices. The members of the buying centre will rate suppliers against these attributes and identify the best suppliers. In the end, the buyer may select a single supplier or a few suppliers. Advantages of a single supplier may be that special relationships can be formed that allow for better prices and terms, as the buyer and supplier are mutually reliant on each other. However, advantages of having more than one supplier include that buyers can avoid being totally dependent on one supplier, and to allow comparisons of prices and performance of several suppliers over time. Today’s supplier development managers often want to develop a full network of supplier–partners that can help the company bring more value to its customers. The buyer now prepares an order-routine specification. It includes the final order with the chosen supplier or suppliers and lists items such as technical specifications, quantity needed, expected time of delivery, return policies and warranties. In the case of maintenance, repair and operating items, buyers may use blanket contracts rather than periodic purchase orders. A blanket contract creates a long-term relationship in which the supplier promises to resupply the buyer as needed at agreed prices for a set time period. Many large buyers have a vendor-managed inventory, in which they turn over ordering and inventory responsibilities to their suppliers. Under such systems, buyers share sales and inventory information directly with key suppliers. The suppliers then monitor inventories and replenish stock automatically as needed. For example, most major suppliers to large retailers, such as Big W and Target, assume vendor-managed inventory responsibilities. The final stage of the business buying process is the supplier performance review, in which the buyer assesses the supplier’s performance and provides feedback. For example, Coles has issued a set of supplier guidelines and policies and regularly evaluates each supplier in terms of quality, delivery and other performance variables. Recognising the importance of relationship development, Coles also asks suppliers to provide feedback on them as a customer.42 The performance review may lead the buyer to continue, modify or drop the arrangement. The seller’s job is to monitor the same factors used by the buyer to make sure that the seller is giving the expected satisfaction. The eight-stage buying-process model provides a simple view of business buying as it might occur in a new-task buying situation. The actual process is usually much more complex. In the modified rebuy or straight rebuy situation, some of these stages would be compressed or bypassed. Each organisation buys in its own way, and each buying situation has unique requirements. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers 159 Different buying centre participants may be involved at different stages of the process. Although certain buying-process steps usually do occur, buyers do not always follow them in the same order, and they may add other steps. Often, buyers will repeat certain stages of the process. Finally, a customer relationship might involve many different types of purchases ongoing at a given time, all in different stages of the buying process. The seller must manage the total customer relationship, not just individual purchases. E-procurement: Buying on the internet (pp. 159–60) Advances in information technology have changed the face of the B2B marketing process. Electronic purchasing, often called e-procurement, has grown rapidly in recent years. Virtually unknown less than a decade ago, online purchasing is standard procedure for most companies today. E-procurement gives buyers access to new suppliers, lowers purchasing costs, and hastens order processing and delivery. In turn, business marketers can connect with customers online to share marketing information, sell products and services, provide customer support services and maintain ongoing customer relationships. Companies can do e-procurement in any of several ways. They can conduct reverse auctions, in which they put their purchasing requests online and invite suppliers to bid for the business. Or they can engage in online trading exchanges, through which companies work collectively to facilitate the trading process. There are a number of public exchanges (such as Community Exchange System Australia) but these are giving way to private trading exchanges, such as Exostar. Exostar connects buyers and sellers in the aerospace and defence industry. Its goal is to improve trading efficiency and reduce costs among industry trading partners. Initially a collaboration among five leading aerospace and defence companies – Boeing, Lockheed Martin, Raytheon, BAE Systems and Rolls-Royce – Exostar has now connected more than 100 000 businesses in 150 countries around the world.43 Companies also can conduct e-procurement by setting up their own company buying sites. For example, the Water Corporation operates a company trading site on which it posts its buying needs and invites bids, negotiates terms and places orders. Or companies can create extranet links with key suppliers or partners. For instance, Gloria Jean’s Coffees uses an extranet to manage relationships with its franchisees.44 B2B e-procurement yields many benefits. First, it shaves transaction costs and results in more efficient purchasing for both buyers and suppliers. E-procurement reduces the time between order and delivery. And a web-powered purchasing program eliminates the paperwork associated with traditional requisition and ordering procedures and helps an organisation keep better track of all purchases. Finally, beyond the cost and time savings, e-procurement frees purchasing people from a lot of drudgery and paperwork. In turn, this enables them to focus on more strategic issues, such as finding better supply sources and working with suppliers to reduce costs and develop new products. B2B marketers can help customers who wish to purchase online by creating well-designed, easy-to-use websites. The rapidly expanding use of e-procurement, however, also presents some problems. For example, at the same time that the web makes it possible for suppliers and customers to share business data and even collaborate on product design, it can also erode decades-old customer–supplier relationships. Many buyers now use the power of the web to pit suppliers against one another and to search out better deals, products and turnaround times on a purchase-by-purchase basis. E-procurement can also create potential security disasters. Although email and home-banking transactions can be protected through basic encryption, the secure environment that businesses e-procurement Purchasing through electronic connections between buyers and sellers – usually online. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 160 Part 2 Understanding the marketplace and consumers need in order to carry out confidential interactions is sometimes still lacking. Companies are spending millions for research on defensive strategies to keep hackers at bay. Cisco Systems, for example, specifies the types of routers, firewalls and security procedures that its partners must use to safeguard extranet connections. In fact, the company goes even further – it sends its own security engineers to examine a partner’s defences and holds the partner liable for any security breach that originates from its computers. Business-to-business digital and social media marketing (p. 160) In response to customers’ rapid shift towards online buying, today’s B2B marketers are now using a wide range of digital and social media marketing approaches – from websites, blogs, mobile apps, e-newsletters and proprietary online networks to mainstream social media, such as Facebook, LinkedIn, YouTube, Google+ and Twitter – to engage customers and manage customer relationships anywhere, any time. The use of digital and social media channels in business marketing is not just growing, it is exploding. Digital and social media marketing have rapidly become the new space for engaging business customers. Compared with traditional media and sales approaches, digital and social media can create greater customer engagement and interaction. B2B marketers know they are not really targeting businesses – rather, they are targeting individuals in those businesses who affect buying decisions. And today’s business buyers are always connected via their digital devices – whether they are PCs, tablets or smartphones. Digital and social media play an important role in engaging these always-connected business buyers in a way that personal selling alone cannot. Instead of the old model of sales reps calling on business customers at work or maybe meeting up with them at trade shows, the new digital approaches facilitate anytime, anywhere connections among a wide range of people in the selling and customer organisations, giving both sellers and buyers more control of and access to important information. B2B marketing has always been social network marketing, but today’s digital environment offers an exciting array of new networking tools and applications. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers Student Learning Centre 161 Learning Objective 3. Describe the adoption and diffusion process for new products. (pp. 148–50) The product adoption process is made up of five stages: awareness, interest, evaluation, trial and adoption. New-product marketers must think about how to help consumers move through these stages. With regard to the diffusion process for new products, consumers respond at different rates, depending on consumer Reviewing the learning objectives This chapter is the last of three chapters that address understanding the marketplace and consumers. Here, we have looked closely at consumer and business buyer behaviour. The Australian and New Zealand consumer market consists of nearly 28 million people who consume over $1 trillion worth of goods and services each year. The business market involves even more dollars and items than the consumer market. Understanding buyer behaviour is one of the biggest challenges marketers face. Learning Objective 1. Identify the consumer market and the main factors that influence consumer buyer behaviour. (pp. 132–45) The consumer market consists of all the individuals and households who buy or acquire goods and services for personal consumption. A simple model of consumer behaviour suggests that marketing stimuli and other major forces enter the consumer’s ‘black box’. This black box has two parts: buyer characteristics and the buyer’s decision process. Once in the black box, the inputs result in buyer responses, such as buying attitudes and preferences and purchase behaviour. Consumer buyer behaviour is influenced by four key sets of buyer characteristics: cultural, social, personal and psychological. Marketers who understand these factors can identify interested buyers and shape products and appeals to serve consumer needs better. Culture is the most basic determinant of a person’s wants and behaviour. People in different cultural and social class groups have different product and brand preferences. Social factors – such as small group, social network and family influences – strongly affect product and brand choices, as do personal characteristics, such as age, life-cycle stage, occupation, economic circumstances, lifestyle, personality and self-concept. Finally, consumer buying behaviour is influenced by four main sets of psychological factors – motivation, perception, learning, and beliefs and attitudes. Each of these factors provides a different perspective for understanding the workings of the buyer’s black box. Learning Objective 2. Identify and discuss the stages in the buyer decision process. (pp. 145–48) When making a purchase, the buyer goes through a decision process consisting of need recognition, information search, evaluation of alternatives, purchase decision and post-purchase behaviour. During need recognition, the consumer recognises a problem or need that could be satisfied by a product or service. and product characteristics. Consumers may be innovators, early adopters, early majority, late majority or laggards. Each group may require different marketing approaches. Marketers often try to bring their new products to the attention of potential early adopters, especially those who are opinion leaders. Learning Objective 4. Define the business market and identify the main factors that influence business buyer behaviour. (pp. 150–56) The business market comprises all organisations that buy goods and services for use in the production of other products and services or for the purpose of reselling or renting them to others at a profit. As compared to consumer markets, business markets usually have fewer, larger buyers who are more geographically concentrated. Business demand is derived demand, and the business buying decision usually involves more, and more professional, buyers. Business buyers make decisions that vary with the three types of buying situations: straight rebuys, modified rebuys and new tasks. The decision-making unit of a buying organisation – the buying centre – can consist of many different persons playing many different roles. The business marketer needs to know the following: Who are the main buying centre participants? In what decisions do they exercise influence, and to what degree? What evaluation criteria does each decision participant use? The business marketer also needs to understand the main environmental, organisational, interpersonal and individual influences on the buying process. Learning Objective 5. List and define the steps in the business buying decision process. (pp. 156–60) The business buying decision process itself can be quite involved, with eight basic stages: problem recognition, general need description, product specification, supplier search, proposal solicitation, supplier selection, order-routine specification and performance review. Buyers who face a new-task buying situation usually go through all stages of the buying process. Buyers making modified or straight rebuys may skip some of the stages. Companies must manage the overall customer relationship, which often includes many different buying decisions in various stages of the buying decision process. Recent advances in information technology have given birth to ‘e-procurement’, by which business buyers are purchasing all kinds of products and services online. Business marketers are increasingly connecting with customers online to share marketing information, sell products and services, provide customer support services and maintain ongoing customer relationships. Once the need is recognised, the consumer moves into the information search Discussion questions stage. With information in hand, the consumer proceeds to alternative evaluation ❶ Nature or nurture? Does it matter to marketing scientists and/or marketing and assesses brands in the choice set. From there, the consumer makes a practitioners that there is no firm resolution concerning the degree to purchase decision and actually buys the product. In the final stage of the buyer which human behaviour is determined by internal characteristics, such as decision process, post-purchase behaviour, the consumer takes action based on our physiological and psychological makeup, or whether it is determined satisfaction or dissatisfaction. The marketer’s job is to understand the buyer’s through learned cultural and social responses? Explain your answer. (Learning behaviour at each stage and the influences that are operating. Objective 1) (AACSB: Reflective Thinking) Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 162 Part 2 Understanding the marketplace and consumers ❷ Consumer purchasing behaviour – so many influences. Figure 5.2 graphically depicts the many influences on consumer purchasing behaviour. Are some influences more important than others? Might marketing management focus on the wrong influences at times? Justify your answer. For example, the early marketers of instant cake mixes could not see that the users had been left with nothing to do, and may have felt guilty about using such a convenient product rather than devoting the time and energy to family care that society of the day saw as necessary. Psychological influences were far stronger than the influence of marketers until they enabled the consumer to ‘add an egg’. (Learning Objective 1) (AACSB: Reflective Thinking) ❸ Are there consumer motives that cannot be expressed, because the consumer cannot admit to them? When consumers buy an oral hygiene product because it removes bad breath, it may be a precautionary measure or it may be because they have been told by their dentist that they have halitosis due to gum disease. However, there are products that consumers buy where they cannot admit the real reason, even to themselves. Might this be the case where an older male buys a bright red sports car? Explain your answer. Suggest other purchases where there might also be hidden motives. (Learning Objective 2) (AACSB: Reflective Thinking) ❹ It is great to be the company that is ahead of the game, bringing new goods and services to market and profoundly changing the way that an industry works – but is it a winning strategy? When Apple launched the iPod and iTunes, it changed the shape of the music industry forever. A few years later, it brought the iPhone and iPad to the market, changing telephony forever and creating a whole new category of electronic devices – the tablet. However, in recent years, Apple has struggled in the face of intense competition in both the mobile phone and tablet markets. Is there room to be a ‘me-too’ marketer and sell established goods and services to the later adopters? Or is out in front, selling to innovators and early adopters, the only place to be? How can companies make the most of differences in innovativeness in consumers by developing different offerings for each segment? (Learning Objective 3) (AACSB: Reflective Thinking) Critical thinking exercises ❶ Two households are situated on opposite sides of the same street in your city or town. One male head of household is a self-employed truck driver, while the other is a Malaysian-born university lecturer. Each household comprises two adults and two children in their early teens. The truck driver’s wife is not in paid work, whereas the lecturer’s wife works as a laboratory assistant in a local hospital. The gross income before tax for each household is $175 000 per annum. Work in groups to develop a presentation showing the likely lifestyle for each household. Describe how this impacts on the buying behaviour of each household member. (Learning Objective 1) (AACSB: Communication; Teamwork) ❷ The buying decision process for consumer and business buyers has many similar elements, but there are also differences between the processes for these two distinctly different types of buyers. Refer to Figures 5.5 (consumer buying process) and 5.9 (business buying process), and use these diagrams to draw the buying process for (a) a consumer purchasing a new iPad Air, and (b) a large business buyer, such as global miner BHP Billiton, purchasing the same iPad Air. How are the buying processes similar and different for each type of buyer? (Learning Objectives 2 and 4) (AACSB: Communication; Application of Knowledge) ❸ Business buying occurs worldwide, so marketers need to be aware of cultural factors influencing business customers. In a small group, select a country and develop a multimedia presentation on proper business etiquette and manners, including appropriate appearance, behaviour and communication. Include a map showing the location of the country, as well as a description of its demographics, culture and economic history. (Learning Objective 4) (AACSB: Communication; Diverse and Multicultural Work Environments; Use of IT; Teamwork) Navigating the key terms Learning Objective 1 Learning Objective 3 consumer buyer behaviour (p. 132) adoption process (p. 149) consumer market (p. 132) new product (p. 148) role of the purchasing department or buying centre within the company? Learning Objective 2 (Learning Objective 4) (AACSB: Reflective Thinking) attitude (p. 144) Learning Objective 4 ❺ The changing role of the buying centre. Using the internet as the basis of procurement means that purchasing agents also become responsible for quality as well as costs. How might this additional responsibility change the ❻ Procurement and the small business. How can a small Australian business belief (p. 144) employing fewer than five employees become a part of the supply chain brand personality (p. 140) of global businesses? Can an online procurement system help, or is the cognitive dissonance (p. 147) business still too small to be considered part of such a system? What does cultural group (p. 134) the small business need to do to join an online procurement system? culture (p. 133) (Learning Objective 5) (AACSB: Reflective Thinking) group (p. 135) business buyer behaviour (p. 150) buying centre (p. 154) derived demand (p. 151) modified rebuy (p. 153) new task (p. 154) straight rebuy (p. 153) ❼ Vertical integration, outsourcing and the business buying process. Many learning (p. 143) companies that were formerly vertically integrated, producing their own lifestyle (p. 138) raw materials or parts, are now using outside suppliers to produce them motive (drive) (p. 141) instead (outsourcing). Are there any longer-term dangers in outsourcing? online social networks (p. 136) What if the company outsources to the same company that produces for its opinion leader (p. 136) Learning Objective 5 closest competitor? What are your thoughts on how outsourcing and vertical perception (p. 142) e-procurement (p. 159) integration change the business buying process? What implications do you personality (p. 140) product or service value analysis foresee for marketers? (Learning Objective 5) (AACSB: Reflective Thinking) social class (p. 135) supplier development (p. 152) systems selling (solutions selling) (p. 154) (p. 157) Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 5 Buyer behaviour: Understanding consumer and business buyers Mini cases 5.1 Consumer behaviour Friend or foe? Have you noticed that some of your Facebook friends like certain advertisements? ❶ Which factors are marketers who advertise on Facebook using to Marketers know what Facebook users like and are using that knowledge to influence consumers? Would you be influenced by an ad if you saw that influence users’ friends. Social-context ads are based on data collected on the your friends ‘liked’ it? (Learning Objective 1) (AACSB: Communication; ‘likes’ and friends of Facebook users. When you click on an ad indicating you Use of IT; Reflective Thinking) like it, you are also giving Facebook permission to share that ‘like’ with all of ❷ How would you feel about Facebook using your name in these types your friends. Marketers like this feature because it appears as though you are of ads, or advertising integrating itself into conversations with your endorsing the brand to your friends. The more you click on the ‘Like’ button in friends? (Learning Objective 1) (AACSB: Communication; Reflective ads, the greater the chance they will migrate on to your wall and become part Thinking) of your conversations rather than stay on the perimeter of the page. 5.2 Business buyer behaviour Genuine spare parts – or are they? Manufacturers of heavy earth-moving equipment, cranes and engines that performance’. Assume that the genuine company-branded parts are power heavy transport vehicles are business marketers who attempt to made for them by the same firm that makes non-genuine parts. Is this persuade their customers to buy genuine spare parts. As in many other business an ethical issue? Explain your reasoning. (Learning Objectives 4 and 5) situations, customers often find that non-genuine spare parts are cheaper than (AACSB: Communication; Reflective Thinking) the genuine parts. However, the original manufacturer (sometimes called ❷ In the situation above, there is clearly no material difference between the original equipment manufacturer, or OEM) may attempt to convince the genuine or non-genuine parts. What major influences on business marketplace that genuine parts will not harm their product, while by implication buyer behaviour might sway a buyer’s decision towards genuine or non-genuine brands may well cause harm. In many cases, the genuine parts are non-genuine parts? (Learning Objective 5) (AACSB: Communication; actually made by the same supplier as the non-genuine brands. Application of Knowledge) ❶ Consider the situation where the OEM claims that its genuine parts and lubricants will ‘protect your investment’ by offering ‘superior 5.3 Marketing analytics at work Where are the customers? Understanding the buying process of customers is crucial for any business, and Café and Café Bean – whose owners are worried about their ability to stay in nowhere more so than in the highly competitive food and hospitality industry. business given the small number of customers who walk through their doors Cafés typically have very tight operating margins, so even a few more customers each day. As the shopping centre owner, you really want both businesses to each day can mean the difference between a thriving business and a failing be successful, so you do some research to help the owners understand their one. Suppose that, in a local shopping centre, there are two cafés – HuggaMug businesses better. Your research revealed the following information: HuggaMug Café (%) Café Bean (%) Awareness: Percentage of visitors to the shopping centre who mentioned the name of the café (unprompted recall) 67 52 Awareness: Percentage of visitors to the shopping centre who correctly identified the location of the café (prompted recall) 53 86 Perceived quality: For those visitors to the shopping centre who were aware of the café, the percentage agreeing or agreeing strongly that ‘the café sells good food/coffee’ 88 74 Perceived value: For those visitors to the shopping centre who were aware of the café, the percentage agreeing or agreeing strongly that ‘the café is good value’ 72 71 Satisfaction: Percentage of the café customers who are very likely to visit the café the next time they visit the shopping centre 92 78 Satisfaction: Percentage of the café customers who have recommended the café to others 68 52 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 163 Part 2 Understanding the marketplace and consumers 164 5.3 Marketing analytics at work continued ❶ Review the information provided in the table above, then describe ❷ Based on the information provided, what advice would you give the problems that each business is facing in terms of the steps in the the owner of each café to assist them to improve their profitability? buying process. (Learning Objective 2) (AACSB: Analytical Thinking) (Learning Objective 2) (AACSB: Application of Knowledge) 5.4 Ethical reflection Old technology for developing markets The world is changing so fast, new products are old even before they are discounted rate. But is that fair? Surely, consumers in those developing out of their box. And no product becomes dated more quickly than the markets would also benefit from the newer technology. It might be argued mobile phone. With new releases coming one after another, many brands that this is a form of ‘dumping’. This practice might be acceptable when have different-generation phones on the market at the same time. Take the it is a mobile phone, but what about a pharmaceutical product? Should iPhone, for example. The iPhone 6s and iPhone 6s Plus were still being the newest technology in medicines only be available to the markets that sold in most markets when the iPhone 7 and iPhone 7 Plus were released. can afford it? Or is it reasonable for a company to try to recover the costs Obviously, Apple wants customers to buy its new phone, but it must also of new-product development by selling first to the markets that can most try to sell its earlier-generation stock. One option for Apple would be to afford high initial prices and then progressively rolling out the product to ship the ‘older’ phones to developing markets and sell them there at a different markets? 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See, for example, Richard Elliott & Bernard Cova, ‘Interpretive consumer research as cultural critique’, Consumption Markets and Culture, 11(2), 2008, pp. 71–2; and Bernard Cova & Richard Elliott, ‘Everything you always wanted to know about interpretive consumer research but were afraid to ask’, Qualitative Marketing Research: An International Journal, 11(2), 2008, pp. 121–9. See Abraham H Maslow, ‘A theory of human motivation’, Psychological Review, 50, 1943, pp. 370–96. Also see A Maslow, Motivation and Personality, 3rd edn, HarperCollins Publishers: New York, 1987; and Barbara Marx Hubbard, ‘Seeking our future potentials’, Futurist, May 1998, pp. 29–32. Ellen Moore, ‘Letter to my colleagues: We can do better’, Adweek, 22 December 2010, <www.adweek.com/news/advertising-branding/letter-my-colleagues-we-can-dobetter-104084>; and Kelsey Libert & Kristin Tynski, ‘Research: The emotions the make marketing campaigns go viral’, Harvard Business Review, 24 October 2013, <https:// hbr.org/2013/10/research-the-emotions-that-make-marketing-campaigns-go-viral>; both accessed August 2016. 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Bob Garfield, ‘“Subliminal” seduction and other urban myths’, Advertising Age, 18 September 2000, pp. 4, 105; and Lewis Smith, ‘Subliminal advertising may work, but only if you’re paying attention’, Times, 9 March 2007. For more on subliminal advertising, see Alastair Goode, ‘The implicit and explicit role of ad memory in ad persuasion: Rethinking the hidden persuaders’, International Journal of Marketing Research, 49(2), 2007, pp. 95–116; Cynthia Crossen, ‘For a time in the 50s, a huckster fanned fears of an ad “hypnosis”’, Wall Street Journal, 5 November 2007, p. B1; and Beth Snyder Bulik, ‘This brand makes you more creative’, Advertising Age, 24 March 2008, p. 4. See <www.wholeberryfolk.com.au/>; and Sophie Langley, ‘New “home-style” baking mixes range launched in Australia’, Australian Food News, 27 November 2013, accessed August 2016. Max Knoblauch, ‘Millennials trust user-generated content 50% more than other media’, 9 April 2014, <http://mashable.com/2014/04/09/millennials-user-generatedmedia/#4debOP7Jrgqn>, accessed August 2016. See Leon Festinger, A Theory of Cognitive Dissonance, Stanford University Press: Stanford, CA, 1957; Cynthia Crossen, ‘“Cognitive dissonance” became a milestone in the 1950s psychology’, Wall Street Journal, 12 December 2006, p. B1; and Anupam Bawa & Purva Kansal, ‘Cognitive dissonance and the marketing of services: Some issues’, Journal of Services Research, October 2008–March 2009, p. 31. The following discussion draws from the work of Everett M Rogers. See his Diffusion of Innovations, 5th edn, Free Press: New York, NY, 2003. Jane Schulze, ‘Viewers slow on digital uptake’, The Australian, 4 May 2009; ‘Digital television in Australian homes 2011’, Australian Communications and Media Authority, 2012, <www.acma.gov.au>, accessed August 2016; ‘Digital television: FAQ’, Australian Communications and Media Authority, 2016, <www.acma.gov.au>, accessed August 2016; ‘Revealed: ABC voted Australia’s most trustworthy broadcaster. But who came in last?’, B&T Magazine, 2016, <www.bandt.com.au/media/revealed-abc-votedaustralias-trustworthy-broadcaster-came-last?>; see also ‘US HDTV penetration nears 25%’, NielsenWire, 11 December 2008. This classic categorisation was first introduced in Patrick J Robinson, Charles W Faris & Yoram Wind, Industrial Buying Behavior and Creative Marketing, Allyn & Bacon: Boston, MA, 1967. Also see James C Anderson & James A Narus, Business Market Management, 2nd edn, Prentice Hall: Upper Saddle River, NJ, 2004, chapter 3; James C Anderson, James A Narus & Wouter van Rossum, ‘Customer value propositions in business markets’, Harvard Business Review, March 2006, pp. 91–9; and Philip Kotler & Kevin Lane Keller, Marketing Management, 14th edn, Prentice Hall: Upper Saddle River, NJ, 2012, chapter 7. Example adapted from information found at <www.elders.com.au/>, accessed August 2016. Example adapted from information found at ‘Consumer scams’, Consumer Affairs Victoria, 2016, <www.consumer.vic.gov.au/resources-and-education/scams/ consumer-scams>; <www.youtube.com/user/consumervic?feature=c4-search>; and at ‘Melbourne agency Taboo launches Stevie’s Scam School campaign for Consumer Affairs Victoria’, Campaign Brief, 20 March 2012, <www.campaignbrief.com/2012/03/ version10-starthtml0000000149-194.html>; all accessed August 2016. See Frederick E Webster, Jr & Yoram Wind, Organizational Buying Behavior, Prentice-Hall: Englewood Cliffs, NJ, 1972, pp. 33–7. Henry Canaday, ‘What recession?’, Selling Power, January–February 2009, pp. 44–9, <www.sellingpower.com/content/article/index.php?a=2/what-recession&page=1>, accessed August 2016. Patrick Robinson, Charles Faris & Yoram Wind, Industrial Buying and Creative Marketing, Allyn & Bacon: Boston, MA, 1967. See <www.supplierportal.coles.com.au/>, accessed August 2016. See <www.communityexchange.net.au/> and <www.exostar.com/>, accessed August 2016. See <www.watercorporation.com.au/home/suppliers/procurement> and <www. gloriajeanscoffees.com.au/Support/FranchisePartners.aspx>, accessed August 2016. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e This page intentionally left blank. PA RT 3 Designing a customer-driven strategy and mix 6 Customer-driven market strategy: Creating value for target customers 7 Products, services and brands: Offering customer value 8 New products: Developing and managing innovation 9 Pricing: Capturing customer value 10 Placement: Customer value fulfilment 11 Communicating customer value: Advertising and public relations 12 Personal selling and sales promotion: Creating value in relationships 13 Direct and digital marketing: Interactivity and fulfilment Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 168 198 230 256 290 340 374 404 Chapter 6 Customer-driven marketing strategy: Creating value for target customers So far, you have learned what marketing involves and the importance of gaining insights into consumers and the marketplace environment. With that as background, you are now ready to delve deeper into marketing strategy and tactics. This chapter takes us further into key customer-driven marketing strategy decisions – the bases upon which markets are broken up into meaningful customer groups (segmentation), how we choose which customer groups to serve (targeting), create market offerings that best serve targeted customers (differentiation) and position the offerings in the minds of consumers (positioning). The chapters that follow explore the tactical marketing tools – the extended marketing mix – by which marketers bring these strategies to life. For a visual representation of the chapter, please see the concept map on the following page. Learning Objectives Learning Objective 1 Define the main steps in designing a customer-driven marketing strategy: market segmentation, targeting, differentiation and positioning. Customer-driven marketing strategy p. 170 Learning Objective 2 List and discuss the main bases for segmenting consumer and business markets. Market segmentation pp. 171–80 Learning Objective 3 Explain how companies identify attractive market segments and choose a market-targeting strategy. Market targeting pp. 180–86 Learning Objective 4 Discuss how companies differentiate and position their products for maximum competitive advantage. Differentiation and positioning pp. 186–92 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 6 Customer-driven marketing strategy: Creating value for target customers 169 stomers to ser ve Select cu LO 1 ON ATI rket into T ENtal ma ents M G he to r segm e all Demographic Psychographic Behavioural Undifferentiated (mass) marketing Differentiated (segmented) marketing Concentrated (niche) marketing Micromarketing (local or individual marketing) DI ES T I op O N FE n co in cid go De PO ing Discuss how companies differentiate and position their products for maximum competitive advantage. (pp. 186–92) r t os h i fo e sa tion rl m es e s F G RE ID E N UE NTA L T A N I V A CE F Y P OS SIBLE S IA S AN A DV ce ITI E V I N T pr o O p T D I T C tua E E O P M N g IN G w E R lue e f e od hic l pos DIFF va mor sam s i h Us LO 4 dif ti fer differ oning map enc en s tia tors es are a • es ding ore the h l Decire for m less • r muc • mo ore for ss fo •m • le Decide o n value proposition Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e C com hoos pet ing th itive e righ adva t ntage BASES FOR SEGMENTATION Geographical TARGETING STRATEGIES LO 3 Explain how companies identify attractive market segments and choose a market targeting strategy. (pp. 180–86) UST OM E t targe ents ect Sel et segm rk ma LO 2 List and discuss the main bases for segmenting consumer and business markets. (pp. 171–80) E ALU V ATE RE RS C Div SE ide sm t Differ TAR en creat tiate t GE e su he T per ma IN ior rke G cu t sto of m FOR TARGETED C o gt rin e fe valu er Define the main steps in designing a customer-driven marketing strategy: market segmentation, targeting, differentiation and positioning. (p. 170) 170 Part 3 Designing a customer-driven strategy and mix Customer-driven marketing strategy (p. 170) market segmentation Analysing how a market is naturally broken into distinct groups of buyers who have different needs, characteristics or behaviours, and who might require tailored products or marketing programs market targeting (targeting) The process of evaluating each market segment’s attractiveness and selecting one or more segments to enter. differentiation Differentiating the company’s market offering from that offered by competitors, to create superior customer value. positioning Arranging for a market offering to occupy a clear, distinctive and desirable place in the minds of target consumers relative to competing products. Companies today recognise that they cannot appeal to all buyers in the marketplace, or at least not to all buyers in the same way. Buyers are too numerous, too widely scattered and too varied in their needs and buying practices. Moreover, the companies themselves vary widely in their ability to serve different segments of the market. Instead, like any sound marketer, a company must identify the parts of the market that it can serve best and most profitably. It must design customer-driven marketing strategies that build the right relationships with the right customers. Thus, most companies have moved away from mass marketing and towards target marketing – identifying market segments, selecting one or more of them and developing products and marketing programs tailored to each. Instead of scattering their marketing efforts (the ‘shotgun’ approach), firms focus on the buyers who have greater interest in the values that the firms create and can serve best (the ‘rifle’ approach). Figure 6.1 shows the four main steps in designing a customer-driven marketing strategy. In the first two steps, the company selects the customers that it will serve. Market segmentation involves analysing a market with the aim of directing marketing focus towards smaller segments of buyers with distinct characteristics or behaviours that might require tailored marketing strategies or mixes. The company identifies different ways to segment the market and develops profiles of the resulting market segments. Market targeting (or targeting) consists of evaluating each market segment’s attractiveness and selecting one or more market segments to enter. In the final two steps, the company decides on a value proposition – on how it will create value for target customers. Differentiation involves differentiating the firm’s market offering from that offered by competitors, to create superior customer value. Positioning consists of arranging for a market offering to occupy a clear, distinctive and desirable place in the minds of target consumers relative to competing products. We discuss each of these steps in turn. DECIDE ON VALUE PROPOSITION SELECT CUSTOMERS TO SERVE Segmentation Differentiation Divide the total market into smaller segments Differentiate the market offering to create superior customer value CREATE VALUE FOR TARGETED CUSTOMERS Targeting Positioning Select the segment or segments to enter Position the market offering in the minds of target customers Figure 6.1 Designing a customer-driven marketing strategy Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 6 Customer-driven marketing strategy: Creating value for target customers Market segmentation (pp. 171–80) Buyers in any market differ in their wants, resources, locations, buying attitudes and buying practices. Through market segmentation, companies divide large, heterogeneous markets into smaller segments that can be reached more efficiently and effectively with products and services that match their unique needs. In this section, we discuss four important segmentation topics: (1) segmenting consumer markets, (2) segmenting business markets, (3) segmenting international markets and (4) requirements for effective segmentation. Segmenting consumer markets There is no single way to segment a market. A marketer has to try different segmentation variables, alone and in combination, to find the best way to view the market structure. Table 6.1 outlines the main variables Table 6.1 Bases for identifying and analysing consumer market segments Variable Typical breakdowns Geographical Region Far North Queensland, South-Eastern Queensland, Far North Coast of NSW, NSW Tablelands, Western NSW, Lakes District – Victoria City size (population) Under 5000; 5000–20 000; 20 000–50 000; 50 000–100 000; 100 000–250 000; 250 000–500 000; 500 000–1 000 000; 1 000 000–2 000 000; 2 000 000 and over Density Urban, suburban, rural Climate Northern, Eastern seaboard, Southern and Western Demographic Age (years) Under 6, 7–11, 12–19, 20–34, 35–49, 50–64, 65+ Sex Male, female Family size (members) 1–2, 3–4, 5+ Family life cycle Young, single; young, married, no children; young, married, youngest child under 6 years; young, married, youngest child 6 or over; older, married, with children; older, married, no children under 18; older, single; other Income (annual) Under $10 000; $10 000–$14 999; $15 000–$19 999; $20 000–$29 999; $30 000–$49 999; $50 000–$99 999; $100 000 and over Occupation Professional and technical; managers, officials and proprietors; clerical, sales; craftspeople, supervisors; operatives; farmers; retired; students; homemakers; unemployed Education Primary school or less; some high school; high school graduate, some TAFE college; TAFE college graduate; some university; university graduate Religion Catholic, Protestant, Orthodox, Jewish, Muslim, other Nationality Australian, British, New Zealander, American, Chinese, French, German, Scandinavian, Italian, Greek, Middle Eastern, Japanese, Taiwanese, Vietnamese, South African, other Psychographic Socioeconomic Quintiles: AB, C, D, E, FG Status Where education, income and occupation levels are used in combination to indicate status Values, attitudes and lifestyle groupings Visible Achievement, Something Better, Young Optimists, Socially Aware, Look at Me, A Fairer Deal, Basic Needs, Real Conservatism, Traditional Family Life, Conventional Family Life Personality Compulsive, gregarious, authoritarian, ambitious Behavioural Purchase occasion Regular occasion, special occasion Benefits sought Quality, service, economy User status Non-user, ex-user, potential user, first-time user, regular user Usage rate Light user, medium user, heavy user Loyalty status None, medium, strong, absolute Readiness stage Unaware, aware, informed, interested, desirous, intending to buy Attitude towards product Enthusiastic, positive, indifferent, negative, hostile Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 171 172 Part 3 Designing a customer-driven strategy and mix that might be used in segmenting consumer markets. Here, we look at the main geographic, demographic, psychographic and behavioural variables. Geographic segmentation geographic segmentation Dividing a market into different geographical units, such as nations, regions, states, local government areas, cities or neighbourhoods. Geographic segmentation calls for dividing the market into different geographical units, such as nations, regions, states, local government areas, cities or even neighbourhoods. A company may decide to operate in one or a few geographical areas, or to operate in all areas but pay attention to geographical differences in needs and wants. Many companies today are localising their products, advertising, promotion and sales efforts to fit the needs of individual regions, cities and even neighbourhoods. For example, retailers such as Coles and Woolworths operate virtually everywhere but sometimes stock specialised products for specific types of geographic locations. For example, a shopper in the Sydney suburb of Double Bay would find smoked eel in the deli cabinet, whereas this product might not be stocked in Melbourne’s Caroline Springs. Demographic segmentation demographic segmentation Dividing the market into segments based on variables such as age, gender, family size, family life cycle, income, occupation, education, religion, race, generation and nationality. age and life-cycle segmentation Analysing a market with the aim of directing marketing focus based on different age and lifecycle groups. Demographic segmentation divides the market into segments based on variables such as age, gender, family size, family life cycle, income, occupation, education, religion, race, generation and nationality. Demographic factors are the most popular bases for segmenting customer groups. One reason is that consumer needs, wants and usage rates often vary closely with demographic variables. Another is that demographic variables are easier to measure than most other types of variables. Even when marketers first define segments using other bases, such as benefits sought or behaviour, they must know segment demographic characteristics in order to assess the size of the target market and to reach it efficiently. Age and life-cycle stage Consumer needs and wants change with age. Some companies use age and life-cycle segmentation, offering different products or using different marketing approaches for different age and life-cycle groups. Some companies focus on a specific age of life-stage groups. For example, Scienceworks offers young children with inquisitive minds an opportunity to see how various mechanical and scientific apparatus work, including an insight into the workings of the universe through a visit to the planetarium. Marketers must be careful to guard against stereotypes when using age and life-cycle segmentation. Although some 80-year-olds fit the doddering stereotypes, others play tennis. Similarly, whereas some 40-year-old couples are sending their children off to university, others are just beginning new families. Age and life-cycle segmentation: Victoria’s Scienceworks museum and planetarium target those with enquiring young minds. https://museumvictoria.com.au/scienceworks/visiting/lightning-room/. Copyright Museum Victoria. Photographer: James Geer. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 6 Customer-driven marketing strategy: Creating value for target customers 173 Thus, age is often a poor predictor of a person’s life-cycle, health, work or family status, needs and buying power. Companies marketing to consumers in a family unit usually employ images and appeals to stress the value and benefits of the market offering, rather than the age of the consumer themselves. An example of such segmented advertising is an ad for funeral insurance, where the focus is on unburdening the remaining family members, regardless of age. Gender Gender segmentation has long been used as a segmentation variable by clothing, cosmetics, toiletries and magazines marketers. More recently, many mostly women’s cosmetics makers have begun marketing men’s lines. For example, Unilever’s Lynx brand of body washes and deodorant sprays targets men, with product names such as Anarchy, Adrenaline and Africa to denote its various fragrances. Nivea markets the Nivea Men range, which includes moisturisers, shaving and shower gels, post-shave balms and more. Crabtree & Evelyn has evolved from a small, family-run business specialising in soap to an international marketer of fragrances, toiletries and more, in a range that includes many products for men, such as fragrances, soaps, body wash and shaving products. An underdeveloped gender segment can offer new opportunities in markets ranging from consumer electronics to motorcycles. For example, Harley-Davidson has traditionally targeted men aged between 35 and 55, but women are now among its fastest-growing customer segments. Female buyers now account for 12 per cent of new Harley-Davidson purchases, up from only 2 per cent in 1995. In response, the company is boosting its appeal to women buyers – through such initiatives as Harley Davidson riding gear designed specifically for women, creating women-based communities through social media, and more. It recently introduced the SuperLow, a lower-to-the-ground, lighter model geared towards women. And it hired Victoria’s Secret and Sports Illustrated swimsuit edition model, Marisa Miller, as a spokesperson. Her riding exploits can be seen in videos on the Harley-Davidson website and on YouTube. ‘It says, look, this is real stuff,’ says Harley-Davidson CEO, Keith Wandell. ‘A lot of women ride bikes, and here’s a Victoria’s Secret supermodel riding bikes and doing burnouts.’1 gender segmentation Dividing a market into different segments based on gender. income Income The marketers of products and services – such as cars, clothing, cosmetics, financial services and segmentation Dividing a market travel – have long used income segmentation. Many companies target affluent consumers with into different income luxury goods and convenience services. For example, for a price, luxury hotels provide amenities to segments. attract specific groups of affluent travellers, such as families, expectant mums and even pet owners. The 196-metre ship The World ‘is the largest privately owned residential yacht on the planet’ and enables its affluent residents to sleep on deck Balinese-style and ‘wake up in a new destination every few days’.2 However, not all companies that use income segmentation target the affluent. For example, many retailers – such as Best & Less and Harris Scarfe – successfully target low- and middle-income groups. The core market for such stores is lower-income families. While the Global Financial Crisis affected Australia less severely than it did most countries at the time, more recently, consumers at all income levels – including affluent consumers – have cut back on their spending and sought Income segmentation: The World successfully markets itself as ‘the greater value from their purchases. In many cases, luxury largest privately owned yacht on the planet’. marketers targeting high-income consumers have been the The World hardest hit (see Marketing in action 6.1).3 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 174 Part 3 Designing a customer-driven strategy and mix Marketing in Action 6.1 ALDI: Offering a ‘same-for-less’ value proposition Whether selling fresh food, clothing, personal computers or mobile phones, to (if you could find one) and carry it to your car. This heroic effort was rewarded by be successful in the marketplace, organisations need to understand and then substantial price savings. But you had earned it! satisfy their customers. Some players in the Australian retail arena have been Franklins found it had created an offer that did not appeal to the market. able to leverage segmentation, targeting and positioning concepts to support It had become confused in its segmentation strategy and, as a result, the brand their market entry strategies. became incorrectly positioned in the minds of its core segments. In 2001, For many years, the large retail chains Coles and Woolworths have dominated the Australian supermarket industry, with the latter considered the market leader. Franklins was broken up and the parts were sold to other companies, including Coles, Woolworths and a newcomer, ALDI. These companies were able to segment the marketplace successfully in the knowledge that Australian consumers could be divided into three broad groups – premium, convenience and discount buyers. Armed with this segmentation ALDI spots the gap down under information, each player in the market was able to position itself based on its Franklins’ inability to reposition itself successfully in the marketplace provided a ability to appeal to specific customer segments. perfect opportunity for the large German retail conglomerate, ALDI, to enter the At one time, a third retailer, Franklins, competed with Coles and Woolworths market. ALDI – the secret grocer in this story – could see that one part of the but at the price-conscious end of the market. In the early 1990s, Franklins’ senior Australian retail market (formerly serviced by Franklins), the discount segment, executives decided they wanted to reposition the business by copying the fresh- was now not serviced by any of the large retail players. food-retailing positioning concept that Coles and Woolworths were successfully Established in the town of Essen in Germany’s Ruhr Valley, with the applying, but to offer it at a discount price. It was thought that this new target first foundation stone laid in 1913, the privately owned ALDI operates more segment for the business would grow the company’s market share and its than 10 000 stores in 18 countries across Europe, the United States and profitability. Australia. The company operates as two separate groups: ALDI North and Franklins launched a series of fresh-food stores and added fresh-food ALDI South. ALDI North comprises the northern region of Germany, Belgium, departments to many of its existing stores. While this strategy seemed a Denmark, France, Luxembourg and the Netherlands. ALDI South comprises positive move, problems soon arose. The company could not match the buying southern Germany, Austria, the United Kingdom, Ireland, the United States power of its rivals, and management was not effective in containing the higher and Australia. The company has an annual sales turnover of more than costs (and therefore the resulting selling prices) associated with fresh-food 50 billion euros (approximately A$72 billion, depending on exchange rates). retailing. In early 2001, Franklins lost market share in the four states in which It differs from local retailers by offering a limited range of about 1300 of the it operated (Queensland, New South Wales, Victoria and South Australia). In its most popular products, mainly under its private label, ‘ALDI’. By comparison, key NSW market, its share fell from 25.6 per cent to 24.2 per cent. In the retail Coles Supermarkets and Woolworths offer up to 20 000 items, largely national market, where profits are based on large-volume sales and very small margins brands, but with increasing numbers of products carried under retailer brands. per item sold, the loss of one percentage point in market share equates to a From the outset, ALDI was successful in gaining consumer acceptance of substantial profit reduction, or even financial disaster. Additionally, Franklins’ private-label brands. fresh-food concept was too highly priced relative to its stated positioning, While the overall market share of private-label brands stood at about and so the price-sensitive core segment became alienated. At the same time, 28 per cent in the United Kingdom in 2006, in Australia it was much lower until neither potential nor existing shoppers accepted that Franklins could sell recent times. Private-label market share in Australia has risen to some 20 per cent fresh food. As a consequence, the retailer failed to gain the anticipated new of supermarket brands according to IBISWORLD market research, and is expected customers while, at the same time, it was also losing its loyal core of discount- to grow to 35 per cent within five years. A consumer survey by Canstar Blue sensitive buyers. showed that ‘the proportion of Australian shoppers buying private labels increased Franklins became a victim of its ambition to emulate Woolworths and Coles, from 44% to 65% in just six months’. revealing its poor understanding of the requirements of repositioning a strongly ALDI’s stores are situated mainly in areas where the price-conscious entrenched brand and retailing concept. One of the original appeals of Franklins congregate, such as adjacent to the direct factory outlets at Moorabbin airport to price-conscious consumers was the way in which you had to ‘fight’ your way in Melbourne; in other words, in the heartland of its selected target market. through the narrow aisles, strain your back to reach items high on the shelves, However, ALDI also locates in shopping centres when the opportunity presents line up and wait at checkouts and, finally, pack your own groceries into a carton itself. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 175 aldi.com.au, 16 February 2017 Chapter 6 Customer-driven marketing strategy: Creating value for target customers Given its experience and timing, ALDI was able to enter the Australian market private-label brands, and may portend the arrival of international giants, such as in 2001 with ease since the needs and wants of a large group of consumers were Tesco and Walmart, if they conquer the more populous markets of China, India not being met by the existing retailers. If Franklins had been able to continue to and Russia. service its natural market segment, ALDI’s penetration of the Australian market would have been much slower and its potential more limited. So, too, did the Coles Group’s loss of focus and confused supermarket positioning help ALDI to grow in 2006/07. The Coles Group made the decision to switch nearly all its Bi-Lo stores to the perceived more-upmarket Coles Supermarkets brands and, in so doing, vacated the price-conscious end of the market. Partway through this change, the Coles Group was purchased by Wesfarmers – owners of the highly successful ‘big box’ hardware retailer, Bunnings – bringing to a halt what would prove to be a poor marketing decision owing to the loss of brand asset value involved. The lesson for marketers is that market segmentation is essential. But, just as importantly, organisations need to assess critically their capabilities to satisfy a selected market segment and determine whether there is a competitive advantage that will enable them to fend off potential new entrants. While ALDI has stuck closely to its position as a discounter of packaged food items, it also features Sources: See ‘Aldi history’ at <corporate.aldi.com.au/en/about-aldi/aldi-history/>, accessed November 2016. Also see Neil Shoebridge, ‘A new brand spanking’, BRW, 6 May 2010; Eli Greenblat, ‘Costco gets another $110 million from US parent for Australian expansion’, Sydney Morning Herald, 30 December 2013; Jeffrey Hutton, ‘Corbett’s fresh idea for rival’, BRW, 18–22 August 2007, p. 9; Jason Baker, GM IBISWorld, ‘Brand in the house’, BRW – ‘Economy Watch’, 19 April 2007; Adelle Ferguson, ‘Envy’, BRW, 14 January 2002; Neil Shoebridge, ‘Franklins’ chief has a job ahead’, BRW, 1 February 1999; Michelle Hannen, ‘Patient ALDI is buying carefully’, BRW, 27 September 2001; Graham Ruddick, ‘Five numbers that show how Aldi has revolutionised grocery shopping’, The Telegraph, 29 September 2014; Frank Chung, ‘Supermarket monsters: How Coles and Woolworths suffocate us’, 18 June 2015, <www.news.com.au/finance/business/retail/supermarket-monsters-how-colesand-woolworths-suffocate-us/news-story/c901feb4f6c255d3a6b613140cbea30c>, accessed November 2016; Catie Low, ‘Supermarket chains Woolworths and Coles struggle with private label brands against Aldi’, Sydney Morning Herald, 11 June 2016; ALDI International website, <www.aldi.com>, accessed November 2016. Quoted private-label shares reported in Ronelle Richards, ‘Aldi winning the private label race as Aussie shoppers increasingly shun big name grocery brands: Research’, smartcompany, <smartcompany. com.au/marketing/sales/49578-aldi-winning-the-private-label-race-as-aussie-shoppersincreasing-shun-big-name-grocery-brands-research>, accessed November 2016. Wednesday and Saturday themed product sales, known as ‘Special Buys’, that Questions include lawn mowers, televisions and camping gear among many other lines, and ❶ Do you think that shoppers at ALDI see the brands offered there as retailer has used these to develop and maintain its competitive advantage against its rivals. Although ALDI has made consumers more price conscious, it does not appear to have any intention of competing at the upmarket end of Australian grocery retailing. The company recognises that a move into that arena would lead it into the same trap that Franklins fell into and, in all likelihood, provoke the local chains to retaliate. ALDI may not face its traditional market segments with everything going its way forever. Costco’s arrival in Australia has continued the move towards (private-label) brands or as ‘regular’ brands? ❷ How is ALDI positioned relative to its competitors in the minds of people you know? ❸ How do the various grocery-market segments perceive private-label brands in your country? Is there room for growth? ❹ What are the reasons behind your answer to Question 3? Do these reasons apply equally to all market segments? Explain your answer. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 176 Part 3 Designing a customer-driven strategy and mix Psychographic segmentation Psychographic segmentation divides buyers into different segments based on social class, lifestyle or personality characteristics. People in the same demographic group can have very different psychographic profiles. In Chapter 5, we discussed how the products people buy reflect their lifestyles. As a result, marketers often segment their markets by consumer lifestyles and base their marketing strategies on lifestyle appeals. For example, although both Gloria Jean’s and Starbucks are coffee shops, they offer very different product assortments and store atmospheres. Yet each succeeds because it creates just the right value proposition for its unique mix of customer lifestyles. Starbucks targets more ‘high-brow’ young professionals, whereas Gloria Jean’s targets the ‘average person’. Personality variables: True North offers enhanced levels of comfort and luxury We see lifestyle differences emerging in to those wanting to experience luxury adventure cruises in a style akin to one of attitudes to car ownership as city-dwelling the world’s most exclusive hotels. North Star Cruises professionals turn to sharing cars and bicycles. These are not rental activities in the usual sense as they involve hourly rentals, with pickup and psychographic drop-off points scattered around cities. Businesses such as GreenShareCar, GoGet and FlexiCar segmentation offer many benefits to private car users, while Melbourne Bike Share caters to those wanting to Dividing a market into make short city trips. In both cases, Australian lifestyles differ from European and North American different segments lifestyles in this regard.4 based on social class, lifestyle or personality Marketers also use personality variables to segment markets. For example, cruises to the Kimberley characteristics. region or to West Papua and Papua New Guinea target adventure seekers. While some cruises to the Kimberley region appeal to high-energy couples and families, with their many outdoor activities, True North is designed to allow discerning adventurers to experience the wilderness in surroundings more akin to one of the world’s most exclusive hotels. By contrast, P&O Cruises are varied and the six ships in the fleet offer choices for adventurers, cultural tourists, wilderness and wildlife seekers, beach lovers and sporty types, as well as catering for families both young and old, young couples and active older people, behavioural depending on their needs.5 segmentation Dividing a market into segments based on consumer knowledge, attitudes, uses or responses to a product. occasion segmentation Dividing the market into segments according to occasions when buyers get the idea to buy, actually make their purchase or use the purchased item. Behavioural segmentation Behavioural segmentation divides buyers into segments based on their knowledge, attitudes, uses or responses to a product. Many marketers believe that behaviour variables are the best starting point for building market segments. Occasions Buyers can be grouped according to occasions when they get the idea to buy, actually make their purchase or use the purchased item. Occasion segmentation can help firms build up product usage. For example, most consumers of fruit juice drink it in the morning, but marketers such as Boost Juice want juices to be seen as a part of a healthy lifestyle and to be consumed throughout the day. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 6 Customer-driven marketing strategy: Creating value for target customers 177 Some holidays, such as Mother’s Day and Father’s Day, were originally promoted partly to increase the sale of chocolates and sweets, flowers, cards and other gifts. And many marketers prepare special offers and ads for holiday occasions. For example, chocolate marketers with impulse lines such as Cherry Ripe, Mars bars and Violet Crumble bars, and specialty lines such as Lindt, make up special Easter egg look-alike products to take advantage of the Easter selling period. Benefits sought A powerful form of segmentation is to group buyers according to the different benefits they seek from the product. Benefit segmentation requires finding the main benefits people look for in the product class, the kinds of people who look for each benefit and the main brands that deliver each benefit. The Athlete’s Foot markets its product lines in Australia and New Zealand according to benefits that different consumers seek from their sporting, leisure and comfort footwear, and must target the benefit segment or segments that it can serve best and most profitably, using appeals that match each segment’s benefit preferences. benefit segmentation Analysing a market with the aim of directing marketing focus based on the different benefits that consumers seek from the product. User status Markets can be segmented into non-users, ex-users, potential users, first-time users and regular users of a product. Marketers want to reinforce and retain regular users, attract targeted non-users and reinvigorate relationships with ex-users. Included in the potential user group are consumers facing life-stage changes – such as newlyweds and new parents – who can be turned into heavy users. For example, Bounty Bags are distributed to Australian mothers-to-be and new mothers by hospital staff or at antenatal classes. The bags contain product samples the new mother may not have used before, such as nappies and baby wipes, as well as parenting magazines and local area health-care information booklets.6 Usage rate Markets can also be segmented into light, medium and heavy product users. Heavy users are often a small percentage of the market but account for a high percentage of total consumption. For example, smartphone users who access the internet may be classified as heavy users based on their use of highbandwidth services such as peer-to-peer file sharing, or on the amount of time they spend in social media communication. Heavy users may require more expensive data plans compared to those required by light users of these services. Either way, the telecommunications companies (telcos) target heavy users, as they provide a higher return on investment. Loyalty status A market can also be segmented by consumer loyalty. Consumers can be loyal to brands (ColdPower), stores (Target) and companies (Toyota). Buyers can be divided into groups according to their degree of loyalty. Some consumers are completely loyal – they buy one brand all the time. For example, as we discussed in the previous chapter, Apple has an almost cult-like following of loyal users. Sony PlayStation users can be almost as fanatical, Consumer loyalty: Attendees view new MacBook Pro laptop computers on display during an event at Apple Inc.’s California headquarters in 2016. Apple introduced the first overhaul of its MacBook Pro laptop in more than four years, demonstrating dedication to a product that represents a small percentage of revenue. David Paul Morris/Bloomberg via Getty Images Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 178 Part 3 Designing a customer-driven strategy and mix Behavioural segmentation extended: Using multiple segmentation bases, Roy Morgan Values Segments assist marketing organisations to find out what segments think, feel and aspire to, and how they act. Source: Roy Morgan. Devised by Michele Levine of Roy Morgan Research and Colin Benjamin of the Horizons Network judging by the fact that some 1 million PS4s were sold in the first 24 hours following the product’s release in November 2013, and over 40 million units were sold worldwide in the three years that followed.7 Other consumers are somewhat loyal – they are loyal to two or three brands of a given product, or favour one brand while sometimes buying others. Still other buyers show no loyalty to any brand. Either they want something different each time they buy, or they buy whatever is a price special. A company can learn a lot by analysing loyalty patterns in its market. It should start by studying its own loyal customers. For example, by studying PS3 and PS4 fanatics, Sony can better pinpoint its target market and develop marketing appeals. Highly loyal customers can be a valuable asset. They often promote the brand and the company through personal word of mouth and via social media. By studying its lessloyal buyers, the company can detect which brands are most competitive with its own. By looking at customers who are shifting away from its brand, the company can learn about its marketing weaknesses and take action to correct them. Using multiple segmentation bases Marketers rarely limit their segmentation analysis to only one or a few variables. Rather, they mostly use multiple segmentation bases in an effort to identify smaller, better-defined target groups. Thus, a bank may not only identify a group of wealthy retired adults but also, within that group, distinguish several segments based on their current income, assets, savings and risk preferences, housing and lifestyles. Business information services, such as The Nielsen Company and Roy Morgan, provide multivariable segmentation systems that merge geographic, demographic, lifestyle and behavioural data to help companies segment their markets down to postcodes, neighbourhoods and even households. Such segmentation provides a powerful tool for marketers of all kinds. It can help companies to identify and better understand key customer segments, target them more efficiently and tailor market offerings and messages to their specific needs. Segmenting business markets Consumer and business marketers use many of the same variables to segment their markets. Business buyers can be segmented geographically, demographically (industry, company size) or by benefits sought, user status, usage rate and loyalty status. Yet, business marketers also use some additional variables, such as customer operating characteristics, purchasing approaches, situational factors and personal characteristics. Almost every company serves at least some business markets. For example, American Express targets businesses in three segments – merchants, corporations and small businesses. It has developed distinct marketing programs for each segment. In the merchants segment, American Express focuses on convincing new merchants to accept the card, and on managing relationships with those merchants that already do. For larger corporate customers, the company offers a corporate card program that includes extensive employee expense and travel management services. It also offers this segment a wide range of asset management, retirement planning and financial education services. Many companies set up separate systems for dealing with larger or multiple-location customers. For example, Progressive, a marketer of office furniture, first segments customers into Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 6 Customer-driven marketing strategy: Creating value for target customers 179 four industries – aged care, commercial, hospitality and health care. Some national, multiplelocation customers have particular requirements that may reach beyond the scope of Progressive’s individual five stores. So, Progressive uses national account managers to help its stores handle its national accounts. Within a given target industry and customer size, the company can segment by purchase approaches and criteria. As in consumer segmentation, many marketers believe that buying behaviour and benefits provide the best basis for segmenting business markets. Segmenting international markets Few companies have either the resources or the will to operate in all, or even most, of the countries that dot the globe. Although some large companies, such as Coca-Cola or Sony, sell products in more than 200 countries, most international firms focus on a smaller set. Operating in many countries presents new challenges. Different countries, even those that are close together, can vary greatly in their economic, cultural and political makeup. Thus, just as they do within their domestic markets, international firms need to group their world markets into segments with distinct buying needs and behaviours. Companies can segment international markets using one or a combination of several variables. They can segment by geographic location, grouping countries by regions such as Western Europe, the Pacific Rim, the Middle East or Africa. Geographic segmentation assumes that nations close to one another will have many common traits and behaviours. Although this is often the case, there are many exceptions. For example, although the countries in South-East Asia have much in common, they differ culturally and economically. As a case in point, Malaysia and the island state of Singapore are connected, and are interdependent in some ways, but differ culturally, economically and linguistically from each other and from the many other adjacent countries, such as Thailand, Vietnam and Indonesia. World markets can also be segmented on the basis of economic factors. Countries might be grouped by population income levels or by their overall level of economic development. A country’s economic structure shapes its population’s product and service needs and, therefore, the marketing opportunities it offers. For example, many companies are now targeting the BRIC countries (Brazil, Russia, India and China) – fast-growing developing economies with rapidly increasing buying power – along with the socalled ‘bottom of the pyramid’ countries that have vast untapped markets (although without such large individual buying power). Countries can also be segmented by political and legal factors, such as the type and stability of government, receptivity to foreign firms, monetary regulations and amount of bureaucracy. Cultural factors can also be used, grouping markets according to common languages, religions, values and attitudes, customs and behavioural patterns. Segmenting international markets based on geographic, economic, political, cultural and other factors assumes that segments should consist of clusters of countries. However, as communications technologies, such as satellite television, the internet and social media, continue to connect consumers around the world, marketers can define and reach segments of like-minded consumers no matter where in the world they are. Using intermarket segmentation (also called cross-market segmentation), marketers form segments of consumers who have similar needs and buying behaviours even though they are located in different countries. For example, Lexus targets the world’s well-to-do – the ‘global elite’ segment – regardless of their country. Coca-Cola creates special programs to target teens, core consumers of its soft drinks the world over. And Swedish furniture giant IKEA targets the aspiring global middle class – it sells good-quality furniture that ordinary people worldwide can afford. intermarket segmentation Forming segments of consumers who have similar needs and buying behaviour even though they are located in different countries. Requirements for effective segmentation Clearly, there are many ways to segment a market, but not all segmentations are effective. For example, buyers of table salt could be divided into blond and brunette customers. But hair colour obviously does not affect the purchase of salt. Furthermore, if all salt buyers bought the same amount of salt each Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 180 Part 3 Designing a customer-driven strategy and mix month, believed that all salt is the same and wanted to pay the same price, the company would not benefit from segmenting this market. To be useful, market segments must be: • Measurable: The size, purchasing power and profiles of the segments can be measured. Certain segmentation variables are difficult to measure. For example, there are approximately 30.5 million left-handed people in the United States – almost equalling the entire population of Canada. Yet, few products are targeted towards this left-handed segment. The main problem may be that the segment is hard to identify and measure. There are no data on the demographics of lefties, and neither the United States Census Bureau, the Australian Bureau of Statistics nor Statistics New Zealand keep track of left-handedness in their surveys. Private data companies keep reams of statistics on other demographic segments but not on left-handers. • Accessible: The market segments can be effectively reached and served. Suppose a fragrance company finds that heavy users of its brand are single men and women who stay out late and socialise a lot. Unless this group lives or shops at certain places and is exposed to certain media, its members will be difficult to reach. • Substantial: The market segments are large or profitable enough to serve. A segment should be the largest possible homogeneous group worth pursuing with a tailored marketing program. It would not pay, for example, for an automobile manufacturer to develop cars especially for people whose height is greater than two metres. • Differentiable: The segments are conceptually distinguishable and respond differently to different marketing mix elements and programs. If married and unmarried women respond similarly to a sale on perfume, they do not constitute separate segments. • Actionable: Effective programs can be designed for attracting and serving the segments. For example, although one small airline identified seven market segments, its staff was too small to develop separate marketing programs for each segment. Linking the concepts Pause for a bit and think about segmentation. As a consumer yourself, think about your own personal experience when you shop. ● Identify specific companies, other than the examples already mentioned, that practise the different types of segmentation just discussed. ● How do the stores you shop at use the segmentation concepts you are reading about here? And why do they do this? ● Using the segmentation bases you have just read about, segment the Australian footwear market. Describe each of the major segments and sub-segments. Keep these segments in mind as you read the next section on market targeting. Market targeting (pp. 180–86) Market segmentation reveals the firm’s market segment opportunities. The firm now has to evaluate the various segments and decide how many and which segments it can serve best. We now look at how companies evaluate and select target segments. Evaluating market segments In evaluating different market segments, a firm must look at three factors: (1) segment size and growth, (2) segment structural attractiveness, and (3) company objectives and resources. The company must first collect and analyse data on current segment sales, growth rates and expected profitability for various segments. It will be interested in segments that have the right size and growth characteristics. But ‘right size and growth’ is a relative matter. The largest, fastest-growing segments are not always the most Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 6 Customer-driven marketing strategy: Creating value for target customers 181 attractive ones for every company. Smaller companies may lack the skills and resources needed to serve the larger segments. Or they may find these segments too competitive. Such companies may target segments that are smaller and less attractive, in an absolute sense, but that are potentially more profitable for them. The company also needs to examine major structural factors that affect long-run segment attractiveness.8 For example, a segment is less attractive if it already contains many strong and aggressive competitors. The existence of many actual or potential substitute products may limit prices and the profits that can be earned in a segment. The relative power of buyers also affects segment attractiveness. Buyers with strong bargaining power relative to sellers will try to force prices down, demand more services and set competitors against one another – all at the expense of seller profitability. Finally, a segment may be less attractive if it contains powerful suppliers who can control prices or reduce the quality or quantity of ordered goods and services. Even if a segment has the right size and growth and is structurally attractive, the company must consider its own objectives and resources. Some attractive segments can be dismissed quickly because they do not align with the company’s long-run objectives. Or the company may lack the skills and resources needed to succeed in an attractive segment. For example, given current economic and resource conditions, the economy segment of the motor vehicle market is large and growing. Even so, given its company objectives and resources, it would make little sense for luxury-performance car maker BMW to enter this segment and compete head-on with the likes of Hyundai and Proton. A company should enter only those segments in which it can create superior customer value and gain advantages over competitors. Selecting target market segments After evaluating different segments, the company must decide which and how many segments it will target. A target market consists of a set of buyers who share common needs or characteristics that the company decides to serve. Market targeting can be carried out at several different levels. Figure 6.2 shows that companies can target very broadly (undifferentiated marketing), very narrowly (micromarketing) or somewhere in between (differentiated or concentrated marketing). Undifferentiated marketing Using an undifferentiated marketing (or mass marketing) strategy, a firm might decide to ignore market segment differences and target the whole market with one offer. This mass-marketing strategy focuses on what is common in the needs of consumers, rather than on what is different. The company designs a product and a marketing program that will appeal to the largest number of buyers. As noted earlier in the chapter, most modern marketers have strong doubts about this strategy. Difficulties arise in developing a product or brand that will satisfy all consumers. Moreover, mass marketers often have trouble competing with more-focused firms that do a better job of satisfying the needs of specific segments and niches. Undifferentiated (mass) marketing Differentiated (segmented) marketing TARGETING BROADLY Concentrated (niche) marketing target market A set of buyers sharing common needs or characteristics that the company decides to serve. undifferentiated (mass) marketing A market-coverage strategy in which a firm decides to ignore market segment differences and go after the whole market with one offer. Micromarketing (local or individual marketing) TARGETING NARROWLY Figure 6.2 Market targeting strategies Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 182 Part 3 Designing a customer-driven strategy and mix Differentiated marketing differentiated (segmented) marketing A market-coverage strategy in which a firm decides to target several market segments and designs separate offers for each. Using a differentiated marketing (or segmented marketing) strategy, a firm decides to target several market segments and designs separate offers for each. Toyota Corporation produces several brands of cars – from Toyota (Corolla, Camry and Aurion) and Lexus (IS, GS and LS models) – each targeting its own segments of car buyers. Procter & Gamble markets various household-care brands, not to mention such beauty and grooming brands as Head & Shoulders, Olay, Pantene and Wella, which compete with each other and with competitor Unilever’s brands on supermarket shelves. Unilever’s personal-care brands include Dove, Impulse, Lifebuoy, Lux, Lynx, Pears, Rexona, Sunsilk and Vaseline. Multibrand distributor Unilever uses differential marketing to offer a range of personal-care brands that tap into consumer lifestyles and aspirations; check out its website at <www.unilever.com.au/brands/>. By offering product and marketing variations to segments, companies such as Toyota, P&G and Unilever, among others, hope for higher sales and a stronger position within each market segment. Developing a stronger position within several segments creates more total sales than does undifferentiated marketing across all segments. But differentiated marketing also increases the costs of doing business. A firm usually finds it more expensive to develop and produce, say, 10 units of 10 different products rather than 100 units of one product. Developing separate marketing plans for the separate segments requires extra marketing research, forecasting, sales analysis, promotion planning and channel management. And trying to reach different market segments with different advertising campaigns increases promotion costs. Thus, the company must weigh increased sales against increased costs when deciding on a differentiated marketing strategy. Concentrated marketing Using a concentrated marketing (or niche marketing) strategy, instead of going after a small share of a large market, the firm goes after a large share of one or a few smaller segments or niches. For A market-coverage example, NightOwl’s vision is ‘more choice, more value’.9 It has been in business for over 40 years and has strategy in which a stores in Queensland, New South Wales and Victoria. The segment the firm targets is buyers of grocery firm goes after a large and convenience demand products, who may buy at any time in the 24 hours that most stores are open. share of one or a few segments or niches. Through concentrated marketing, the firm achieves a strong market position because of its greater knowledge of consumer needs in the niches it serves and the special reputation it acquires. It can market more effectively by fine-tuning its products, prices and programs to the needs of carefully defined segments. It can also market more efficiently, targeting its products or services, channels and communications programs towards only consumers that it can serve best and most profitably. Whereas segments are fairly large and normally attract several competitors, niches are smaller and may attract only one or a few competitors. Niching lets smaller companies focus their limited resources on serving niches that may be unimportant to or overlooked by larger competitors. Many companies start as nichers to get a foothold against larger, more-resourceful competitors and then grow into broader competitors. In contrast, as markets change, some megamarketers develop niche products to create sales growth. For example, in recent years, as consumers have grown more health conscious, the demand for carbonated soft drinks has declined while the Concentrated marketing: NightOwl’s franchise stores serve the market segment seeking grocery and convenience products market for energy drinks and juices has grown. To meet this 24 hours a day. shifting demand, mainstream cola marketers PepsiCo and © LADO/Shutterstock.com Coca-Cola have both developed or acquired their own niche concentrated (niche) marketing Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 6 Customer-driven marketing strategy: Creating value for target customers 183 products, ranging from low-kilojoule carbonated soft drinks (CSDs) to enhanced waters, energy drinks and juices.10 Today, the low cost of setting up shop on the internet makes it even more profitable to serve seemingly minuscule niches. Small businesses, in particular, are realising riches from serving small niches on the web. Consider Etsy: Etsy is ‘the world’s handmade marketplace’ – selling everything from handmade soaps to vintage fedoras, and even Vampire hunting kits. Sometimes referred to as eBay’s funky little sister, the Etsy online crafts-fair website is a far cry from the old-fashioned street-corner flea market. Thanks to the reach and power of the web, Etsy now counts 1.6 million active sellers, more than 26 million active buyers and over 35 million listings in nearly every country in the world. It reported a 33 per cent revenue growth in the third quarter of 2016, with annual gross merchandise sales of over US$2.4 billion. Etsy’s vibrant marketplace is more than an e-business site; it is a thriving community. For example, it sponsors actual and virtual meet-ups organised by location (from Syracuse to Saskatchewan and Singapore), medium (papier-mâché, mosaic), and interest area (Chainmailers Guild, Lizards and Lollipops). Etsy’s mission is ‘to reimagine commerce in ways that build a more fulfilling and lasting world’. It aims to build a platform where ‘creative entrepreneurs can find meaningful work selling their goods in both global and local markets, where thoughtful consumers can discover those goods and build relationships with the people who make and sell them’.11 Concentrated marketing can be highly profitable. At the same time, it involves higher-than-normal risks. Companies that rely on one or a few segments for all of their business will suffer greatly if the segment turns sour. Or larger competitors may decide to enter the same segment with greater resources. For these reasons, many companies prefer to diversify in several market segments. Micromarketing Differentiated and concentrated marketers tailor their offers and marketing programs to meet the needs of various market segments and niches. At the same time, however, they do not customise their offers to each individual customer. Micromarketing is the practice of tailoring products and marketing programs to suit the tastes of specific individuals and locations. Rather than seeing a customer in every individual, micromarketers see the individual in every customer. Micromarketing includes local marketing and individual marketing. Local marketing Local marketing involves tailoring brands and promotions to the needs and wants of local customer groups – cities, neighbourhoods and even specific stores. For example, large retailers customise their merchandise on a regional basis to meet the needs of local shoppers. Advances in communications technology have given rise to a new high-tech version of locationbased marketing. By coupling mobile phone services with GPS devices, many marketers are now targeting customers wherever they are with what they want. For example, Starbucks’ Mobile Order and Pay feature on a mobile app uses a customer’s proximity to a store to enable the customer to order ahead, then just walk in and collect their purchase.12 Local marketing has some drawbacks, particularly in relatively small markets such as Australia and New Zealand. It can drive up manufacturing and marketing costs by reducing economies of scale. It can also create logistics problems as companies try to meet the varied requirements of different regional and local markets. Further, a brand’s overall image might be diluted if the product and message vary too much in different localities. Still, as companies face increasingly fragmented markets, and as new supporting technologies develop, the advantages of local marketing often outweigh the drawbacks. Local marketing helps a company to micromarketing The practice of tailoring products and marketing programs to the needs and wants of specific individuals and local customer segments – includes local marketing and individual marketing local marketing Tailoring brands and promotions to the needs and wants of local customer segments – cities, neighbourhoods and even specific stores. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 184 Part 3 Designing a customer-driven strategy and mix market more effectively in the face of pronounced regional and local differences in demographics and lifestyles. It also meets the needs of the company’s first-line customers – retailers – who prefer more finely tuned product assortments for their neighbourhoods. individual marketing Tailoring products and marketing programs to the needs and preferences of individual customers – also labelled ‘one-to-one marketing’, ‘customised marketing’ and ‘marketsof-one marketing’. Individual marketing In the extreme, micromarketing becomes individual marketing – tailoring products and marketing programs to the needs and preferences of individual customers. Individual marketing has also been labelled one-to-one marketing, mass customisation and markets-of-one marketing. The widespread use of mass marketing has obscured the fact that, for centuries, consumers were served as individuals: the tailor custom-made a suit, the cobbler designed shoes for an individual, the cabinetmaker made furniture to order. Today, however, new technologies are permitting many companies to return to customised marketing. More-detailed databases, robotic production and flexible manufacturing, and interactive communication media, such as smartphones and the internet, have all combined to foster ‘mass customisation’. Mass customisation is the process through which firms interact one-to-one with masses of customers to design products and services tailor-made to individual needs. Dell creates custom-configured computers. Visitors to Nike’s NikeID website can personalise their sneakers by choosing from hundreds of colours and putting an embroidered word or phrase on the tongue. Marketers are also finding new ways to personalise promotional messages. For example, in overseas markets, plasma screens placed in shopping malls can now analyse shoppers’ faces and place ads based on an individual shopper’s gender, age or ethnicity: Watch an advertisement on a video screen in a mall, health club or grocery store and there is a growing chance that the ad is watching you too. Small cameras can now be embedded in or around the screen, tracking who looks at the screen and for how long. With surprising accuracy, the system can determine the viewer’s gender, approximate age range and, in some cases, ethnicity – and change the ads accordingly. That could mean razor ads for men, cosmetics ads for women and videogame ads for teens. Or a video screen might show a motorcycle ad for a group of men, but switch to a minivan ad when women and children join them. ‘This is proactive merchandising,’ says a media executive. ‘You’re targeting people with smart ads.’13 Business-to-business marketers are also finding new ways to customise their offerings. For example, John Deere manufactures seeding equipment that can be configured in more than 2 million versions to individual customer specifications. The seeders are produced one at a time, in any sequence, on a single production line. Mass customisation provides a way to stand out against competitors. Unlike mass production, which eliminates the need for human interaction, one-to-one marketing has made relationships with customers more important than ever. Just as mass production was the marketing principle of the past century, interactive marketing is becoming a marketing principle for the 21st century. The world appears to be coming full circle – from the good old days when customers were treated as individuals, to mass marketing when nobody knew your name, and back again. Choosing a targeting strategy Companies need to consider many factors when choosing a market-targeting strategy. Which strategy is best depends on company resources. When the firm’s resources are limited, concentrated marketing makes the most sense. The best strategy also depends on the degree of product variability. Undifferentiated marketing is more suited to uniform products, such as grapefruit or steel. Products that can vary in design, such as cameras and cars, are more suited to differentiation or concentration. The product’s life-cycle stage also must be considered. When a firm introduces a new product, it may be practical to launch only one version, and undifferentiated marketing or concentrated marketing may Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 6 Customer-driven marketing strategy: Creating value for target customers make the most sense. In the mature stage of the product life cycle, however, differentiated marketing often makes more sense. Another factor is market variability. If most buyers have the same tastes, buy the same amounts and react the same way to marketing efforts, undifferentiated marketing is appropriate. Finally, competitors’ marketing strategies are important. When competitors use differentiated or concentrated marketing, undifferentiated marketing can be a high-risk strategy. Conversely, when competitors use undifferentiated marketing, a firm can gain an advantage by using differentiated or concentrated marketing, focusing on the needs of buyers in specific segments. Socially responsible target marketing Smart targeting helps companies to be more efficient and effective by focusing on the segments that they can satisfy best and most profitably. Targeting also benefits consumers – companies serve specific groups of consumers with offers carefully tailored to their needs. However, target marketing sometimes generates controversy and concern. The biggest issues usually involve the targeting of vulnerable or disadvantaged consumers with controversial or potentially harmful products. For example, over the years, marketers in a wide range of industries – from cereal and toys to fast food and fashion – have been heavily criticised for their marketing efforts directed towards children. Critics worry that premium offers and high-powered advertising appeals presented through the mouths of lovable animated characters will overwhelm children’s defences. Various state and Commonwealth consumer affairs departments and citizen action groups have accused tobacco and beer companies of targeting underage smokers and drinkers. One US study found that more than a third of alcohol radio ads are more likely to be heard by underage listeners than by adults on a per capita basis.14 To encourage responsible advertising, the Australian Association of National Advertisers (AANA) publishes the industry Code of Ethics as the cornerstone of the self-regulatory system. This is supplemented by the Code of Advertising and Marketing to Children; Food and Beverages Code; Environmental Claims Code; and Wagering Advertising & Marketing Communication Code – to which all accredited agencies are expected to adhere.15 In effect, they have published extensive children’s advertising guidelines that recognise the special needs of child audiences. Still, critics believe that more should be done. Some have even called for a complete ban on advertising to children. Cigarette, beer, carbonated soft-drink and fast-food marketers have also generated controversy in recent years by their attempts to target low-income minority consumers, who are more likely than others to be heavy consumers. The growth of the internet and other carefully targeted direct media has raised fresh concerns about potential targeting abuses. The internet allows increased pinpointing of audiences and, in turn, more precise targeting. This might help makers of questionable products or deceptive advertisers to more readily victimise the most vulnerable audiences. Unscrupulous marketers may send tailor-made deceptive messages directly to the computers of millions of unsuspecting consumers despite spam filters and government legislation. Not all attempts to target children, minorities or other special segments draw such criticism. In fact, most provide benefits to targeted consumers. A Melbourne-based technology start-up company, Kisa, markets the KisaPhone directly to seniors who need a simpler mobile phone that has larger personalised tactile buttons, a dedicated SOS button for emergency services and a louder ringtone.16 And Colgate makes a large selection of toothbrush shapes and toothpaste flavours for children. Such products help make tooth brushing more fun and get children to brush for longer and more often. Thus, in target marketing, the issue is not really who is targeted but, rather, how and for what. Controversies arise when marketers attempt to profit at the expense of targeted segments – when they unfairly target vulnerable segments or target them with questionable products or tactics. Socially responsible marketing calls for segmentation and targeting that serve not just the interests of the company but also the interests of those targeted. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 185 186 Part 3 Designing a customer-driven strategy and mix Linking the concepts It is time to pause and review. ● At the last ‘Linking the concepts’, you segmented the Australian footwear market. Refer to Figure 6.2 (Market targeting strategies) and select two companies that serve the footwear market. Describe their segmentation and targeting strategies. ● Identify two companies serving the footwear market, one that targets many different segments and another that focuses on only one or a few segments. How does each company that you chose differentiate its market offering and image? How effectively has each company established this differentiation in the minds of targeted consumers? The final section in this chapter deals with such positioning issues. Differentiation and positioning (pp. 186–92) product position The complex set of perceptions, impressions and feelings that consumers have for the product compared with competing products. Beyond deciding which segments of the market it will target, the company must decide on a value proposition – or how it will create differentiated value for targeted segments and what positions it wants to occupy in those segments. A product’s position is the way the product is defined by consumers on important attributes – that is, the place the product occupies in consumers’ minds relative to competing products. ‘Products are created in the factory, but brands are created in the mind,’ says a positioning expert.17 In the motor vehicle market, the Nissan Micra and Suzuki Swift are positioned on economy, Lexus and Mercedes-Benz on luxury, and Audi, BMW and Porsche on performance. Volvo positions powerfully on safety. And Toyota positions its fuel-efficient hybrid Camry and Prius models as a high-tech solution to the energy shortage. Consumers are overloaded with information about products and services. They cannot re-evaluate products every time they make a buying decision. To simplify the buying process, consumers organise products, services and companies into categories and ‘position’ them in their minds. A product’s position is the complex set of perceptions, impressions and feelings that consumers have for the product compared with competing products. Essentially, it is the way the product is defined by consumers on important attributes: the place the product occupies in consumers’ minds relative to competing products. Consumers position products with or without the help of marketers. But marketers do not want to leave their products’ positions to chance. They must plan positions that will give their products the greatest advantage in selected target markets, and they must design marketing mixes to create these planned positions. Positioning maps In planning their differentiation and positioning strategies, marketers often prepare perceptual positioning maps, which show consumer perceptions of their brands versus competing products on important buying dimensions. Figure 6.3 shows a hypothetical positioning map for carbonated beverages in the 15- to 18-year-old segment. The position of each circle on the map indicates the brand’s perceived positioning on two dimensions – social acceptability with peers, and sweetness. The size of each circle indicates the brand’s relative market share. Thus, this age group perceives Coca-Cola as being the carbonated beverage to be seen consuming when drinking with friends. Pepsi is seen as being sweeter and less socially acceptable by this age group, while Solo is seen as low on sweetness and less socially acceptable. The perception of the Solo brand is perhaps understandable given its positioning in advertising with an older age group. Given the larger market share achieved by Coke, as shown by the size of the circle, we could conclude that among this age group, Coke is closest to the ideal brand. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 6 Customer-driven marketing strategy: Creating value for target customers 187 High Social acceptability Coca-Cola Pepsi Solo Low Sweetness High Figure 6.3 Positioning map: Carbonated beverages (15- to 18-year-olds) Choosing a differentiation and positioning strategy Some firms find it easy to choose a differentiation and positioning strategy. For example, a firm well known for quality in certain segments will go for this position in a new segment if there are enough buyers seeking quality. But in many cases, two or more firms will go after the same position. Then, each will have to find other ways to set itself apart. Each firm must differentiate its offer by building a unique bundle of benefits that appeals to a substantial group within the segment. Above all else, a brand’s positioning must serve the needs and preferences of well-defined target markets. The differentiation and positioning task consists of three steps: (1) identifying a set of differentiating competitive advantages upon which to build a position; (2) choosing the right competitive advantages; and (3) selecting an overall positioning strategy. The company must then effectively communicate and deliver the chosen position to the market. Identifying possible value differences and competitive advantages To build profitable relationships with target customers, marketers must understand customer needs better than competitors do and deliver more customer value. To the extent that a company can differentiate and position itself as providing superior customer value, it gains competitive advantage. But solid positions cannot be built on empty promises. If a company positions its product as offering the best quality and service, it must actually differentiate the product so that it delivers the promised quality and service. Companies must do much more than simply shout out their positions in ad slogans and taglines. They must first live the slogan. For example, if a department store conducts research and finds that customers place high value on an easier shopping experience, then it should ensure that the stores do indeed offer this experience. It would be wise to remake the stores to actually deliver the promised positioning – even if this meant a long delay to get it right.18 competitive advantage An advantage over competitors gained by offering greater customer value, either through lower prices or by providing more benefits that justify higher prices. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 188 Part 3 Designing a customer-driven strategy and mix To find points of differentiation, marketers must think through the customer’s entire experience with the company’s product or service. An alert company can find ways to differentiate itself at every customer contact point. In what specific ways can a company differentiate itself or its market offer? It can differentiate along the lines of product, services, channels, people or image. Through product differentiation brands can be differentiated on features, performance, or style and design. Thus, Bose positions its speakers on their striking design and sound characteristics. By using the Heart Foundation’s Heart Smart tick, retailers differentiate different cuts of meat as being a healthy food choice. And so do brands such as McCain with their Potato Cubes, among other products. Beyond differentiating its physical product, a firm can also differentiate the services that accompany the product. Some companies gain services differentiation through speedy, convenient or careful delivery. For example, Lexus makes fine cars but is perhaps even better known for the quality service that creates outstanding ownership experiences for Lexus owners. In an age where customer satisfaction with airline service is in constant decline, Singapore Airlines sets itself apart through extraordinary customer care and the grace of its flight attendants. ‘When you’re able to meet the expectations of your customers, that’s normal service. However, if there’s an opportunity that arises to go beyond the expectation of a customer . . . to anticipate what a customer wants . . . To me, that’s good service,’ says a crewmember of the international airline. ‘I treat the aircraft as my home and every passenger that walks in through that door is my guest that I welcome into my home,’ says another.19 Firms that practise channel differentiation gain competitive advantage through the way they design their channel’s coverage, expertise and performance. Amazon.com sets itself apart with its smooth-functioning direct channel. Companies can also gain a strong competitive advantage through people differentiation – hiring and training better people than their competitors do. Singapore Airlines enjoys an excellent reputation, largely because of its flight attendants. People differentiation requires that a company selects its customer-contact people carefully and trains them well. For example, Disney trains its theme-park people thoroughly to ensure they are competent, courteous and friendly – from the hotel check-in agents, to the monorail drivers, to the ride attendants, to the people who sweep Main Street, USA. Each employee is carefully trained to understand customers and to ‘make people happy’. Even when competing offers look the same, buyers may perceive a difference based on company or brand image differentiation. A company or brand image should convey the product’s distinctive benefits and positioning. Developing a strong and distinctive image calls for creativity and hard work. A company cannot develop an image in the public’s mind overnight using only a few advertisements. If Sofitel means quality, this image must be supported by everything the company says and does in its luxury hotels. Symbols – such as McDonald’s’ golden arches, the Nike swoosh, the Commonwealth Bank’s yellow-and-black rendition of the Southern Cross constellation or Google’s colourful logo – can provide strong company or brand recognition and image differentiation. The company might build a brand around a famous person, as Nike did with its Air Jordan basketball shoes and Tiger Woods golfing products. Some companies even become associated with colours, such as IBM (blue), Cadbury Commonwealth Bank logo: One of Australia’s most widely recognised brands is a rendition of the Southern Cross (purple) or Coca-Cola (red). The chosen symbols, characters constellation. and other image elements must be communicated through Commonwealth Bank advertising that conveys the company’s or brand’s personality. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 6 Customer-driven marketing strategy: Creating value for target customers 189 Choosing the right competitive advantages Suppose a company is fortunate enough to discover several potential differentiations that provide competitive advantages. It now must choose the ones on which it will build its positioning strategy. It must decide how many differences to promote and which ones. How many differences to promote Many marketers think that companies should aggressively promote only one benefit to the target market. Advertising executive Rosser Reeves, for example, believes a company should develop a unique selling proposition (USP) for each brand and stick to it. Each brand should pick an attribute and tout itself as ‘number one’ on that attribute. Buyers tend to remember number one better, especially in our society where we receive so many communications each day.20 Thus, Big W promotes its everyday savings and Commonwealth Bank promotes its positive power for customers with its ‘can’ campaign. Other marketers think that companies should position themselves on more than one differentiator. This may be necessary if two or more firms are claiming to be best on the same attribute. Today, in a time when the mass market is fragmenting into many small segments, companies are trying to broaden their positioning strategies to appeal to more segments. For example, Microsoft recently introduced a campaign for its Windows 10 PC, featuring ‘Meet the bug chicks’ (see <www.youtube.com/ watch?v=k6SVsf0k2i0>). The ad shows how two entomologists can use the new PC, which features a touch screen that one of the actors is jealous of because ‘I don’t have a touch screen on my Mac’. Clearly, many buyers want these multiple benefits. The challenge will be for Microsoft to convince consumers that their one brand can do it all. However, as companies increase the number of claims for their brands, they risk disbelief and a loss of clear positioning. Which differences to promote Not all brand differences are meaningful or worthwhile; not every difference makes a good differentiator. Each difference has the potential to create company costs as well as customer benefits. A difference is worth establishing to the extent that it satisfies the following criteria: • Important: The difference delivers a highly valued benefit to target buyers. • Distinctive: Competitors do not offer the difference, or the company can offer it in a more distinctive way. • Superior: The difference is superior to other ways in which customers might obtain the same benefit. • Communicable: The difference is communicable and visible to buyers. • Pre-emptive: Competitors cannot easily copy the difference. • Affordable: Buyers can afford to pay for the difference. • Profitable: The company can introduce the difference profitably. Many companies have introduced differentiations that failed one or more of these tests. When the Westin Stamford Hotel in Singapore once advertised that it was the world’s tallest hotel, it was a distinction that was not important to most tourists – in fact, it turned many off. Polaroid’s Polarvision, which produced instantly developed home movies failed too. Less-for-much less: Accor revolutionised the budget hotel sector by Although Polarvision was distinctive and even pre-emptive, launching the standardised HotelF1 product, emphasising value and consistency. it was inferior to another way of capturing motion – namely, Nik Wheeler/Corbis camcorders. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 190 Part 3 Designing a customer-driven strategy and mix Thus, choosing competitive advantages upon which to position a product or service can be difficult, yet such choices may be crucial to the brand’s success. Choosing the right differentiators can help a brand to stand out from the pack of competitors, as the example of Accor Group’s HotelF1, which offers a ‘less-for-much-less’ value strategy, illustrates (see Mini case 6.2). Selecting an overall positioning strategy value proposition The full positioning of a brand – the full mix of benefits upon which it is positioned. The full positioning of a brand is called the brand’s value proposition – the full mix of benefits upon which the brand is differentiated and positioned. It is the answer to the customer’s question, ‘Why should I buy your brand?’. Volvo’s value proposition hinges on safety but also includes reliability, roominess and styling, all for a price that is higher than average but seems fair for this mix of benefits. Figure 6.4 shows possible value propositions upon which a company might position its products. In the figure, the five green cells represent winning value propositions – differentiation and positioning that give the company competitive advantage. The blue cells, however, represent losing value propositions. The centre yellow cell represents, at best, a marginal proposition. In the following sections, we discuss the five winning value propositions upon which companies can position their products: (1) more for more, (2) more for the same, (3) the same for less, (4) less for much less and (5) more for less. More for more ‘More-for-more’ positioning involves providing the most prestigious product or service and charging a higher price to cover the higher costs. Sofitel Luxury Hotels, Mont Blanc writing instruments, Mercedes-Benz motor vehicles, Miele cooking appliances – each claims superior quality, craftsmanship, durability, performance or style, and charges a price to match. The market offering not only is high in quality, but also gives prestige to the buyer. It symbolises status and a loftier lifestyle. Often, the price difference exceeds the actual increment in quality. Sellers offering ‘only the best’ can be found in every product and service category, from hotels, restaurants, food and fashion, to cars and household appliances. Consumers are sometimes surprised, even delighted, when a new competitor enters a category with an unusually high-priced brand. When Apple premiered its iPhone, it offered higher-quality user features than a traditional mobile phone, with a hefty price tag to match. BENEFITS More The same Less More PRICE The same Less More for more More for the same More for less The same for less Less for much less Figure 6.4 Possible value propositions Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 6 Customer-driven marketing strategy: Creating value for target customers In general, companies should be on the lookout for opportunities to introduce a ‘more-for-more’ brand in any underdeveloped product or service category. Yet, ‘more-for-more’ brands can be vulnerable. They often invite imitators who claim the same quality but at a lower price. For example, in the eyes of many users, smartphones, such as the Google Pixel and Samsung Galaxy S7 Edge, offer even more desirable features than the iPhone does. Also, luxury goods that sell well during good times may be at risk during economic downturns, when buyers become more cautious in their spending. The gloomy economy of recent years hit premium brands, such as Starbucks, the hardest. More for the same Companies can attack a competitor’s more-for-more positioning by introducing a brand offering comparable quality but at a lower price. For example, Toyota introduced its Lexus line with a ‘morefor-the-same’ value proposition versus Mercedes-Benz and BMW. Its first North American ad headline read: ‘Perhaps the first time in history that trading a $72,000 car for a $36,000 car could be considered trading up.’ It communicated the high quality of its new Lexus through rave reviews in car magazines and through a widely distributed video that showed side-by-side comparisons of Lexus and Mercedes-Benz automobiles. It published surveys showing that Lexus dealers were providing customers with better sales and service experiences than Mercedes-Benz dealerships were. Many Mercedes-Benz owners switched to Lexus, and the Lexus repurchase rate rose to 60 per cent, twice the industry average. More recently, by introducing more advanced technologies and architecture, Lexus is targeting those who might seek greater performance, design and fun and who might otherwise have become an Audi or BMW customer. The same for less Offering ‘the same for less’ can be a powerful value proposition – everyone likes a good deal. Discount stores such as Big W, and ‘category killers’ such as Bunnings, use this positioning. They do not claim to offer different or better products. Instead, they offer many of the same brands as department stores and specialty stores do but at deep discounts based on superior purchasing power and lower-cost operations. Other companies develop imitative but lower-priced brands in an effort to lure customers away from the market leader. For example, AMD makes less-expensive versions of Intel’s market-leading microprocessor chips. Less for much less A market almost always exists for products that offer less and therefore cost less. Few people need, want or can afford ‘the very best’ in everything they buy. In many cases, consumers will gladly settle for lessthan-optimal performance or give up some product features in exchange for a lower price. For example, many travellers seeking lodgings prefer not to pay for what they consider unnecessary extras, such as a pool, attached restaurant or mints on the pillow. Hotel chain Accor suspends some of these amenities in its HotelF1 hotels and charges less accordingly (see Mini case 6.2). ‘Less-for-much-less’ positioning involves meeting consumers’ lower performance or quality requirements at a much lower price. For example, Two Dollar shops offer more affordable goods at very low prices. The Reject Shop and Costco warehouse stores offer less merchandise selection and consistency and much lower levels of service; as a result, they charge rock-bottom prices. Tigerair and Jetstar also practise less-for-much-less positioning. More for less Of course, the winning value proposition would be to offer ‘more for less’. Many companies claim to do this. And, in the short run, some companies can actually achieve such lofty positions. Yet, in the long run, companies will find it very difficult to sustain such best-of-both positioning. Offering more usually costs more, making it difficult to deliver on the ‘for-less’ promise. Companies that try to deliver both may lose out to more-focused competitors. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 191 192 Part 3 Designing a customer-driven strategy and mix When all is said and done, each brand must adopt a positioning strategy designed to serve the needs and wants of its target markets. ‘More for more’ will draw one target market, ‘less for much less’ will draw another, and so on. Thus, in any market, there is usually room for many different companies, each successfully occupying different positions. The important thing is that each company must develop its own winning positioning strategy, one that makes it special to its target consumers. Developing a positioning statement positioning statement A statement that summarises company or brand positioning – it takes this form: To (target segment and need) our (brand) is (concept) that (point of difference). Company and brand positioning should be summed up in a positioning statement. The statement should follow the form: To (target segment and need) our (brand) is (concept) that (point of difference).21 For example: ‘For every athlete, Nike’s experience and expertise ensures that you have the perfect shoe for your sport.’ Note that the positioning first states the product’s membership in a category (athletics, sport) and then shows its point of difference from other members of the category (experience, expertise, perfection). Placing a brand in a specific category suggests similarities that it might share with other products in the category – but the case for the brand’s superiority is made on its points of difference. Communicating and delivering the chosen position Once it has chosen a position, the company must take strong steps to deliver and communicate the desired position to target consumers. All the company’s marketing mix efforts must support the positioning strategy. Positioning the company calls for concrete action, not just talk. If the company decides to build a position on better quality and service, it must first deliver that position. Designing the marketing mix involves working out the tactical details of the positioning strategy. Thus, a firm that seizes on a morefor-more position knows that it must produce high-quality products, charge a high price, distribute through high-quality dealers and advertise in high-quality media. It must hire and train more service people, find retailers who have a good reputation for service, and develop sales and advertising messages that broadcast its superior service. This is the only way to build a consistent and believable more-formore position. Companies often find it easier to come up with a good positioning strategy than to implement it. Establishing or changing a position usually takes a long time. In contrast, positions that have taken years to build can quickly be lost. Once a company has built the desired position, it must take care to maintain it through consistent performance and communication. It must closely monitor and adapt the position over time to match changes in consumer needs and competitors’ strategies. However, the company should avoid abrupt changes that might confuse consumers. Instead, a product’s position should evolve gradually as it adapts to the ever-changing marketing environment. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 6 Customer-driven marketing strategy: Creating value for target customers Student Learning Centre Reviewing the learning objectives 193 approaches, situational factors and personal characteristics. The effectiveness of segmentation analysis depends on finding segments that are measurable, accessible, substantial, differentiable and actionable. Learning Objective 3. Explain how companies identify attractive market segments and choose a market-targeting strategy. (pp. 180–86) To target the best market segments, the company first evaluates each segment’s In this chapter, you have learned about the main elements of a customer-driven size and growth characteristics, structural attractiveness, and compatibility with marketing strategy: segmentation, targeting, differentiation and positioning. company objectives and resources. It then chooses one of four market-targeting Marketers know that they cannot appeal to all buyers in their markets, or at strategies – ranging from very broad to very narrow targeting. The seller can least not to all buyers in the same way. Therefore, most companies today practise ignore segment differences and target broadly using undifferentiated (or mass) target marketing – identifying market segments, selecting one or more of them, marketing. This involves mass-producing, mass-distributing and mass-promoting and developing products and marketing mixes tailored to each. the same product in much the same way to all consumers. Or the seller can adopt differentiated marketing – developing different market offers for several Learning Objective 1. Define the main steps in designing a customer-driven marketing strategy: market segmentation, targeting, differentiation and positioning. (p. 170) Customer-driven marketing strategy begins with selecting which customers to serve and deciding on a value proposition that best serves the targeted customers. It consists of four steps. Market segmentation is the act of analysing the bases upon which it might be best to divide a market into distinct segments of buyers with different needs, characteristics or behaviours who might require separate products or marketing mixes. Once the groups have been identified, market targeting evaluates each market segment’s attractiveness and selects one or more segments to serve. Market targeting consists of designing strategies to build the right relationships with the right customers. Differentiation involves actually differentiating the market offering to create superior customer value. Positioning consists of positioning the market offering in the minds of target customers. Learning Objective 2. List and discuss the main bases for segmenting consumer and business markets. (pp. 171–80) There is no single way to segment a market. Therefore, the marketer tries different variables to see which provide the best segmentation opportunities. For consumer marketing, the main segmentation variables are geographic, demographic, psychographic and behavioural. In geographic segmentation, the market is segments. Concentrated (or niche) marketing involves focusing on only one or a few market segments. Finally, micromarketing is the practice of tailoring products and marketing programs to suit the tastes of specific individuals and locations. Micromarketing includes local marketing and individual marketing. Which targeting strategy is best depends on company resources, product variability, product life-cycle stage, market variability and competitive marketing strategies. Learning Objective 4. Discuss how companies differentiate and position their products for maximum competitive advantage. (pp. 186–92) Once a company has decided which segments to enter, it must decide on its differentiation and positioning strategy. The differentiation and positioning task consists of three steps: (1) identifying a set of possible differentiations that create competitive advantage; (2) choosing advantages upon which to build a position; and (3) selecting an overall positioning strategy. The brand’s full positioning is called its value proposition – the full mix of benefits upon which the brand is positioned. In general, companies can choose from one of five winning value propositions upon which to position their products: more for more, more for the same, the same for less, less for much less, or more for less. Company and brand positioning are summarised in positioning statements that state the target segment and need, positioning concept and specific points of difference. The company must then effectively communicate and deliver the chosen position to the market. divided into different geographical units, such as nations, regions, states, local Discussion questions government areas, cities or neighbourhoods. In demographic segmentation, the ❶ Market segmentation and market targeting. How does market market is divided into groups based on demographic variables, including age, segmentation differ from market targeting? (Learning Objective 1) (AACSB: gender, family size, family life cycle, income, occupation, education, religion, race, Communication; Reflective Thinking) generation and nationality. In psychographic segmentation, the market is divided ❷ Marketers do not segment markets … they are already segmented. Do you into different groups based on social class, lifestyle or personality characteristics. agree with this statement? Explain your reasoning. (Learning Objective 1) In behavioural segmentation, the market is divided into groups based on consumers’ knowledge, attitudes, uses or responses to a product. (AACSB: Communication; Reflective Thinking) ❸ Demographic and psychographic segmentation. Compare and contrast Business marketers use many of the same variables to segment their demographic segmentation and psychographic segmentation. Which is markets. But business markets also can be segmented by business consumer more useful to marketers? Justify your answer. (Learning Objective 2) demographics (industry, company size), operating characteristics, purchasing (AACSB: Communication; Reflective Thinking) Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 194 Part 3 Designing a customer-driven strategy and mix ❹ Positioning strategies. Some managers say that positioning is far more ❸ Hydrographics presents an idea for a new business in Australia and New important than segmentation or targeting. What is your view of this Zealand. First, research hydrographics at <www.hydroconcepts.com.au/ statement? (Learning Objectives 1, 2, 3 and 4) (AACSB: Communication; indexnew.htm>. Using the steps described in the chapter, identify relevant Reflective Thinking) target markets, then develop a customer-driven marketing strategy. Describe ❺ Market targeting levels. Name and describe the levels at which market your strategy and conclude with a positioning statement for this business. targeting can be carried out. Give an example of a company using (Learning Objectives 3 and 4) (AACSB: Communication; Use of IT; Analytical each. (Learning Objective 3) (AACSB: Communication; Reflective Thinking; Reflective Thinking) Thinking) ❺ Target market of one. The argument some put forward is that by using the internet and the web, every customer can be treated as an individual and receive a custom-made product. Do you agree or disagree? Justify your Navigating the key terms answer. (Learning Objectives 2, 3 and 4) (AACSB: Communication; Use of IT; Learning Objective 1 occasion segmentation (p. 176) Reflective Thinking) (see Figure 6.1 for abridged psychographic segmentation (p. 176) definitions) Critical thinking exercises ❶ Visit a supermarket and examine the brands of breakfast cereal on offer. Using the bases for segmenting consumer markets, identify the segmentation variables a specific brand, such as Uncle Toby’s Calcium Plus, differentiation (p. 170) market segmentation (p. 170) market targeting (targeting) (p. 170) Learning Objective 3 concentrated (niche) marketing (p. 182) differentiated (segmented) marketing (p. 182) positioning (p. 170) individual marketing (p. 184) for this brand. Identify other brands with a similar positioning strategy(ies). Learning Objective 2 age and life-cycle segmentation micromarketing (p. 183) (Learning Objective 1) (AACSB: Communication; Reflective Thinking) appears to be using. Summarise the segmentation and targeting strategy ❷ Various companies, such as Toyota, Nissan and BMW, are introducing (p. 172) local marketing (p. 183) target market (p. 181) undifferentiated (mass) marketing hybrid technology-powered cars to suit the needs of various target markets. behavioural segmentation (p. 176) In a small group, identify the various models of hybrid cars offered in your benefit segmentation (p. 177) marketplace. Discuss the likely profiles of the target markets for these demographic segmentation (p. 172) Learning Objective 4 vehicles. For example, do you think that BMW’s i8 is targeting a different gender segmentation (p. 173) competitive advantage (p. 187) target market from Mitsubishi Motor’s MiEV electric car? Justify your answer. geographic segmentation (p. 172) positioning statement (p. 192) (Learning Objective 2) (AACSB: Communication; Analytical Thinking; income segmentation (p. 173) product position (p. 186) Reflective Thinking) intermarket segmentation (p. 179) value proposition (p. 190) (p. 181) Mini cases 6.1 Target marketing Targeting markets of one to make many Australia’s population really is much more homogeneous than would not be sustainable due to the size and composition of the the populations of many other countries, even the United States. local market. Yes, there are conclaves of various cultural groups in both urban and US department stores also allow customisation to suit local markets. regional areas. For example, Griffith, in regional New South Wales, For example, Macy’s – the second-largest US department-store chain has a large Italian population, which explains the focus on such – permits its 1600 distant managers around the country to meet local agricultural pursuits as vineyards and wine production. However, needs with specialised assortments. In one Christmas trading period, there are so many cultural groups in Australia that there is more of Macy’s in Memphis stocked Elvis Presley Christmas ornaments, as it a blending than occurs in the United States, where one might find seems the locals still cannot get enough of their hometown King of Rock even Walmart – the world’s largest chain – offering particular formats ’n’ Roll. tailored to specific types of geographic locations. Australian retailers Today, though, many organisations practise mass customisation – using do follow some US practices, such as offering smaller Woolworths technology to tailor offers made to a mass market. If you visit the website stores and even smaller Coles Express stores where full-size stores of Macy’s Memphis from a country such as Australia or New Zealand, you Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 6 Customer-driven marketing strategy: Creating value for target customers will find that their web servers use the IP lookup services to identify where ❸ Have you experienced ‘target markets of one’, either as a marketer or you are located and offer you flat-fee shipping on a Christmas present as a consumer? In what ways are these ‘target markets of one’ similar purchase. to or different from the examples provided in this mini case study? Catering to markets of one is a similar value-adding marketing strategy, as Amazon.com’s marketing exemplifies. If you buy Kindle (Learning Objectives 1, 2 and 3) (AACSB: Communication; Analytical Thinking; Reflective Thinking) ebooks on a regular basis, you will no doubt develop a list of favourite authors and favourite genres. Let us take the example of a digital-book reader who is hooked on books set in the Florida Keys – Key West, in particular – and the surrounding Caribbean islands. Having read one of the Matt Royal series by H. Terrell Griffin, the reader will find that Amazon uses collaborative filtering technology to generate a list of recommended books by various authors, and then uses this information to recommend similar books to other readers of any books set in the Keys and the Caribbean. Amazon will even advise the reader when a new book is to be published, thus allowing pre-orders. In this way, target markets of one add up to become many. This form of consumer-to-consumer advocacy is also practised by Tripadvisor.com, when travellers advise of their positive and negative experiences in places they have stayed, eaten and played. So, when you next buy an ebook, visit a restaurant or engage in some other activity and leave a review, remember that you are helping others as well as yourself, and turning markets of one into many.22 ❶ Do you agree with the authors’ contention that Australia’s population is much more homogeneous than that of the United States? (Hint: See <www.nationmaster.com/index.php>.) (Learning Objectives 1, 2 and 3) (AACSB: Analytical Thinking; Reflective Thinking; Diverse and David Grossman/Alamy Multicultural Environments) ❷ Can you provide other examples of mass customisation? If so, what is/are the basis(es) for identifying segments that are targeted by the marketing organisations concerned? (Learning Objectives 1, 2 and 3) (AACSB: Analytical Thinking; Reflective Thinking) 6.2 Differentiation Ibis Budget offers a ‘less-for-much-less’ value proposition Not everyone can afford to stay at three- to five-star hotels. What are the budget. France-based Accor is one of the world’s largest hotel groups, with alternatives – caravan parks, motels, pubs or bed and breakfast places? over 4000 hotels in 100 countries, including over 700 hotels in the Asia- As good as these can be, we can never foresee the standard of the next Pacific under the brands of Raffles, Fairmont, Sofitel, onefinestay, Pullman, accommodation as we travel from place to place. The market segmentation MGallery, Swissotel, Grand Mercure, Sebel, Novotel, Mercure, Mama Shelter, and positioning studies of key hotel chains have indicated a series of adagio, Ibis and HotelF1. distinctive segments in the marketplace – for example, the luxury segment, While Accor is unique among hotel groups in that it covers the full the business-traveller segment, the value-for-money segment, the segment spectrum of the market, the group has, in particular, been a pioneer in the that values leisure activities, and those who value proximity to main city mid-market, economy and budget sectors. After identifying a significant gap landmarks and attractions. Are there other segments? Yes! and opportunity in the budget travel segment, Accor developed a brand- The Accor Group realised some years ago that the need for budget new concept, first in France (its home base), specifically targeted and accommodation was not successfully serviced by any of the large hotel positioned for this market segment. The HotelF1 concept (as it is branded groups. And, as the tourism market expanded with low airfares, an ever- in France), which culminated in the opening of Ibis Budget branded hotels growing number of travellers were those with young children on a shoestring in Australia, Belgium, the United Kingdom, Spain, India and more than Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 195 196 Part 3 Designing a customer-driven strategy and mix 6.2 Differentiation continued 17 other countries, is based on providing a highly affordable and standardised would preclude them from booking overnight accommodation or perhaps product in key commercial areas, close to major transport arteries. from planning a holiday trip at all.23 The brand has been called the ‘McDonald’s of hotel accommodation’, ❶ Identify the target markets that might find Ibis Budget Hotels appealing. with most rooms identical (offering a queen-size bed and bunk beds plus (Learning Objectives 2, 3 and 4) (AACSB: Analytical Thinking; Reflective en suite bathroom with extra-large showers), including an all-you-can- Thinking; Diverse and Multicultural Environments) eat breakfast and with a daily tariff displayed in front of the hotel’s entry. ❷ How does Accor differentiate its Ibis Budget Hotels offering from other The Ibis Budget offer is based on price per room. Each room can sleep up to offerings in its portfolio? (Learning Objectives 2, 3 and 4) (AACSB: three (sometimes four) people, and the tariff in Australia is usually between $69 and $109 per night, depending on the location. The main objective Communication; Analytical Thinking; Reflective Thinking) ❸ Looking at the range of accommodation options provided by the behind developing this new concept was to be able to extend into the Accor group (do visit their website), might the positioning of the Ibis previously underserviced market of budget travellers. It focuses on individuals, Budget Hotel chain cannibalise sales from other chains managed by couples and families travelling to a destination and needing to stop over this group? Why, or why not? (Learning Objectives 2, 3 and 4) (AACSB: for the night, particularly along major transport routes. Standard hotel rates Communication; Analytical Thinking; Reflective Thinking) 6.3 Marketing analytics at work Defence Health Defence Health (<www.defencehealth.com.au>) was established in 1953 July 2016 saw Defence Health attract their 120 000th member. to support members of the Australian Defence Forces (ADF) and the wider According to the Australian Department of Defence, there are currently defence community in their private health-insurance needs. The members about 60 000 active ADF personnel, with approximately 45 000 reservists they serve include members of the ADF, their partners, children and extended standing by. As of December 2015, there were 170 000 registered returned families, as well as returned servicemen and servicewomen, and those who servicemen and servicewomen. There are also 18 000 staff who work in the have supported ADF serving personnel, such as past and present staff of the Department of Defence to support the ADF.24 Department of Defence and other Defence-related departments. They pride ❶ Assuming the annual cost of private health insurance is $900 and themselves on understanding the extra needs their members have – for that potential customers purchase one policy per year, use the chain example, when one parent is deployed overseas and on the move, there ratio method described in Appendix 3, Analytic measure 6.2 (‘Demand can be long periods when there is only one parent in the home. Defence estimates’), to calculate the market potential for private health insurance Health provide tailor-made private health-insurance packages to meet in the ADF market. (Learning Objective 3) (AACSB: Analytical Thinking) their members’ particular needs. The many industry and consumer awards ❷ Discuss the factors used to evaluate the attractiveness of the ADF and they have won indicate their members are quite satisfied by their market community segment described here. (Learning Objectives 2, 3) (AACSB: offerings. Communication, Analytical Thinking; Reflective Thinking) 6.4 Ethical reflection Targeting very young consumers You would never know that consumers are more frugal these days if you a T-shirt, jeans, a belt with the trademark double-G, a raincoat and boots looked at the new children’s lines from fashion houses such as Fendi, will set Mum and Dad back about $1500. A Burberry tailored coat for Versace and Gucci. Toddler high fashion is not new, but designers are a baby runs at $710, a bargain compared to Mum’s matching $2895 taking it to new levels and extending it beyond special-occasion clothing coat. The CEO of the Young Versace brand sees growth in this market and to everyday wear. In the past, some of the little girls marching down anticipates this brand making up 10 per cent of the company’s global fashion runways carried dolls with matching outfits. But this year, many sales in only a few years. of the children’s fashions are geared around matching their parents’ What (if any) ethical issues are relevant to this type of target marketing? clothing. Jennifer Lopez and her little ones helped Gucci launch a line How do you feel about this type of target marketing from a personal point for babies and children aged 2 to 8 years. A Gucci children’s outfit with of view? Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 6 Customer-driven marketing strategy: Creating value for target customers References 1 Mark Clothier, ‘Why Harley is showing its feminine side’, Bloomberg Businessweek, 4–10 October 2010, pp. 25–6; <www.harley-davidson.com/en_US/Content/ Pages/2010c/ss/start-something.html>; <www.harley-davidson.com/wcm/Content/ Pages/women_riders/landing.jsp>; <www.harley-davidson.com/content/h-d/ en_US/home/community/women-riders/the-right-bike.html>; and <www.harleydavidson.com/content/h-d/en_US/home/community/women-riders.html>; all accessed November 2016. 2 Quotes from ‘The World: Residences at sea’ website. See <aboardtheworld.com/ our_story>, accessed November 2016. 3 John Waggoner, ‘Even the wealthy feel tapped out’, USA Today, 2 February 2009, p. B1. 4 GreenShareCar, <www.greensharecar.com.au/>; FlexiCar, <www.flexicar.com.au/>; GoGet, <www.goget.com.au/>; Melbourne Bike Share, <www.melbournebikeshare. com.au/>; all accessed November 2016; also see Emily Stewart, ‘Bike sharing … why Europe is streets ahead of Australia’, ABC News, 7 August 2013. 5 Information from P&O Cruises, <www.pocruises.com.au/experiences/search#?c=&sort= pra&page=1>, accessed November 2016. 6 See Bounty Bags, <www.bountybags.com.au>, accessed November 2016. 7 See James Vincent, ‘PS4 sales top one million in most successful console launch ever’, Belfast Telegraph, 19 November 2013; Julia Alexander, ‘Sony has sold more than 40 million PlayStation 4 units worldwide’, 26 May 2016, <www.polygon. com/2016/5/26/11783776/sony-playstation-40-million-units>, accessed November 2016. 8 See Michael Porter, Competitive Advantage, Free Press: New York, 1985, pp. 4–8, 234–6. For more recent discussions, see Kenneth Sawka & Bill Fiora, ‘The four analytical techniques every analyst must know: 2. Porter’s five forces analysis’, Competitive Intelligence Magazine, May–June 2003, p. 57; and Philip Kotler & Kevin Lane Keller, Marketing Management, 14th edn, Prentice Hall: Upper Saddle River, NJ, 2012, p. 232. 9 See NightOwl at <www.nightowl.com.au/about/>, accessed November 2016. 10 For the full range of Coca-Cola Amatil’s drink brands, see <www.ccamatil.com/en/ourbusinesses-and-brands/our-brands >; for the full range of PepsiCo’s drink brands, see <www.pepsico.com.au/brands/pepsico/>; both accessed November 2016. 11 Adapted from information found in Linda Tischler, ‘The fast company 50 – 2009: Etsy’, Fast Company, 11 February 2009; Max Chafkin, ‘Rob’s world’, Inc., April 2011, pp. 56–64; and <www.etsy.com/au/about/?ref=ftr>, <http://investors.etsy.com/phoenix. zhtml?c=253952&p=irol-newsArticle&ID=2218142>, accessed November 2016. 12 See Michael Jones, ‘3 ways location-based marketing is shaping retail in 2016’, Forbes, 3 May 2016, <www.forbes.com/sites/michaeljones/2016/03/03/location-based- 13 14 15 16 17 18 19 20 21 22 23 24 197 marketing/#4cc07dd0196b>; and <www.starbucks.com/coffeehouse/mobile-order>; accessed November 2016. Adapted from information found in ‘When you watch these ads, the ads check you out’, New York Times, 31 January 2009. See also <www.tru-media.com/solutions/shoppingmall-solutions/>, accessed November 2016. Katy Bachman, ‘Study: Radio alcohol ads reaching young ears’, Mediaweek, 18 September 2007. See the Australian Association of National Advertisers codes concerning standards under self-regulation which complement government regulations, <http://aana.com.au/ self-regulation/codes/>, accessed November 2016. See <www.kisaphone.com.au/index.aspx>, accessed November 2016. Jack Trout, ‘Branding can’t exist without positioning’, Advertising Age, 14 March 2005, p. 28. Based on information found in Michael Myser, ‘Marketing made easy’, Business 2.0 Magazine, 7 June 2006, pp. 43–4. Quotes from Singapore Airlines, ‘Understanding your needs’, <http://thelengthswegoto. com/understanding-your-needs/#!service>, accessed November 2016. Also see Andrew S C Ehrenberg, Gerald J Goodhardt & T Patrick Barwise, ‘Double jeopardy revisited’, Journal of Marketing, 54, July 1990, pp. 82–91. See Bobby J Calder & Steven J Reagan, ‘Brand design’, in Dawn Iacobucci (ed.), Kellogg on Marketing, John Wiley & Sons: New York, NY, 2001, p. 61. For more discussion, see Philip Kotler & Kevin Lane Keller, Marketing Management, 14th edn, Prentice Hall: Upper Saddle River, NJ, 2012, chapter 10. See Macy’s Memphis website at <www1.macys.com/index.ognc />; also see ‘Islands’ at <www.islands.com/tags/key-west >, accessed November 2016. ‘Accor launches its first Formule 1 hotel in India, plans to open 10 more by the end of 2013’, India Hospitality Review, 2 April 2013; see also Accor Hotels at <www. accorhotels-group.com/en.html>, HotelF1 at <www.accorhotels-group.com/en/brands/ brand-portfolio/hotelf1.html>, Ibis Budget Hotels at <www.accorhotels-group.com/en/ brands/brand-portfolio/ibis-budget.html>, and Ibis Budget Australia at <www.ibis.com/ gb/australia/discovering-ibis-budget-hotel/index.shtml>; all accessed November 2016. See The Australian Government Department of Defence, Defence Portfolio Budget Statements 2015–16, Commonwealth of Australia: Canberra, 2015, <www.defence. gov.au/budget/15-16/2015-16_Defence_PBS_Complete.pdf>; and Returned Services League of Australia, National Annual Report 2015, <http://rslnational.org/wpcontent/uploads/2015/12/2015-RSL-National-Annual-Report.pdf>; both accessed November 2016. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value In their quest to create customer relationships, marketers must build and manage products and brands that connect with customers. This chapter begins with a deceptively simple question: What is a product? After addressing this question, we look at ways to classify products in consumer and business markets. We then discuss the important decisions that marketers make regarding individual products, product lines and product mixes. Next, we examine the characteristics and marketing requirements of a special form of product – services. Finally, we look into the critical issue of how marketers build and manage brands. For a visual representation of the chapter, please see the concept map on the following page. Learning Objectives Learning Objective 1 Define product and the main classifications of products and services. What is a product? pp. 200–5 Learning Objective 2 Describe the decisions companies make regarding their individual products and services, product lines and product mixes. Product and service decisions pp. 205–13 Learning Objective 3 Identify the four characteristics that affect the marketing of a service and the additional marketing considerations that services require. Services marketing pp. 213–18 Learning Objective 4 Describe the brand strategy companies use to build and manage their brands. Branding strategy: Building strong brands pp. 218–24 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value e product classifi ing th cat d n e ion t x E Ser vic es ds Goo Com mo dit ies LO 2 CUSTOMER Quality VALUE Design uct Warranty ng li n e a Lab Packaging elli n d pro d u ct m ix d e ng io cis ns lity Brand positioning BRANDING Brand development nd hip Bra sors n spo Bra n sele d nam ctio e n Var ia i rab epa bili ty SERVICES Peris hability Ins Describe the brand strategies companies use to build and manage their brands. (pp. 218–24) ility Intangib od ndi Pr su odu c pp t or t ct du s Pro ib ute a ttr LO 3 Packaging Product support Bra Pr LO 4 Delivery After-sale Actual product and service credit Brand Features name CORE level Describe the decisions companies make regarding their individual products and services, product lines and product mixes. (pp. 205–13) Identify the four characteristics that affect the marketing of a service and the additional marketing considerations that services require. (pp. 213–18) Augmented product INTANGIBLE TANGIBLE Define product and the main classifications of products and services. (pp. 200–5) E ces en eri xp LO 1 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 199 200 Part 3 Designing a customer-driven strategy and mix What is a product? (pp. 200–5) product Anything that can be offered to a market for attention, acquisition, use or consumption that might satisfy a want or need. service An activity, benefit or satisfaction offered for sale that is essentially intangible and does not result in the ownership of anything. We define a product as anything that can be offered to a market for attention, acquisition, use or consumption that might satisfy a want or need. Products include more than just tangible objects, such as cars, computers or mobile phones. Broadly defined, ‘products’ also include services, events, persons, places, organisations and ideas, or mixes of these. Throughout this book, we use the term product broadly to include any or all of these entities. Thus, an Apple iPhone, a Volkswagen Golf, a caffé latte at Gloria Jean’s, a trip to Auckland, your Pinterest page and a check-up from your family doctor are all products. Because of their importance in the world economy, we give special attention to services. Services are a form of product that consists of activities, benefits or satisfactions offered for sale that are essentially intangible and do not result in the ownership of anything. Examples are banking, hotel, airline, retail, wireless communication and home-repair services. We look at services more closely later in this chapter. Products, services and experiences Product is a key element in the overall market offering. Marketing-mix planning begins with building an offering that brings value to target customers. This offering becomes the basis upon which the company builds profitable customer relationships. A company’s market offering often includes both tangible goods and services. At one extreme, the offer may consist of a pure tangible good, such as soap, toothpaste or salt – little or no services accompany the product. At the other extreme are pure services, for which the offer consists primarily of a service. Examples include a doctor’s consultation or financial services. Between these two extremes, however, many combinations of goods and services are possible. Today, as products and services become more commoditised, many companies are moving to a new level in creating value for their customers. To differentiate their offers, beyond simply making products and delivering services, they are creating and managing customer experiences with their brands or company. Experiences have always been an important part of marketing for some companies. Disney has long manufactured dreams and memories through its movies and theme parks. And Nike has long declared, ‘It’s not so much the shoes but where they take you.’ Today, however, all kinds of firms are recasting their traditional goods and services to create experiences. For example, a visit to Bunnings Warehouse involves a lot more than just picking up paint or garden equipment. Homemakers roam through the store pushing shopping carts big enough to carry an armchair and sipping a coffee purchased from the in-store barista while their children are happily engaged at the in-store playground. The store offers over 45 000 hardware, homemaking and garden goods, along with services ranging from colour consultations for decorators to courtesy trailer hire, gas bottle refills and key cutting. Not unexpectedly, the store also provides a full range of DIY brochures and in-store DIY training sessions. But who would have thought they would hold a workshop with the local police to engrave tools and advise tradespeople how to reduce theft? On its website, Creating experiences: Bunnings Warehouse creates customer experiences by offering everything from paint and hardware to Bunnings claims that ‘Lowest prices are just the beginning . . .’ entertainment for children. and that it aims to provide the ‘best service’ to ‘earn the right to Simon Kenny/AAP serve our customers tomorrow and into the future’.1 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value Companies that market experiences realise that customers are really buying much more than just products and services. They are buying what those offers will do for them. ‘A brand, product, or service is more than just a physical thing. Humans that connect with the brand add meaning and value to it,’ says one marketing executive. ‘Successfully managing the customer experience is the ultimate goal,’ adds another.2 Levels of products and services Product planners need to think about products and services on three levels (see Figure 7.1). Each level adds more customer value. The most basic level is the core customer value, which addresses the question: What is the buyer really buying? When designing products, marketers must first define the core, problem-solving benefits or services that consumers seek. A woman buying lipstick buys more than lip colour. Charles Revson of Revlon saw this early: ‘In the factory, we make cosmetics; in the store, we sell hope.’ And people who buy a Samsung Galaxy S7 Edge smartphone are buying more than a mobile phone, email device or camera. They are buying freedom and on-the-go connectivity to information, people and communities. At the second level, product planners must turn the core benefit into an actual product. They need to develop product and service features, design, a quality level, a brand name and packaging. For example, the Samsung Galaxy S7 Edge is an actual product. Its name, parts, styling, features, packaging and other attributes have all been combined carefully to deliver the core customer value of staying connected. Finally, product planners must build an augmented product around the core benefit and actual product by offering additional consumer services and benefits. The Galaxy S7 Edge offers more than just a communications device. It provides consumers with a complete solution to mobile connectivity problems. Thus, when consumers buy a Galaxy S7 Edge, the company and its dealers also might give buyers a warranty on parts and workmanship, instructions on how to use the device, quick repair services when needed, and a toll-free telephone number and website to use if they have problems or questions. Consumers see products as complex bundles of benefits that satisfy their needs. When developing products, marketers first must identify the core customer value that consumers seek from the product. They must then design the actual product and find ways to augment it in order to create this customer value and the most-satisfying customer experience. Augmented product After-sale Delivery Actual product service and credit Brand Features name CORE CUSTOMER VALUE Quality Design level Packaging Product support Warranty Figure 7.1 Three levels of products Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 201 202 Part 3 Designing a customer-driven strategy and mix Product and service classifications Products and services fall into two broad classes based on the types of consumers that use them – consumer products and industrial products. Broadly defined, products also include other marketable entities such as experiences, organisations, persons, places and ideas. Consumer products Consumer products are products and services bought by final consumers for personal consumption. Marketers usually classify these products and services further based on how consumers go about buying them. Consumer products include Core, actual and augmented product: People who buy a Samsung convenience products, shopping products, specialty products and unsought Galaxy S7 Edge smartphone are buying more than a mobile phone, email device or camera. Owners are invited to ‘enjoy products. These products differ in the ways consumers buy them more freedom to explore, stay connected, and capture the and, therefore, in how they are marketed (see Table 7.1). adventure’. Convenience products are consumer products and services Bloomberg/Contributor/Getty that customers usually buy frequently, immediately, and with a minimum of comparison and buying effort. Examples include consumer product laundry detergent, sweets, magazines and fast food. Convenience products are usually low priced, and A product bought by marketers place them in many locations to make them readily available when customers need them. final consumers for Shopping products are less-frequently purchased consumer products and services that customers compare personal consumption. carefully on suitability, quality, price and style. When buying shopping products and services, consumers spend much time and effort in gathering information and making comparisons. Examples include furniture, clothing, used cars, major appliances, and hotel and airline services. Shopping products marketers usually distribute their products through fewer outlets, but provide deeper sales support to help customers in their comparison efforts. Specialty products are consumer products and services with unique characteristics or brand identification for which a significant group of buyers is willing to make a special purchase effort. Examples include specific brands of cars, high-priced photographic equipment, designer clothes, and the services of medical Table 7.1 Marketing considerations for consumer products Marketing considerations Convenience Type of consumer product Shopping Specialty Unsought Customer buying behaviour Frequent purchase, little planning, little comparison or shopping effort, low customer involvement Less frequent purchase, much planning and ­shopping effort, comparison of brands on price, quality, style Strong brand preference and loyalty, special purchase effort, little comparison of brands, low price sensitivity Little product awareness, knowledge (or, if aware, little or even negative interest) Price Low price Higher price High price Varies Distribution Widespread distribution, convenient locations Selective distribution in fewer outlets Exclusive distribution in only one or a few outlets per market area Varies Promotion Mass promotion by the producer Advertising and personal selling by both producer and resellers More carefully targeted promotion by both producer and resellers Aggressive advertising and personal selling by producer and resellers Examples Toothpaste, magazines, laundry detergent Major appliances, ­televisions, furniture, clothing Luxury goods, such as Rolex watches or fine crystal Life insurance, Red Cross blood donations Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value 203 or legal specialists. A Lamborghini car, for example, is a specialty product because buyers are usually willing to travel great distances to buy one. Buyers normally do not compare specialty products. They invest only the time needed to reach dealers carrying the wanted products. Unsought products are consumer products that the consumer either does not know about or knows about but does not normally think of buying. Most major new innovations are unsought until the consumer becomes aware of them through advertising. Classic examples of known but unsought products and services are life insurance, pre-planned funeral services and blood donations to the Red Cross. By their very nature, unsought products require a lot of advertising, personal selling and other marketing efforts (see Marketing in action 7.1 later in this chapter). Industrial products Industrial products are those purchased for further processing or for use in conducting a business. Thus, the distinction between a consumer product and an industrial product is based on the purpose for which the product is bought. If a consumer buys a lawn mower for use around the home, the lawn mower is a consumer product. If the same consumer buys the same lawn mower for use in a landscaping business, the lawn mower is an industrial product. The three groups of industrial products and services include materials and parts, capital items, and supplies and services. Materials and parts include raw materials and manufactured materials and parts. Raw materials consist of farm products (wheat, cotton, livestock, fruits, vegetables) and natural products (fish, timber, crude petroleum, iron ore). Manufactured materials and parts consist of component materials (iron, yarn, cement, wires) and component parts (small motors, tyres, castings). Most manufactured materials and parts are sold directly to industrial users. Price and service are the main marketing factors; branding and advertising tend to be less important. Capital items are industrial products that aid in the buyer’s production or operations, including installations and accessory equipment. Installations consist of major purchases such as buildings (factories, offices) and fixed equipment (generators, drill presses, large computer systems, elevators). Accessory equipment includes portable factory equipment and tools (hand tools, fork lifts) and office equipment (computers, printers, desks). They have a shorter life than installations and simply aid in the production process. The final group of industrial products is supplies and services. Supplies include operating supplies (lubricants, coal, paper, pencils) and repair and maintenance items (paint, nails, brooms). Supplies are the convenience products of the industrial field because they are usually purchased with a minimum of effort or comparison. Business services include maintenance and repair services (window cleaning, computer repair) and business advisory services (legal, management consulting, advertising). Such services are usually supplied under contract. industrial product A product bought by individuals and organisations for further processing or for use in conducting a business. Organisations, persons, places, events and ideas In addition to tangible products and services, marketers have broadened the concept of a product to include other market offerings – organisations, persons, places, events and ideas. Organisations often carry out activities to ‘sell’ the organisation itself. Organisation marketing consists of activities undertaken to create, maintain or change the attitudes and behaviour of target Corporate image advertising: BOQ styles itself as a lovable bank, using humour and cartoons, and by explaining that ‘we’ve learned that love has to be earned’. Bank of Queensland Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 204 Part 3 Designing a customer-driven strategy and mix consumers towards an organisation. Both profit and not-forprofit organisations practise organisation marketing; business firms sponsor public relations or corporate image advertising campaigns to market themselves and polish their images. For example, banker BOQ tackles ‘bank hate’ head-on, using humour and cartoons that ask: ‘Is it possible to love a bank?’ In their corporate image campaign, they reply: ‘We’ve learned love has to be earned.’ Similarly, not-for-profit organisations, such as churches, universities, charities, museums and performing arts groups, market their organisations in order to raise funds and attract members or patrons.3 People can also be thought of as products. Person marketing consists of activities undertaken to create, maintain or change attitudes or behaviour towards particular people. People such Person marketing: Amaysim invited customers to ‘go hassle free’ with TV actor David Hasselhoff, who changed his name to David as politicians, entertainers and sports figures, and professionals Hoff, explaining he wanted less hassle in his life. Amaysim used the such as doctors, lawyers and architects, use person marketing well-known actor to share its commitment to hassle-free mobile to build their reputations. And businesses, charities and other phone plans with the tag-line: ‘less hassle, more hoff ’. organisations use well-known personalities to help sell their Craig Greenhill/Newspix products or causes. For example, Amaysim used American actor David Hasselhoff to invite mobile phone users to remove one hassle from their life. The actor nicknamed ‘the Hoff’ announced he was officially changing his name to David Hoff amid much media speculation. Amaysim later revealed the social media campaign as the focus for its commitment to deliver hassle-free phone experiences to its customers: ‘less hassle, more hoff’.4 The skilful use of marketing can turn a person’s name into a powerhouse brand. Consider the TV chefs who have achieved the status almost of rock stars for their many ardent fans. These days, it is hard to shop for kitchen products without encountering goods endorsed by these culinary all-stars. For example, celebrity chef Donna Hay endorses a kitchen cupboard filled with jams and bake-at-home cakes. A quick tour of her online store reveals that her product endorsements extend to an assortment of kitchen tools and bakeware, and on into the dining room and laundry with fine china and fabric conditioner.5 Place marketing involves activities undertaken to create, maintain or change attitudes or behaviour towards particular places. Cities, states, regions and even entire nations compete to attract tourists, new residents, conventions, company offices and factories. Tourism New Zealand advertises the country as ‘100% pure New Zealand’, and Destination NSW invites visitors to ‘Love every second in Sydney’. Vivid Sydney is one of the very successful ‘seconds in time’ that form part of Destination NSW’s place marketing campaign. Attracting visitors from all over the world, the Vivid Sydney website provides information about spectacular light shows, as well as music and ideas events. Information is also available on accommodation and travel to Vivid events. Visitors are encouraged to download a smartphone app to help them ‘experience everything Vivid Sydney has to offer’.6 Ideas can also be marketed. In one sense, all marketing is the marketing of an idea, whether it is the social marketing general idea of brushing your teeth or the specific idea that Colgate Total toothpaste offers superior The use of commercial protection because it ‘fights plaque bacteria for up to 12 hours’. Political marketing is also a type of marketing concepts and tools to influence idea marketing. Political parties use mass media, social media such as YouTube, Twitter and Facebook, behaviours that and direct marketing approaches to get their message across to the converted and unconverted alike. benefit individuals and Here, however, we narrow our focus to the marketing of social ideas. This area has been called social communities for the greater social good. marketing, defined by the Australian Association of Social Marketing as the use of commercial Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value 205 Place marketing: Destination NSW’s Vivid Sydney event includes an app so visitors can manage the experience and so that they can ‘Love every second in Sydney’. Provided courtesy of Destination NSW marketing concepts and tools to ‘influence behaviours that benefit individuals and communities for the greater social good’.7 Social marketing programs include public health campaigns to reduce smoking, drug abuse and obesity. Other social marketing efforts include environmental campaigns to promote wilderness protection, clean air and conservation. Still others address issues such as family planning, human rights and racial equality. But social marketing involves much more than just advertising; it uses every other element of the marketing mix to achieve its social change objectives. Product and service decisions (pp. 205–13) Marketers make product and service decisions at three levels: individual product decisions, product line decisions and product mix decisions. We discuss each of these in turn. Individual product and service decisions Figure 7.2 shows the important decisions in the development and marketing of individual products and services, including product and service attributes, branding, packaging, labelling and product support services. Product and service attributes Developing a product or service involves defining the benefits that it will offer. These benefits are communicated and delivered by product attributes such as quality, features and style and design. Product quality Product quality is one of the marketer’s main positioning tools. Quality has a direct impact on product or service performance; thus, it is closely linked to customer value and satisfaction. In the narrowest sense, quality can be defined as ‘freedom from defects’. But most customer-centred companies go beyond this narrow definition. Instead, they define quality in terms of creating customer value and satisfaction. The American Society for Quality defines quality as the characteristics of a product or service that bear on its Product attributes Branding Packaging Labelling product quality The characteristics of a product or service that bear on its ability to satisfy stated or implied customer needs. Product support services Figure 7.2 Individual product decisions Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 206 Part 3 Designing a customer-driven strategy and mix Marketing in Action 7.1 Headspace and the unsought product Let’s face it, some goods and services are not at the top of our shopping list. both online and in the real world. Headspace ‘built’ a stigma! Actually, they built Life insurance or a will, smoke detectors and security alarms, a gravestone, a an enormous panelled dome at a railway station in Melbourne. For five days, thermometer or survival gear – these are all examples of goods and services we travellers were invited to ‘take away’ the stigma by removing a panel. Each panel just don’t want to think about needing. They are unsought products. Even though had a message about mental health and how to get help. Following the outdoor we do not really want these products they are often needed. For example, every event, the campaign launched online, with a digital ‘stigma’ to break down. home should have a smoke detector (and, often, more than one) – it’s the law! The opportunity to break down the digital stigma not only encourages visitors to But many home owners do not think about installing a smoke detector until their access the website but also provides those visitors with a story and information real estate agent reminds them they cannot sell their home without one. So local about youth mental health. The campaign was promoted via television, radio, governments and smoke-detector manufacturers and distributors can spend a social and digital media, and flyers. Comedian Dave Hughes, who experienced great deal of time and money reminding us to install smoke detectors and to mental health issues at the age of 21, also supported the campaign. check regularly that they are working. Smoke detectors are just one of many unsought products that marketers play a big role in bringing to our attention. The Big Stigma campaign aimed to change the way people think about mental wellbeing and to encourage young people to get information and help Headspace aims both to help young people with mental health matters and to when needed. In marketing terms, the goal was to shift the services and support improve the ‘wellbeing of young Australians’. Each year, many young people face provided by Headspace from unsought to a service actively sought out by young health and wellbeing issues that compromise their mental wellness, and many people. Let’s take a closer look at how they did this. face these problems alone – they don’t seek help. Sometimes this is because Headspace is a service – a service that is not only unsought but also intangible. they do not realise they need help but, more often than not, it is because they It is difficult for young people to understand what the service will provide. are embarrassed or because of a perceived stigma. For young people, support for The Big Stigma campaign brings the issue of youth mental health into the open, mental wellbeing is an unsought service. and makes it more real. Each panel removed from the Big Stigma represents Recently, Headspace launched a campaign to tackle this issue head on. another person who has heard the message and who understands the The campaign aimed to break down the stigma by creating an engaging experience, issues a bit better. With more people talking about youth mental health, Unsought products: Many young people do not reach out to get the help they need with their mental wellbeing. Headspace’s Big Stigma campaign aimed to change attitudes and to encourage young people to get the help they need. Headspace Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value getting help becomes a real possibility for more young people. When they arrive at Headspace, either online or in person, they learn they can get help with everything from applying for jobs or managing stress and anxiety, to accessing support for dealing with alcohol and/or drug problems, relationship issues, bullying and violence. The online site and drop-in centres are friendly, open spaces with lots of easy-to-access information. The website also shares stories from Headspace users to show how getting help makes a difference. These stories create links and, importantly, they show the young person that others just like them have been, or perhaps still are, on a similar journey to their own. Sources: In Australia, people aged 12–25 seeking help for a mental health problem should contact Headspace at <www.headspace.org.au> and, in New Zealand, the Mental Health Foundation provides support for people of all ages at <www.mentalhealth.org.nz/get-help/>; Debra J Rickwood, Kelly R Mazzer & Nic R Telford, ‘Social influences on seeking help from mental health services, in-person and online, during adolescence and young adulthood’, BMC Psychiatry, 15(40), 2015, <http://bmcpsychiatry.biomedcentral.com/articles/10.1186/ s12888-015-0429>; ‘Experiential campaign combats stigma around youth mental health’, Marketing Magazine, 20 June 2016, <www.marketingmag.com.au/ news-c/experiential-campaign-combats-stigma-around-youth-mental-health/>; ‘CHE Proximity and Headspace launch campaign to remove mental health stigma’, B&T, 17 June 2016, <www.bandt.com.au/marketing/che-proximity-headspacelaunch-campaign-remove-mental-health-stigma>; see also Headspace websites at <http://thebigstigma.com.au/> and <http://headspace.org.au/>, accessed June 2016. Questions ❶ Go to the website for Headspace, <http://headspace.org.au/>. What features do you see on the website that make the service something young people might want to use? ❷ Marketing an unsought product requires attention to changing attitudes and increasing awareness. What differences (if any) are there between marketing an unsought good and marketing an unsought service? What needs to be considered when marketing an unsought product that is entirely new – like Stan (the entertainment service) was a few years ago? How do you think the role of the marketer changes when marketing an unsought product? ability to satisfy stated or implied customer needs. Similarly, Siemens defines quality this way: ‘Quality is when our customers come back and our products don’t.’8 Total quality management (TQM ) is an approach in which all the company’s people are involved in constantly improving the quality of products, services and business processes. For most top companies, customer-driven quality has become a way of doing business. Today, companies are taking a ‘return on quality’ approach, viewing quality as an investment and holding quality efforts accountable for bottom-line results. Product quality has two dimensions – level and consistency. In developing a product, the marketer must first choose a quality level that will support the product’s positioning. Here, product quality means performance quality – the ability of a product to perform its functions. For example, a Rolls-Royce provides higher performance quality than a Holden: it has a smoother ride, provides more ‘creature comforts’ and lasts longer. Companies rarely try to offer the highest possible performance-quality level – few customers want or can afford the high levels of quality offered in products such as a Rolls-Royce automobile, B&W Nautilus speakers or a Rolex watch. Instead, companies choose a quality level that matches target market needs and the quality levels of competing products. Beyond quality level, high quality also can mean high levels of quality consistency. Here, product quality means conformance quality – freedom from defects and consistency in delivering a targeted level of performance. All companies should strive for high levels of conformance quality. In this sense, a Holden can have just as much quality as a Rolls-Royce. Although a Holden does not perform at the same level as a Rolls-Royce, it can deliver just as consistently the quality that customers pay for and expect. Product features A product can be offered with varying features. A stripped-down model, one without any extras, is the starting point. The company can create higher-level models by adding more features. Features are a competitive tool for differentiating the company’s product from competitors’ products. Being the first producer to introduce a valued new feature is one of the most effective ways to compete. How can a company identify new features and decide which ones to add to its product? The company should periodically survey buyers who have used the product and ask these questions: How do you like the product? Which specific features of the product do you like most? Which features could we add to improve the product? The answers provide the company with a rich list of feature ideas. The company can then Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 207 208 Part 3 Designing a customer-driven strategy and mix assess each feature’s value to customers versus its cost to the company. Features that customers value highly in relation to costs should be added. Product style and design Another way to add customer value is through distinctive product style and design. Design is a larger concept than style. Style simply describes the appearance of a product. Styles can be eye-catching or yawn-producing. A sensational style may grab attention and produce pleasing aesthetics, but it does not necessarily make the product perform better. Unlike style, design is more than skin deep – it goes to the very heart of a product. Good design contributes to a product’s usefulness as well as to its looks. Good design does not start with brainstorming new ideas and making prototypes. Design begins with observing customers and developing a deep understanding of their needs. More than simply creating product or service attributes, Product design: Sonos created a wireless, internet-enabled speaker system that is stylish and easy to use and fills a whole house with it involves shaping the customer’s product-use experience. great sound. Product designers should think less about product attributes T3 Magazine/Contributor/Getty Images and technical specifications and more about how customers will use and benefit from the product. Sonos created a wireless, internet-enabled speaker system that is easy to use and fills a whole house with great sound. In the past, setting up a whole-house entertainment or sound system required routing wires through walls, floors and ceilings, creating a big mess and lots of expense. And if you moved, you could not take the system with you. Using smart design based on consumer needs, Sonos created a wireless speaker system that is not just stylish but also easy to set up, easy to use and easy to move to meet changing needs. Smart design has paid off handsomely for Sonos. Founded in 2002, over just the past two years the company’s sales have nearly tripled to an estimated US$1 billion a year.9 Branding brand A name, term, sign, symbol or design, or a combination of these, that identifies the products or services of one seller or group of sellers and differentiates them from those of competitors. Perhaps the most distinctive skill of professional marketers is their ability to build and manage brands. A brand is a name, term, sign, symbol or design, or a combination of these, that identifies the maker or seller of a product or service. Consumers view a brand as an important part of a product, and branding can add value to a product. Customers attach meanings to brands and develop brand relationships. Brands have meaning well beyond a product’s physical attributes. For example, consider Coca-Cola. In one interesting taste test of Coca-Cola versus Pepsi, 67 subjects were hooked up to brain-­wavemonitoring machines while they consumed both products. When the soft drinks were unmarked, consumer preferences were split down the middle. But when the brands were identified, subjects choose Coke over Pepsi by a margin of 75 per cent to 25 per cent. When drinking the identified Coke brand, the brain areas that lit up most were those associated with cognitive control and memory – a place where culture concepts are stored. That did not happen as much when drinking Pepsi. Why? According to one brand strategist, it is because of Coca-Cola’s long-established brand imagery – the almost 100-year-old contour bottle and cursive font, and its association with iconic images ranging from the Polar Bears to Santa Claus. Pepsi’s imagery is not quite as deeply rooted. The conclusion: consumer preference is not based on taste alone. Coke’s iconic brand appears to make a difference.10 Branding has become so strong that, today, hardly anything goes unbranded. Salt is packaged in branded containers, common nuts and bolts are packaged with a distributor’s label, and automobile parts – spark plugs, tyres, filters – bear brand names that differ from those of the car makers. Even fruits, Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value vegetables, dairy products and poultry are branded – Sweet Cheeks mangos, Super Tom tomatoes, Perfection milk and Steggles chickens. Branding helps buyers in many ways. Brand names help consumers identify products that might benefit them. Brands also say something about product quality and consistency – buyers who always buy the same brand know they will get the same features, benefits and quality each time they buy. Branding also gives the seller several advantages. The brand name becomes the basis on which a whole story can be built about a product’s special qualities. The seller’s brand name and trademark provide legal protection for unique product features that otherwise might be copied by competitors. And branding helps the seller to segment markets. For example, Toyota Motor Corporation can offer the major Lexus and Toyota brands, each with numerous sub-brands – such as Camry, Corolla, Prius and Yaris – not just one general product for all consumers. Building and managing brands are perhaps the marketer’s most important tasks. We discuss branding strategy in more detail later in the chapter. 209 Branding: Turners & Growers – marketers of fresh produce – distribute a number of premium brands, from Bonita bananas to Beekist tomatoes. Image provided by Turners & Growers Ltd Packaging Packaging involves designing and producing the container or wrapper for a product. Traditionally, the primary function of the package was to hold and protect the product. In recent times, however, numerous factors have made packaging an important marketing tool as well. Increased competition and clutter on retail store shelves means that packages must now perform many sales tasks – from attracting attention, to describing the product, to making the sale. Companies are realising the power of good packaging to create immediate consumer recognition of a brand. For example, an average supermarket stocks about 44 000 items The typical shopper makes three out of four purchase decisions in stores and passes by some 300 items per minute. In this highly competitive environment, the package may be the seller’s last and best chance to influence buyers. Thus, for many companies, the package itself has become an important promotional medium.11 Poorly designed packages can cause headaches for consumers and lost sales for the company. Think about all those hard-to-open packages, such as DVD cases sealed with impossibly sticky labels, packaging with finger-splitting wire twisties or sealed plastic clamshell containers that cause ‘wrap rage’ and send thousands of people to the hospital each year with lacerations and puncture wounds. Another packaging issue is overpackaging – such as when a tiny USB flash drive in an oversized cardboard and plastic display package is delivered in a giant corrugated shipping carton. Overpackaging creates an incredible amount of waste, frustrating those who care about the environment. Amazon now offers Frustration-Free Packaging to alleviate both wrap rage and overpackaging. The online retailer works with more than 2000 companies, such as Fisher-Price, Mattel, Unilever, Microsoft and others, to create smaller, easy-to-open, recyclable packages that use less packaging material and no frustrating plastic clamshells or wire ties. It currently offers more than 200 000 such items and to date has shipped more than 75 million of them to 175 countries. In the process, the initiative has eliminated nearly 6 square kilometres of cardboard and over 11 000 tonnes of packaging waste.12 Innovative packaging can give a company an advantage over competitors and boost sales. Distinctive packaging may even become an important part of a brand’s identity. For example, an otherwise plain brown carton imprinted with the familiar curved arrow from the Amazon.com logo – variously interpreted as ‘a to z’ or even a smiley packaging The activities of designing and producing the container or wrapper for a product. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 210 Part 3 Designing a customer-driven strategy and mix face – leaves no doubt as to who shipped the package sitting at your doorstep. And Tiffany’s distinctive blue boxes have come to embody the exclusive jewellery retailer’s premium legacy and positioning. As the company puts it, ‘Glimpsed on a busy street or resting in the palm of a hand, Tiffany Blue Boxes make hearts beat faster and epitomize Tiffany’s great heritage of elegance, exclusivity, and flawless craftsmanship.’13 In recent years, product safety has also become a major packaging concern. We have all learned to deal with hard-to-open ‘childproof’ packaging. And after the rash of product-tampering scares during the 1980s, most drug producers and food makers now put their products in tamper-resistant packages. In making packaging decisions, the company also must heed growing environmental concerns. Fortunately, many companies have gone ‘green’ by reducing their packaging and using environmentally responsible packaging materials. Labelling Labels range from simple tags attached to products to complex graphics that are part of the package. They perform several functions. At the very least, the label identifies the product or brand, such as the name ‘Bonita’ stuck on bananas. The label might also describe several things about the product – who made it, where it was made, when it was made, its contents, how it is to be used and how to use it safely. Finally, the label might help to promote the brand, support its positioning and connect with customers. For many companies, labels have become an important element in broader marketing campaigns. Labels and brand logos can support the brand’s positioning and add personality to the brand. In fact, brand labels and logos can become a crucial element in the brand–customer connection. Customers often become strongly attached to logos as symbols of the brands they represent. Consider the feelings evoked by the logos of companies such as Coca-Cola, Google, Twitter, Apple and Nike. Logos must be redesigned from time to time. For example, Optus has redesigned their brand and company logos to make them more approachable, upbeat and engaging. An Optus company representative explains: ‘[It] isn’t so much about the new logo; it’s about the entire brand experiences our customers have with us.’ The new brand representation, featuring a bubbly font and a friendly new brand character, is designed to connect more closely with the customer. It is a big contrast to the old logo, which was more ‘formal, structured and quite cold’. Underpinning the new brand position is the ‘declaration of Yes’ – a promise about what Optus does to be better for its customers.14 Along with the positives, labelling also raises concerns. There has been a long history of legal concerns about packaging and labels. Labels can mislead customers, fail to describe important ingredients or fail to include needed safety warnings. As a result, several federal and state laws regulate labelling. These laws set mandatory labelling requirements, encourage voluntary industry packaging standards and allow federal agencies to set packaging regulations in specific industries. For example, the Food Standards Australia New Zealand Act 1991 establishes the Australia New Zealand Food Standards Code, which sets out labelling and packaging requirements for a wide range of foods. Labelling has been affected in recent times by unit pricing (stating the price per unit of standard measure), open dating (stating the expected shelf life of the product) and nutritional labelling (stating the nutritional values in the product). Legislation requires sellers to provide detailed nutritional information on food products, and regulates the use of health-related terms, such as low fat, light and high fibre. Sellers must ensure that their labels contain all the required information. Packaging: Distinctive packaging may become an important part of a brand’s identity. An otherwise plain brown carton imprinted with only the familiar curved arrow from the Amazon.com logo – variously interpreted as ‘a to z’ or even a smiley face – leaves no doubt as to who shipped the package sitting at your doorstep. Lux Igitur/Alamy Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value 211 Product support services Customer service is another element of product strategy. A company’s offer usually includes some support services, which can be a minor or a major part of the total offering. Later in the chapter, we discuss services as products in themselves. Here, we discuss services that augment actual products. Support services are an important part of the customer’s overall brand experience. For example, Crumpler makes a range of quality, street-smart bags. But the company knows that good marketing does not stop with making the sale. Keeping customers happy after the sale is the key to building lasting relationships. They do this in a relaxed and fun-filled way, offering customers a reassuring order follow-up service, and explaining that ‘sometimes stuff happens’. They even offer customers a ‘Til Death Do Us Part’ warranty! They ‘repair or replace the parts in question – no questions asked’. ‘Second thoughts? No dramas’ for Crumpler customers with their exchange service. So, Crumpler goes to great lengths to make great bags and to provide outstanding after-sale service.15 The first step in designing support services is to survey customers periodically to assess the value of current services and to obtain ideas for new ones. Once the company has assessed the quality of various support services to customers, it can take steps to fix problems and add new services that will both delight customers and yield profits to the company. Many companies now use a sophisticated mix of phone, email, fax, internet and interactive voice and data technologies to provide support services that were not possible previously. For example, Bosch Australia offers a complete set of sales and after-sale services. It promises ‘We are here to help’. Customers can click on to the Bosch customer care portal for a range of online resources for their products, including service videos and instruction manuals, as well as service bookings and even recipes, all of which can be accessed 24/7.16 Product line decisions Beyond decisions about individual products and services, product strategy also calls for building a product line. A product line is a group of products that are closely related because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlets or fall within given price ranges. For example, Nike produces several lines of athletic shoes and apparel, and Marriott offers several lines of hotels. The main product line decision involves product line length – the number of items in the product line. The line is too short if the manager can increase profits by adding items; the line is too long if the manager can increase profits by dropping items. Managers need to analyse their product lines periodically to assess each product item’s sales and profits and to understand how each item contributes to the line’s overall performance. A company can expand its product line in two ways: by line filling or by line stretching. Product line filling involves adding more items within the present range of the line. There are several reasons for product line filling: reaching for extra profits, satisfying dealers, using excess capacity, being the leading full-line company and plugging holes to keep out competitors. However, line filling is overdone if it results in cannibalisation and customer confusion. The company should ensure that new items are noticeably different from existing ones. Product line stretching occurs when a company lengthens its product line beyond its current range. As shown in Figure 7.3, the company can stretch its line downward, upward or both ways. Companies located at the upper end of the market can stretch their lines downward. A company may stretch downward to plug a market hole that otherwise would attract a new competitor or to respond to a competitor’s attack on the upper end. Or it may add low-end products because it finds faster growth taking place in the low-end segments. Companies can also stretch their product lines upward. Sometimes, companies stretch upward in order to add prestige to their current products. Or they may be attracted by a faster growth rate or higher margins at the higher end. Over the past few years, Samsung has both stretched and filled its Galaxy line of premium smartphone and tablet mobile devices. Samsung started the Galaxy line with a 4-inch smartphone, and then quickly added a 10.1-inch tablet. It now offers a bulging Galaxy line that includes a size for any need or preference. product line A group of products that are closely related because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlets or fall within given price ranges. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Part 3 Designing a customer-driven strategy and mix 212 High High High Present products Price New products Price Present products Price New products New products Present products Low New products Low Low High Low Low High Low High Quality Quality Quality Stretching downward Stretching upward Stretching both ways Figure 7.3 Product line stretching decisions To top things off, Samsung offers the Gear VR, a headset that combines with a smartphone to provide a virtual reality experience for gamers, and the Gear Fit2, a wearable activity-tracking device. The Galaxy line still caters heavily to the top end of its markets. But to address the fastest-growing smartphone segment – phones that sell for less than $300 – Samsung has introduced the lower-priced Galaxy J1 models. As a result, through artful stretching and filling, Samsung’s successful Galaxy line has broadened its appeal, improved its competitive position and boosted growth.17 product mix (product portfolio) Product mix decisions The set of all product lines and items that a particular seller offers for sale. An organisation with several product lines has a product mix. A product mix (or product portfolio) consists of all the product lines and items that a particular seller offers for sale. Some companies manage very complex product portfolios. For example, Sony’s diverse portfolio consists of a number of product businesses worldwide: Sony Electronics, Sony Computer Entertainment (games), Sony Pictures Entertainment (movies, television shows), Sony Music Entertainment (music, DVDs) and Sony Financial Services (life insurance, banking and other offerings). Each main Sony business consists of several product lines. For example, Sony Electronics includes cameras and camcorders, computers, televisions and home entertainment products, mobile electronics and others. In turn, each of these lines contains many individual items. Sony’s television and home entertainment line includes televisions, DVD players, home audio components, digital home products and more. Altogether, Sony’s product mix includes a diverse collection of hundreds of products. A company’s product mix has four important dimensions: width, length, depth and consistency. Product mix width refers to the number of different product lines the company carries. Sony markets a wide range of consumer and industrial products around the world, from televisions and PlayStation consoles to semiconductors. Product mix length refers to the total number of items the company carries within its product lines. Sony typically carries many products within each line. The personal audio line, for instance, includes the expected digital media players, headphones and wireless speakers, as well as digital voice recorders and radios, along with a wide range of accessories.18 Product mix depth refers to the number of versions offered of each product in the line. Sony has a very deep product mix. For example, it makes and markets just about any kind of television you would ever want to buy – LED, LCD, High Definition, Android TV, 2D or 3D – each in almost any imaginable size. Finally, the consistency of the product mix refers to how closely related the various product lines are in terms of end use, production requirements, distribution channels or some other way. Within each major business, Sony’s Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value 213 product lines are fairly consistent in that they perform similar functions for buyers and go through the same distribution channels. Company-wide, however, Sony markets a very diverse mix of products. Managing such a broad and diverse product portfolio requires skill. These product mix dimensions are the basis of the company’s product strategy. The company can increase its business in four ways. (1) It can add new product lines, widening its product mix. In this way, its new lines build on the company’s reputation in its other lines. (2) The company can lengthen its existing product lines to become a more full-line company. (3) The company can add more versions of each product and thus deepen its product mix. (4) Finally, the company can pursue more product line consistency – or less – depending on whether it wants to have a strong reputation in a single field or in several fields. From time to time, a company may also have to streamline its product mix to pare out marginally performing lines and to regain its focus. As consumers rethink their brand preferences and priorities, marketers must do the same. They need to align their product mixes with changing customer needs and profitably create better value for customers. Linking the concepts To get a better sense of how large and complex a company’s product offering can become, investigate Procter & Gamble’s (P&G’s) product mix. ● Using P&G’s website <www.pg.com/en_ANZ/>, its annual report or other sources, develop a list of all the company’s product lines and individual products. What surprises you about this list of products? ● Is P&G’s product mix consistent? What products has P&G dropped or sold recently? What overall strategy or logic appears to have guided the shaping of this product mix? Services marketing (pp. 213–18) Services have grown dramatically in recent years. Services now account for nearly 70 per cent of GDP in Australia and New Zealand. Three in every four people are employed in the sector, and that number is growing.19 Service industries vary greatly. Governments offer services through courts, employment services, hospitals, military services, police and fire departments, the postal service and schools. Private not-for-profit organisations offer services through museums, charities, churches, universities, foundations and hospitals. A large number of business organisations offer services – airlines, banks, hotels, insurance companies, consulting firms, medical and legal practices, entertainment and telecommunications companies, real-estate firms, retailers and others. Nature and characteristics of a service A company must consider four special service characteristics when designing marketing programs: (1) intangibility, (2) inseparability, (3) variability and (4) perishability (see Figure 7.4). Service intangibility means that services cannot be seen, tasted, felt, heard or smelled before they are bought. For example, people undergoing cosmetic surgery cannot see the result before the purchase. Airline passengers have nothing but a ticket and the promise that they and their luggage will arrive safely at the intended destination, hopefully at the same time. To reduce uncertainty, buyers look for ‘signals’ of service quality. They draw conclusions about quality from the place, people, price, equipment and communications that they can see. Therefore, the service provider’s task is to make the service tangible in one or more ways and to send the right signals about quality. One analyst calls this evidence management, in which the service organisation presents its customers with organised, honest evidence of its capabilities. NRMA Insurance practises good evidence management. No one really wants to buy insurance; it is difficult to work out what you need and it is difficult to compare alternative offerings. To make it easy for customers, NRMA provides plain-English policy booklets, a phone helpline to explain benefits, free iPhone apps, a broad range of safety and security information, and, of course, user-friendly quotes, payments and claims systems.20 service intangibility A major characteristic of services – they cannot be seen, tasted, felt, heard or smelled before they are bought. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 214 Part 3 Designing a customer-driven strategy and mix Intangibility Inseparability Services cannot be seen, tasted, felt, heard or smelled before purchase Services cannot be separated from their providers SERVICES Variability Perishability Quality of services depends on who provides them and when, where and how Services cannot be stored for later sale or use Figure 7.4 Four service characteristics service inseparability A major characteristic of services – they are produced and consumed at the same time and cannot be separated from their providers. service variability A major characteristic of services – their quality may vary greatly, depending on who provides them and when, where and how. service perishability A major characteristic of services – they cannot be stored for later sale or use. Physical goods are produced, then stored, later sold and, still later, consumed. In contrast, services are first sold, then produced and consumed at the same time. In services marketing, the service provider is the product. Service inseparability means that services cannot be separated from their providers, whether the providers are people or machines. If a service employee provides the service, then the employee becomes a part of the service. Because the customer is also present as the service is produced, provider–customer interaction is a special feature of services marketing. Both the provider and the customer affect the service outcome. Service variability means that the quality of services depends on who provides them, as well as when, where and how they are provided. For example, some hotels – say, Sofitel – have reputations for providing better service than others. Still, within a given hotel, one registration-counter employee may be cheerful and efficient, whereas another standing just a metre or so away may be unpleasant and slow. Even the quality of a single Sofitel employee’s service varies according to his or her energy and frame of mind at the time of each customer encounter. Service perishability means that services cannot be stored for later sale or use. Some doctors charge patients for missed appointments because the service value existed only at that point and disappeared when the patient did not show up. The perishability of services is not a problem when demand is steady. However, when demand fluctuates, service firms often experience problems. For example, because of rush-hour demand, public transportation companies have to own much more equipment than they would if demand were spread evenly throughout the day. Thus, service firms often design strategies for producing a better match between demand and supply. Hotels and resorts charge lower prices in the off-season to attract more guests. And restaurants hire parttime employees to serve during peak periods. Marketing strategies for service firms Service perishability: Service providers in the hospitality sector offer off-season and last-minute rates to manage demand. Courtesy Helloworld Ltd Just like manufacturing businesses, good service firms use marketing to position themselves strongly in chosen target markets. AAMI reminds its policy holders, ‘Lucky you’re with AAMI’; Uber Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value 215 promises to ‘Get there’ and to ‘Move Sydney’; and the Cancer Council Australia explains that they ‘Fund breakthrough cancer research, not your tax bill’. These and other service firms establish their positions through traditional marketing mix activities. However, because services differ from tangible products, they often require additional marketing approaches.21 The service–profit chain In a service business, the customer and frontline service employee interact to create the service. Effective interaction, in turn, depends on the skills of frontline service employees and on the support processes backing these employees. Thus, successful service companies focus their attention on both their customers and their employees. They understand the service–profit chain, which links service firm profits with employee and customer satisfaction. This chain consists of five links:22 • Internal service quality: superior employee selection and training, a quality work environment and strong support for those dealing with customers, which results in . . . • Satisfied and productive service employees: more satisfied, loyal and hardworking employees, which results in . . . • Greater service value: more effective and efficient customer value creation and service delivery, which results in . . . • Satisfied and loyal customers: satisfied customers who remain loyal, repeat purchase and refer other customers, which results in . . . • Healthy service profits and growth: superior service firm performance. Therefore, reaching service profits and growth goals begins with taking care of those who take care of customers. The management team at Kent Relocation Services understands this. The global removal and relocations company is based in Australia and aims to offer ‘best practice solutions’ to its global clients. With over 40 000 removals each year, this service provider maintains a 95 per cent satisfaction record because of its outstanding service. The management team ensures the highest standard of work by paying their staff well – some 15–20 per cent above the industry average – and by providing a range of benefits designed to ensure its people are happy. 23 Thus, service marketing requires more than just traditional external marketing using the four Ps. Figure 7.5 shows that service marketing also requires internal marketing and interactive marketing. Internal marketing means that the service firm must orient and motivate its customer-contact employees and service–profit chain The chain that links service firm profits with employee and customer satisfaction. internal marketing Orienting and motivating customercontact employees and supporting service people to work as a team to provide customer satisfaction. Employees g tin Int e rke rna ma lm al ark n ter Ex eti ng Company Interactive marketing Customers Figure 7.5 Three types of service marketing Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 216 Part 3 Designing a customer-driven strategy and mix interactive marketing Interacting with customers and others in the marketing channel on a one-to-one basis in person or remotely via digital technologies. supporting service people to work as a team to provide customer satisfaction. Marketers must get everyone in the organisation to be customer-centred. In fact, internal marketing must precede external marketing. For example, Coles Supermarkets starts by hiring the right people and carefully orienting and inspiring them to give unparalleled customer service. Interactive marketing means that service quality depends heavily on the quality of the buyer–seller interaction during the service encounter. In product marketing, product quality often depends little on how the product is obtained. But in services marketing, service quality depends on both the service deliverer and the quality of the delivery. Therefore, service marketers have to master interactive marketing skills. Thus, Coles explains its services values to all job applicants and provides comprehensive customer-service training options to staff. In today’s marketplace, companies must know how to deliver interactions that are not only ‘high-touch’ but also ‘high-tech’. For example, customers can log on to the Coles website and shop online. They can also follow Coles on Twitter, pin to Pinterest, like on Facebook and check out recipes and product reviews on the website. Customers seeking more personal interactions can contact service representatives by phone or visit a local Coles store. Thus, Coles has mastered interactive marketing at all three levels – calls, clicks and personal visits. Today, as competition and costs increase, and as productivity and quality decrease, more service marketing sophistication is needed. Service companies face three main marketing tasks: They want to increase their service differentiation, service quality and service productivity. We discuss each of these below. Managing service differentiation In these days of intense price competition, service marketers often complain about the difficulty of differentiating their services from those of competitors. To the extent that customers view the services of different providers as similar, they care less about the provider than the price. The solution to price competition is to develop a differentiated offer, delivery and image. The offer can include innovative features that set one company’s offer apart from competitors’ offers. Some hotels offer no-wait kiosk registration; car-rental, banking and business-centre services in their lobbies; and free high-speed internet connections in their rooms. Some retailers differentiate themselves by offerings that take you well beyond the products they stock. For example, Kellyville Pets is not your average pet shop – it is a destination, with in-store events and entertainment, a café and training for both pets and pet owners, making it your one-stop shop for all your pet’s needs. Service companies can differentiate their service delivery by having more able and reliable customer-contact people, by developing a superior physical environment in which the service product is delivered, or by designing a superior delivery process. For example, many grocery chains now offer online shopping and home delivery as a better way for their customers to shop rather than having to drive, park, wait in line and carry groceries home. And banks allow you to access your account information from almost anywhere – from the ATM to your mobile phone. Finally, service companies also can work on Managing service differentiation: Kellyville Pets is not your average pet shop – it is a differentiating their images through symbols destination – with in-store events, a café and training for both pets and pet owners. and branding. Camp Quality adopted ‘the Courtesy of Kellyville Pets, 1-15 Millcroft Way, Beaumont Hills, NSW 2155 face of giggle’ as its symbol in its advertising. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value The smiling face represents their brand by reminding the community of Camp Quality’s programs, which help build optimism and resilience for children living with cancer and their families.24 Other well-known service symbols include Qantas’s flying kangaroo, MGM’s lion, McDonald’s’ golden arches and Weta Workshop’s weta (insect) symbol. Managing service quality A service firm can differentiate itself by delivering consistently higher quality than its competitors provide. Like manufacturers before them, most service industries have now joined the customer-driven quality movement. And like product marketers, service providers need to identify what target customers expect in regards to service quality. Unfortunately, service quality is more difficult to define and judge than product quality. For instance, it is harder to agree on the quality of a haircut than on the quality of a hair straightener. Customer retention is perhaps the best measure of quality – a service firm’s ability to hang on to its customers depends on how consistently it delivers value to them. Top service companies set high service-quality standards. They watch service performance closely, both their own and that of competitors. They do not settle for merely good service; they set targets that they aim to meet each year. Australia Post commits to provide over 10 000 street posting boxes (they have nearly 16 000), to deliver 94 per cent of domestic letters on time (they deliver over 94.8 per cent on time) and to maintain at least 2500 postal outlets in rural areas (and they do this, too).25 Unlike product manufacturers who can adjust their machinery and inputs until everything is perfect, service quality will always vary, depending on the interactions between employees and customers. As hard as they try, even the best companies will have an occasional late delivery, burned steak or grumpy employee. However, good service recovery can turn angry customers into loyal ones. In fact, good recovery can win more customer purchasing and loyalty than if things had gone well in the first place. The following story, which was posted online, illustrates just how important service recovery is. After many years of great service from their local KwikKopy printer, a management consultant collected a print job needed for the next day. Opening the package at 6 o’clock that night the consultant was dismayed to find the job had been very poorly done. A call to the printer produced instant action. The printer collected the faulty work and returned to the consultant’s home later that evening with the printing completed to the high quality the consultant had come to expect. The quick action of the printer meant that the online story was filled with praise for the standard of service, rather than frustration with the initial outcome.26 These days, social media, such as Facebook and Twitter, can help companies remedy or remove customer dissatisfaction with service. As discussed in Chapter 4, many companies now monitor the digital space to identify customer issues quickly and respond in real-time. A quick and thoughtful response can turn a dissatisfied customer into a brand advocate.27 Managing service productivity With their costs rising rapidly, service firms are under great pressure to increase service productivity. They can do so in several ways. They can train current employees to work more effectively or hire new ones who will work harder or more skilfully. Or they can increase the quantity of their service by giving up some quality. The provider can ‘streamline the service’ by standardising production, as in McDonald’s’ assembly-line approach to fast-food retailing. Finally, the service provider can harness the power of technology. Although we often think of technology’s power to save time and costs in manufacturing companies, it also has great – and often untapped – potential to make service workers more productive. However, companies must avoid pushing productivity to the point that doing so reduces quality. Attempts to streamline a service or to cut costs can make a service company more efficient in the short run. But such changes can also reduce its longer-term ability to innovate, maintain service quality or respond to consumer needs and desires. For example, some airlines have learned this lesson the hard way as they Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 217 218 Part 3 Designing a customer-driven strategy and mix attempt to economise in the face of rising costs. They stopped offering even the little things for free – such as in-flight snacks – and began charging extra for everything. The result is an aircraft full of dissatisfied customers who avoid the airline whenever they can. In their attempts to improve productivity, these airlines mangled customer service. Thus, in attempting to improve service productivity, companies must be mindful of how they create and deliver customer value. In short, they should be careful not to take the ‘service’ out of service. Linking the concepts Let’s pause here for a moment. We have said that although services are ‘products’ in a general sense, they have special characteristics and marketing needs. To get a better grasp of this concept, select a traditional product brand, such as Nike or Honda. Next, select a service brand, such as Jetstar or McDonald’s. Then compare the two. ● How are the characteristics and marketing needs of the product and service brands you selected similar? ● How do the characteristics and marketing needs of the two brands differ? How are these differences reflected in each brand’s marketing strategy? Keep these differences in mind as we move into the final section of the chapter. Branding strategy: Building strong brands (pp. 218–24) Some analysts see brands as the main enduring asset of a company, outlasting the company’s specific products and facilities. A former CEO of McDonald’s declared, ‘If every asset we own, every building, and every piece of equipment were destroyed in a terrible natural disaster, we would be able to borrow all the money to replace it very quickly because of the value of our brand . . . The brand is more valuable than the totality of all these assets.’28 Thus, brands are powerful assets that must be carefully developed and managed. In this section, we examine the key strategies for building and managing product and service brands. Brand equity brand equity The differential effect that knowing the brand name has on customer response to the product or its marketing. Brands are more than just names and symbols. They are a key element in the company’s relationships with consumers. Brands represent consumers’ perceptions and feelings about a product and its performance – everything that the product or service means to consumers. In the final analysis, brands exist in the heads of consumers. As one well-respected marketer once said, ‘Products are created in the factory, but brands are created in the mind.’29 A powerful brand has high brand equity. Brand equity is the differential effect that knowing the brand name has on customer response to the product and its marketing. It is a measure of the brand’s ability to capture consumer preference and loyalty. A brand has positive brand equity when consumers react more favourably to it than they do to a generic or unbranded version of the same product. A brand has negative brand equity if consumers react less favourably to it than they do to an unbranded version. Brands vary in the amount of power and value they hold in the marketplace. Some brands – such as Coca-Cola, Nike, Disney, Bonds, McDonald’s, Harley-Davidson and others – become larger-than-life icons that maintain their power in the market for years, even generations. Other brands create fresh consumer excitement and loyalty, brands such as Google, YouTube, Apple, eBay, Twitter and Wikipedia. These brands win in the marketplace not simply because they deliver unique benefits or reliable service. Rather, they succeed because they forge deep connections with customers. Ad agency Young & Rubicam’s Brand Asset Valuator measures brand strength along four consumer perception dimensions: differentiation (what makes the brand stand out), relevance (how consumers Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value feel it meets their needs), knowledge (how much consumers know about the brand) and esteem (how highly consumers regard and respect the brand). Brands with strong brand equity rate high on all of these dimensions. A brand must be distinct, or consumers will have no reason to choose it over other brands. But the fact that a brand is highly differentiated does not necessarily mean consumers will buy it. The brand must stand out in ways that are relevant to consumers’ needs. But even a differentiated, relevant brand is far from being a shoo-in. Before consumers will respond to the brand, they must first know about and understand it. And that familiarity must lead to a strong, positive consumer–brand connection.30 Thus, positive brand equity derives from consumer feelings about and connections with a brand. Consumers sometimes bond very closely with specific brands. As perhaps the ultimate expression of brand devotion, a surprising number of people – and not just Harley-Davidson fans – have their favourite brand tattooed on their bodies. Whether it is contemporary new brands, such as Facebook or Amazon, or old classics like Harley or Converse, strong brands are built around an ideal of engaging consumers in some relevant way. A brand with high brand equity is a very valuable asset. Brand valuation is the process of estimating the total financial value of a brand. Measuring such value is difficult. However, according to one estimate, the brand value of Apple is a whopping US$170 billion, with Google at $US120 billion and Coca-Cola at US$78 billion. Other brands rating among the world’s most valuable include Microsoft, McDonald’s, Toyota, IKEA, Facebook, Amazon and Louis Vuitton.31 Table 7.2 shows Australia’s most valuable brands in 2016. High brand equity provides a company with many competitive advantages. A powerful brand enjoys a high level of consumer brand awareness and loyalty. Because consumers expect stores to carry the brand, the company has more leverage in bargaining with resellers. Because the brand name carries high credibility, the company can more easily launch line and brand extensions. A powerful brand offers the company some defence against fierce price competition. Above all, however, a powerful brand forms the basis for building strong and profitable customer relationships. The fundamental asset underlying brand equity is customer equity – the value of the customer relationships that the brand creates. A powerful brand is important, but what it really represents is a profitable set of loyal customers. The proper focus of marketing is building customer equity, with brand management serving as a major marketing tool. Companies need to think of themselves not as portfolios of products, but as portfolios of customers. Table 7.2 Australia’s top-ranked brands, 2016 2016 2015 Rank Brand value (US$m) Rank Brand value (US$m) Brand 1 10 707 2 8 708 Telstra 2 7 755 1 8 964 Woolworths 3 7 458 4 6 664 ANZ 4 7 186 4 7 520 Commonwealth Bank of Australia 5 5 846 7 5 673 Westpac 6 5 550 8 5 139 National Australia Bank 7 5 275 5 6 107 BHP Billiton 8 4 826 6 5 828 Coles 9 3 622 10 3 087 Optus 10 3 076 9 4 229 Rio Tinto Source: Brand Finance, Brand Directory Australia, 2016 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 219 220 Part 3 Designing a customer-driven strategy and mix Building strong brands Branding poses challenging decisions to the marketer. Figure 7.6 shows that the major brand strategy decisions involve brand positioning, brand name selection, brand sponsorship and brand development. Brand positioning Marketers need to position their brands clearly in target customers’ minds. They can position brands at any of three levels.32 At the lowest level, they can position the brand on product attributes. For example, P&G invented the disposable nappy category with its Pampers brand. Early Pampers marketing focused on such attributes as fluid absorption, fit and disposability. In general, however, attributes are the least desirable level for brand positioning. Competitors can easily copy attributes. More importantly, customers are not interested in attributes as such; they are interested in what the attributes will do for them. A brand can be better positioned by associating its name with a desirable benefit. Thus, Pampers can go beyond technical product attributes and talk about the resulting containment and skin-health benefits from dryness. Some successful brands positioned on benefits are Volvo (safety), FedEx (guaranteed on-time delivery), Nike (performance) and Instagram (capturing and sharing moments). The strongest brands go beyond attribute or benefit positioning. They are positioned on strong beliefs and values, engaging customers on a deep, emotional level. An Australian study showed that emotionally connected consumers purchased 40 to 60 per cent more than an average buyer. So it is not surprising that brand managers remind us that Qantas ‘Feels like Home’ and that ‘Hearts Align’ with Pedigree.33 Advertising agency Saatchi & Saatchi suggests that brands should strive to become lovemarks, products or services that ‘inspire loyalty beyond reason’. Brands ranging from Apple, Disney, Nike and Coca-Cola to Google and Pinterest have achieved this status with many of their customers. Lovemark brands pack an emotional wallop. Customers do not just like these brands; they have strong emotional connections with them and love them unconditionally.34 When positioning a brand, the marketer should establish a mission for the brand and a vision of what the brand must be and do. A brand is the company’s promise to deliver a specific set of features, benefits, services and experiences consistently to buyers of the brand. The brand promise must be simple and honest. Hotel Formule1, for example, offers clean rooms, low prices and good service, but does not promise expensive furniture or large bathrooms. In contrast, Sofitel offers luxurious rooms and a truly memorable experience, but does not promise low prices. Brand name selection A good name can add greatly to a product’s success. However, finding the best brand name is a difficult task. It begins with a careful review of the product and its benefits, the target market and proposed marketing strategies. After that, naming a brand becomes part science, part art and a measure of instinct. BRAND POSITIONING BRAND NAME SELECTION BRAND SPONSORSHIP BRAND DEVELOPMENT Attributes Benefits Beliefs and values Selection Protection Manufacturer’s brand Private brand Licensing Co-branding Line extensions Brand extensions Multibrands New brands Figure 7.6 Major brand strategy decisions Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value 221 Desirable qualities for a brand name include the following: • The brand name should suggest something about the product’s benefits and qualities: Click Clack (food storage), Acuvue (contact lenses), Snapchat (photo and video sharing), Lean Cuisine (diet meals). • It should be easy to pronounce, recognise and remember: Omo, Twitter, JetStar. • The brand name should be distinctive: Fruche, Big W, Nest. • It should be extendable: Amazon.com began as an online bookseller but chose a name that would allow expansion into other categories. • The name should translate easily into foreign languages. The official name of Microsoft’s Bing search engine in China is bi ying, which literally means ‘very certain to respond’ in Chinese.35 • It should be capable of registration and legal protection. A brand name cannot be registered if it infringes on existing brand names. Choosing a new brand name is not easy. After a decade or two of choosing quirky names (Yahoo!, Google) or trademark-proof made-up names (Novartis, Aventis, Lycos), today’s style is Brand name selection: Johnson to build brands around names that have real meaning. For example, names like Vitaminwater & Johnson are careful to protect the iconic brand name ‘BAND(beverages) and Blackboard (eLearning software) are simple and make intuitive sense. But with AID® Brand Adhesive Bandages’ trademark applications soaring, available new names can be hard to find. by always using both the Once chosen, the brand name must be protected. Many firms try to build a brand name registered trademark symbol and the word ‘brand’. that will eventually become identified with the product category. Brand names such as Kleenex, © Sheila Fitzgerald/Shutterstock.com Velcro, Nugget, BluTac and Formica have succeeded in this way. However, their very success may threaten the company’s rights to the name. Many originally protected brand names – such as cellophane, aspirin, nylon, kerosene, linoleum, yo-yo, trampoline, escalator, kiwi fruit and shredded wheat – are now generic names that any seller can use. To protect their brands, marketers present them carefully using the word ‘brand’ and the registered trademark symbol, as in ‘BAND-AID® Brand Adhesive Bandages’. Brand sponsorship A manufacturer has four sponsorship options. The product may be launched as a national brand (or manufacturer’s brand ), such as when Sony and Kellogg sell their output under their own brand names (Sony Bravia HDTV or Kellogg’s Corn Flakes). Or the manufacturer may sell to resellers who give the product a private brand (also called a store brand or distributor brand ). Although most manufacturers create their own brand names, others market licensed brands. Finally, two companies can join forces and co-brand a product. We discuss each of these options in turn. National brands versus store brands National brands (or manufacturers’ brands) have long dominated the retail scene. In recent times, however, an increasing number of retailers and wholesalers have created their own store brands (or private brands). Store brands have been gaining strength for more than two decades, but recent tighter economic times have created a store-brand boom. Today, over 65 per cent of Australians buy store brands.36 In fact, store brands are growing much faster than national brands. In Australia nearly one-quarter of all grocery sales are private-label products. Food lines dominate the private-label brands in Australia and New Zealand, although other categories are increasing in importance. Private-label apparel, such as Basque and Basque Women (Myer) and Target Collection, is also becoming increasingly popular. Many large retailers skilfully market a deep assortment of store-brand merchandise spanning a broad range of categories. For example, Costco, the world’s largest warehouse club, with eight stores in Sydney, Melbourne, Brisbane, Adelaide and Canberra, offers a staggering array of goods and services under its Kirkland Signature brand.37 In the so-called battle of the brands between national and private brands, retailers have many advantages. They control what products they stock, where they go on the shelf, what prices they charge and which products they will feature in local circulars. Retailers often price their store brands lower than comparable store brand (private brand) A brand created and owned by a reseller of a product or service. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 222 Part 3 Designing a customer-driven strategy and mix national brands, thereby appealing to the budget-conscious shopper in all of us. Although store brands can be hard to establish, and costly to stock and promote, they also yield higher profit margins for the reseller. And they give resellers exclusive products that cannot be bought from competitors, resulting in greater store traffic and loyalty. To compete with store brands, national brands must sharpen their value propositions. Many national brands are fighting back by rolling out more discounts to defend their market share. In the long run, however, leading brand marketers must compete by investing in new brands, new features and quality improvements that set them apart. They must design strong advertising programs to maintain high awareness and preference. And they must find ways to ‘partner’ with major distributors in a search for distribution economies and improved joint performance. Licensing Most manufacturers take years and spend millions to create their own brand names. However, some companies license names or symbols previously created by other manufacturers, names of well-known celebrities, or characters from popular movies and books. For a fee, any of these can provide an instant and proven brand name. Apparel and accessories sellers pay large royalties to adorn their products – from blouses to ties, and linens to luggage – with the names or initials of well-known fashion innovators such as Calvin Klein, Tommy Hilfiger, Gucci or Armani. Sellers of children’s products attach an almost endless list of character names to clothing, toys, school supplies, linens, dolls, lunch boxes, cereals and other items. Licensed character names range from classics, such as Sesame Street, Disney, Star Wars, Winnie-the-Pooh, Scooby Doo, Hello Kitty and Dr Seuss characters, to the more recent Dora the Explorer, Little Einsteins and Angry Birds characters. And currently a number of top-selling retail toys are products based on television shows and movies, such as the Doc McStuffins Doctor’s Bag Playset, from the television show of the same name about a girl who runs a clinic for her toys. Name and character licensing has grown rapidly in recent years. Annual retail sales of licensed products worldwide have grown from only US$4 billion in 1977 to US$55 billion in 1987 and more than US$262 billion today. Licensing can be a highly profitable business for many companies. For example, Disney is the world’s largest licensor with a studio full of hugely popular characters, from the Disney Princesses and Disney Fairies to heroes from Toy Story and Cars and classic characters such as Mickey Mouse and Minnie Mouse. Disney characters recently reaped a reported US$52 billion in annual worldwide merchandise sales.38 Co-branding co-branding Co-branding occurs when two established brand names of different companies are used on the same The practice of using the established brand names of two different companies on the same product. product. For example, financial services firms often partner with other companies to create co-branded credit cards, such as when ANZ MasterCard and Aussie Home Loans joined forces to create the Aussie Credit Card. Behind the Lyrics is a new brand co-created by Genius and Spotify. Genius brings to the table the world’s largest collection of song lyrics and crowd-sourced music knowledge, while Spotify brings the music. Spotify iPhone users will be able to add the Genius Behind the Lyrics experience to their songs with the new brand. More than just co-branding, these companies are ‘co-making’ these products.39 Co-branding offers many advantages. Because each brand operates in a different category, the combined brands create broader consumer appeal and greater brand equity. Co-branding can take advantage of the complementary strengths of two brands. It also allows a company to expand its existing brand into a category it might otherwise have difficulty entering alone. For example, the Nike + iPod arrangement gives Apple a presence in the sports and fitness market. At the same time, it helps Nike to bring new value to its customers. Co-branding also has limitations. Such relationships usually involve complex legal contracts and licences. Co-branding partners must carefully coordinate their advertising, sales promotion and other Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value 223 marketing efforts. Finally, when co-branding, each partner must trust that the other will take good care of its brand. If something damages the reputation of one brand, it can tarnish the co-brand as well. Brand development A company has four choices when it comes to developing brands (see Figure 7.6). It can introduce line extensions, brand extensions, multibrands or new brands. Line extensions Line extensions occur when a company extends existing brand names to new forms, colours, sizes, ingredients or flavours of an existing product category. Thus, the Kellogg’s line of cereals includes Corn Flakes, Just Right and Nutri-Grain, and several other variations. A company might introduce line extensions as a low-cost, low-risk way to introduce new products. Or it might want to meet consumer desires for variety, to use excess production capacity or simply to command more shelf space from resellers. However, line extensions involve some risks. An overextended brand name might lose its specific meaning. For example, you can now pick from an array of seven different Holden Commodore models – from the basic Evoke to the top-of-the-line sports model SS V-Series Redline Edition. It is unlikely that many customers will fully appreciate the differences across the many similar models, and these can cause consumer confusion or even frustration. Another risk is that sales of an extension may come at the expense of other items in the line. A line extension works best when it takes sales away from competing brands, not when it ‘cannibalises’ the company’s other items. Brand extensions A brand extension extends a current brand name to new or modified products in a new category. For example, both Woolworths and Coles have extended their brand to include petrol, credit cards and even insurance. But did you know that Woolworths has moved into the mobile phone market with Woolworths Mobile and has partnered with Big W, Ezibuy and eBay to offer their customers an in-store collection service with ‘Simply Collect’?40 A brand extension gives a new product instant recognition and faster acceptance. It also saves the high advertising costs usually required to build a new brand name. At the same time, a brand extension strategy involves some risk. Brand extensions such as Heinz pet food and Life Savers chewing gum met early deaths. The extension may confuse the image of the main brand. And if a brand extension fails, it may harm consumer attitudes towards the other products carrying the same brand name. Furthermore, a brand name may not be appropriate to a particular new product, even if it is well-made and satisfying: Would you consider flying on Hooters Air or wearing an Evian water-filled padded bra (both failed)? line extension Extending an existing brand name to new forms, colours, sizes, ingredients or flavours of an existing product category. brand extension Extending an existing brand name to new product categories. Multibrands Companies often market many different brands in a given product category. For example, in Australia, Nestlé sells 14 brands in its chocolate and confectionery line (including Allens, Kit Kat, Life Savers, Smarties, Milkybar and Chokito). But Nestlé does not just sell confectionery; their categories include everything from coffee, with the iconic Nespresso, to breakfast cereals (Uncle Tobys) and medicated lozenges (Quick-Eze, Soothers), as well as baby formulas, baking ingredients, recipe bases and sauces. Multibranding offers a way to establish different features that appeal to different customer segments, lock up more reseller shelf space and capture a larger market share. A major drawback of multibranding is that each brand might obtain only a small market share, and none may be very profitable. The company may end up spreading its resources over many brands instead of building a few brands to a highly profitable level. These companies should reduce the number of brands they sell in a given category and set up tighter screening procedures for new brands. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 224 Part 3 Designing a customer-driven strategy and mix New brands A company might believe that the power of its existing brand name is waning and a new brand name is needed. Or it may create a new brand name when it enters a new product category for which none of the company’s current brand names are appropriate. For example, Nissan created the separate luxury car brand Infiniti to attract the premium car buyer. As with multibranding, offering too many new brands can result in a company spreading its resources too thinly. And in some industries, such as consumer packaged goods, consumers and retailers have become concerned that there are already too many brands, with too few differences between them. Thus, Procter & Gamble, Kraft and other large consumer-product marketers are now pursuing megabrand strategies – weeding out weaker or slower-growing brands and focusing their marketing dollars only on brands that can achieve the number-one or number-two market share positions with good growth prospects in their categories. Managing brands Companies must manage their brands carefully. First, the brand’s positioning must be continuously communicated to consumers. Major brand marketers often spend huge amounts on advertising to create brand awareness and build preference and loyalty. For example, worldwide, Coca-Cola spends almost US$3 billion annually to advertise its many brands, General Motors spends nearly US$3.4 billion, Unilever spends US$7.9 billion and P&G spends an astounding US$11.5 billion.41 Such advertising campaigns can help to create name recognition, brand knowledge and maybe even some brand preference. However, the fact is that brands are not maintained by advertising but by the customers’ brand experiences. Today, customers come to know a brand through a wide range of contacts and touch points. These include advertising, but also personal experience with the brand, word of mouth, company websites and Facebook pages, and many others. The company must put as much care into managing these touch points as it does into producing its ads. ‘Managing each customer’s experience is perhaps the most important ingredient in building [brand] loyalty,’ states one branding expert. ‘Every memorable interaction . . . must be completed with excellence and . . . must reinforce your brand essence.’ A former Disney executive agrees: ‘A brand is a living entity, and it is enriched or undermined cumulatively over time, the product of a thousand small gestures.’42 The brand’s positioning will not take hold fully unless everyone in the company lives the brand. Therefore, the company needs to train its people to be customer-centred. Even better, the company should carry on internal brand-building to help employees understand and be enthusiastic about the brand promise. Many companies go even further by training and encouraging their distributors and dealers to serve their customers well. Finally, companies need to periodically audit their brands’ strengths and weaknesses. They should ask: Does our brand excel at delivering benefits that consumers truly value? Is the brand properly positioned? Do all of our consumer touch points support the brand’s positioning? Do the brand’s managers understand what the brand means to consumers? Does the brand receive proper, sustained support? The brand audit may turn up brands that need more support, brands that need to be dropped or brands that must be rebranded or repositioned because of changing customer preferences or new competitors. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value Student Learning Centre 225 present range of the line. All product lines and items offered to customers by a particular seller make up the product mix. The mix can be described by four dimensions: width, length, depth and consistency. These dimensions are the tools for developing the company’s product strategy. A product is more than a simple set of tangible features. Each product or service Learning Objective 3. Identify the four characteristics that affect the marketing of a service and the additional marketing considerations that services require. (pp. 213–18) offered to customers can be viewed on three levels. The core customer value Services are characterised by four key characteristics: they are intangible, consists of the core problem-solving benefits that consumers seek when they inseparable, variable and perishable. Each characteristic poses problems and buy a product. The actual product exists around the core and includes the quality marketing requirements. Marketers work to find ways to make the service level, features, design, brand name and packaging. The augmented product is the more tangible, to increase the productivity of providers who are inseparable actual product plus the various services and benefits offered with it, such as a from their products, to standardise the quality in the face of variability, and warranty, free delivery, installation and maintenance. to improve demand movements and supply capacities in the face of service Reviewing the learning objectives Learning Objective 1. Define product and the main classifications of products and services. (pp. 200–5) perishability. Good service companies focus attention on both customers and employees. They understand the service–profit chain, which links service firm profits with Broadly defined, a product is anything that can be offered to a market for employee and customer satisfaction. Services marketing strategy calls not only attention, acquisition, use or consumption that might satisfy a want or need. for external marketing but also for internal marketing to motivate employees and Products include physical objects, but also services, events, persons, places, interactive marketing to create service delivery skills among service providers. organisations, ideas or mixes of these entities. Services are products that To succeed, service marketers must create competitive differentiation, offer high consist of activities, benefits or satisfactions offered for sale that are essentially service quality and find ways to increase service productivity. intangible, such as banking, hotel, tax-preparation and home-repair services. – are usually classified according to consumer shopping habits (convenience Learning Objective 4 Describe the brand strategy companies use to build and manage their brands. (pp. 218–24) products, shopping products, specialty products and unsought products). Some analysts see brands as the major enduring asset of a company. Brands are Industrial products – purchased for further processing or for use in conducting a more than just names and symbols – they embody everything that the product or business – include materials and parts, capital items, and supplies and services. service means to consumers. Brand equity is the positive differential effect that Other marketable entities – such as organisations, persons, places and ideas – knowing the brand name has on customer response to the product or service. can also be thought of as products. A brand with strong brand equity is a very valuable asset. Products and services fall into two broad classes based on the types of consumers that use them. Consumer products – those bought by final consumers Learning Objective 2. Describe the decisions companies make regarding their individual products and services, product lines and product mixes. (pp. 205–13) In building brands, companies need to make decisions about brand positioning, brand name selection, brand sponsorship and brand development. The most powerful brand positioning builds around strong consumer beliefs and values. Brand name selection involves finding the best brand name based on a careful review of product benefits, the target market and proposed marketing Individual product decisions involve product attributes, branding, packaging, strategies. A manufacturer has four brand sponsorship options: it can launch labelling and product support services. Product attribute decisions involve a national brand (or manufacturer’s brand), sell to resellers who use a private product quality, features, and style and design. Branding decisions include brand, market licensed brands or join forces with another company to co-brand selecting a brand name and developing a brand strategy. Packaging provides a product. A company also has four choices when it comes to developing brands. many key benefits, such as protection, economy, convenience and promotion. It can introduce line extensions, brand extensions, multibrands or new brands. Package decisions often include designing labels, which identify, describe Companies must build and manage their brands carefully. The brand’s and possibly promote the product. Companies also develop product support positioning must be continuously communicated to consumers. Advertising services that enhance customer service and satisfaction and safeguard against can help. However, brands are not maintained by advertising but by the competitors. customers’ brand experiences. Customers come to know a brand through a Most companies produce a product line rather than a single product. wide range of contacts and interactions. The company must put as much care A product line is a group of products that are related in function, customer- into managing these touch points as it does into producing its ads. Companies purchase needs or distribution channels. Line stretching involves extending a line must periodically audit their brands’ strengths and weaknesses. In some cases, downward, upward or in both directions to occupy a gap that might otherwise brands may need to be repositioned because of changing customer preferences be filled by a competitor. In contrast, line filling involves adding items within the or new competitors. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 226 Part 3 Designing a customer-driven strategy and mix Discussion questions ❶ Services and experiences. The distinction made between goods, services and experiences is an interesting view of the progression that has occurred over time, as organisations have become more sophisticated in developing offerings for the marketplace. In truth, most services are experiential. The key point to experiential offerings is the staging of the events that keep the customer coming back. It is necessary to consider the management of service organisations separately from manufacturing organisations, and the other classifications mentioned should also be considered for their similarities as well as their differences. How would you distinguish between services and experiences? (Learning Objective 1) (AACSB: Reflective Thinking) ❷ Relationships with consumers. Evert Gummesson defines relationship marketing as ‘marketing seen as relationships, networks, and interaction’. He cites Grönroos’s definition of marketing with a relationship focus: ‘Marketing is to establish, maintain, and enhance relationships with customers and other partners, at a profit, so that the objectives of the parties are met. This is achieved by mutual exchange and fulfilment of promises.’ It is understandable that business users form relationships with 43 the firms they buy from, since they are dependent on their suppliers and buy directly from them. Consumers deal with self-service intermediaries, 44 such as Coles Supermarkets, where they have contact with few people other than at the checkout. What part might relationships play in the a year I need to update my maps, surely it must be perishable? Are not the measures similar to, and in some cases, the same as, those employed in measuring service quality for an ‘almost pure’ service? Considering all of the above, are service characteristics really so different from branded goods? Justify your answer. (Learning Objective 3) (AACSB: Reflective Thinking) ❺ Brand distinctiveness. Gillette reportedly spent US$160 million on research and development for its Mach3 product, which it advertised onpack and off-pack in Australia and New Zealand as ‘The First Triple Blade Razor . . . The Closest Shave . . . In Fewer Strokes . . . With Less Irritation’. Next came Schick Quattro, with four blades and two conditioning strips with aloe and vitamin E to help prevent nicks and cuts (or to help the skin repair itself?), a pivoting head that rotates so as to offer optimal blade contact, anti-clog technology for improved rinsing and a travel stand for quick air-drying. Gillette followed with its five-blade Fusion shaving system, and both products now compete with battery-operated moving shaving heads. Arguably, the brands now copycat each other. But how do they compete from here on in? Does each manufacturer simply add more blades and more strips until the device becomes so heavy it is unusable? Considering all of the above, how can apparent ‘copycat’ brands compete effectively in the marketplace? (Learning Objective 4) (AACSB: Reflective Thinking) marketing of branded products, given the differences between the process Critical thinking exercises of marketing business-to-business products compared with marketing of ❶ Branding is not just for products and services; destinations are getting in on consumer products? Do you think consumers might form relationships the action, too. In a small group, come up with a brand identity proposal for with the brands themselves? Explain your answer. (Learning Objective 2) your town, city or state. Present your idea to the rest of the class and explain (AACSB: Reflective Thinking) the meaning you are trying to convey. (Learning Objective 1) (AACSB: ❸ Private labels. For the last decade, the two main supermarket retailers in Communication; Application of Knowledge) Australia have been competing aggressively with their range of services, ❷ Choose one product category (such as chocolate chip cookies), and then their private-label (store) brands and price. During this time, there has been identify at least the brands in that category, including national brands significant growth in private labels, with European supermarket chain, ALDI, and private-label brands. For each brand, compare the product attributes, entering the market, as well as growth in other sectors (see the case study including price and quality; product features; and its style and design ‘Supermarket wars’ in Appendix 1). Do you think retailers are committed to (appearance). Record these comparisons in a table and compare your views their own private labels? Explain your answer. What evidence do you see with those of your classmates. What might be the reason for you and your that retailers recognise the need to use advertising to build brand equity classmates to have different opinions? Which brands might have higher in these private-label brands? (Learning Objective 2) (AACSB: Reflective brand equity? Justify your answer. (Learning Objectives 2 and 4) (AACSB: Communication, Reflective Thinking) Thinking) ❹ Service characteristics. This issue makes for interesting class debates. ❸ Search online to find five examples of service-provider attempts to reduce Here, we consider several points that force us to think deeply about the service intangibility. Present one of your examples to the rest of the class and nature of a product. The characteristics of services include intangibility, justify your views. (Learning Objective 3) (AACSB: Communication; Use of IT) inseparability (they are personal in nature), variability and perishability. What is the significance of these points at a practical level? For example, a concept such as ‘being ethical in business’, which might be marketed Navigating the key terms within an organisation, is intangible, yet it is not a service. What is Learning Objective 1 it? What could be more personal and involving than buying a house? consumer product (p. 202) Learning Objective 2 brand (p. 208) Yet, a house is not a service. Some people use fluoride toothpaste for 10 or industrial product (p. 203) packaging (p. 209) 15 years and still get tooth decay – surely this is an example of variability product (p. 200) product line (p. 211) in the outcomes from using a physical product? So, what makes service service (p. 200) product mix (product portfolio) (p. 212) encounters more variable than this? If I buy a GPS navigator and after social marketing (p. 204) product quality (p. 205) Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value 227 Learning Objective 3 service intangibility (p. 213) Learning Objective 4 co-branding (p. 222) interactive marketing (p. 216) service perishability (p. 214) brand equity (p. 218) line extension (p. 223) internal marketing (p. 215) service variability (p. 214) brand extension (p. 223) store brand (private brand) (p. 221) service inseparability (p. 214) service–profit chain (p. 215) Mini cases 7.1 Industrial products Opening doors with Grifco Grifco makes industrial door openers – those gadgets that make a also offers after-sales support for installers and customers, both online and door open and close – and they have been doing so for over 50 years. in person. The first openers were mechanical, and today Grifco make some of the best ❶ What type of industrial good are Grifco’s door openers? What factors electronic door-opening systems in the world. Think for a moment about all did you consider in classifying this good? (Learning Objective 1) the different places industrial businesses might need door openers: from (AACSB: Communication; Application of Knowledge) manufacturing plants to shop fronts, warehouses and fire stations. Some ❷ An industrial product is a complex bundle of benefits in much the same door openers need to be fire-proof, others need to be ignition-proof and way as a consumer product is. Marketers must identify the core customer still others need to be able to handle very heavy use. Grifco sell them all. value, create an actual product and choose how to augment that They also promise their customers personalised sales service, reliable and product. Identify the core value, as well as the actual and augmented efficient products of exceptional quality, and a huge array of spare parts product, for Grifco door openers (see <www.grifco.com.au/>). (Learning and accessories. The service does not stop with the sale – the company Objective 1) (AACSB: Communication; Application of Knowledge) 7.2 Packaging Vote 1 for ‘The Original’ Farmers Union Iced Coffee brand was launched in 1977. It is one of ❶ Involving loyal customers in packaging decisions seems like a good the largest-selling brands in the category and Australia’s only national­ idea, but it could also be a problem for the brand manager if there iced-coffee brand. Brand owner Lion Pty Limited has asked its loyal Iced is no clear favourite package design. What are the advantages and Coffee brand customers to join them in redesigning the packaging for the disadvantages of involving customers in package design decisions? market-leading brand. Brand devotees have been asked to vote for their (Learning Objective 2) (AACSB: Communication; Application of favourite package design – choosing between ‘The Original’, ‘The Real Knowledge; Analytical Thinking) McCoy’, ‘The Straight-Shooter’ and ‘The Wild Card’ – with the design varying ❷ Iced coffee is a convenience good. Customers purchase such items progressively from the original. In branding and packaging, consistency often and may have well-established preferences so they do not need to is crucial so each of the package alternatives is the same shape and size, expend a great deal of effort when choosing a brand. Customers often uses the same colours (teal and brown) and retains the same Farmers use the package design to quickly locate their favourite brand in the Union trademark. After voting for their favourite package design on a confusion of products on a supermarket shelf. Industrial goods also have custom-made website, customers can follow progress of the vote on the packaging. Do you think industrial buyers are influenced in the same brand’s Facebook page. Changing packaging, its layout and design is not way by a product’s packaging? Explain your answer. What might be the something a brand manager does lightly. This is because the package is considerations in designing packaging for industrial buyers? (Learning often the last and best chance to attract a buyer’s attention.45 Objectives 1 and 2) (AACSB: Communication; Application of Knowledge) 7.3 Marketing analytics at work Just one more cereal Kellogg’s, maker of All-Bran, Special K and Kellogg’s Corn Flakes, has flavour to Kellogg’s Ultimate Spiderman cereal, and gluten-free versions more than 10 established cereal brands on the market in Australia of its iconic Special K and Corn Flakes brands. When launching a new as well as many new cereals – everything from Nutri-Grain Ice Break brand, the company must consider a number of key brand strategy Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 228 Part 3 Designing a customer-driven strategy and mix 7.3 Marketing analytics at work continued decisions as well as the likely impact of the new brand on each of its little more expensive to make, with variable costs of $0.55 per packet existing brands. (compared to $0.30 for the original product). The company expects to ❶ What brand development strategy is Kellogg’s undertaking with the sell 5 million packets of Cereal X in the first year after introduction but following three new products: Nutri-Grain Ice Break flavour, Kellogg’s 80 per cent of those sales will come from buyers who would normally Ultimate Spiderman cereal and Special K Gluten Free? Do you think buy the standard product (i.e. cannibalised sales). Assuming sales of the new brands will cannibalise the existing Kellogg’s cereal brands? the standard brand are normally 25 million packets a year and that the Justify your answer. (Learning Objective 4) (AACSB: Analytical Thinking; company will incur an increase in fixed costs of $500 000 during the Application of Knowledge) first year to launch Cereal X, will the new product be profitable? Refer ❷ Suppose Kellogg’s were considering launching a new brand extension to the discussion of cannibalisation in Appendix 3 (see ‘8.5 Financial – let’s call it Cereal X. Suppose this new brand will be sold for a analysis of marketing tactics’) for an explanation regarding how to higher wholesale price of $1.20 per unit (compared to the standard conduct this analysis. (Learning Objective 4) (AACSB: Analytical brand of cereal at $1.00 per unit), but that the new brand is also a Thinking) 7.4 Ethical reflection Champagne from Australia? Scotch Whiskey, Champagne Sparkling Wine, Parmesan Cheese, Dijon Scotch. True Scotch must be aged in oak casks in Scotland for at least three Mustard – what do all of these have in common? They are not brand names years. All of these products come with a higher price tag for consumers. but, rather, geographical indicators (GIs) of the origins of these foodstuffs. ❶ Do you think products with geographic indicators are actually superior Europe has a long history of gastronomical delicacies that the European to other similar ones not originating from that geographical region? Union has been eager to protect for economic reasons. For example, not Give some examples to support your answer. (Learning Objective 2) just any sparkling wine can be labelled champagne because only sparkling (AACSB: Application of Knowledge) wine produced in the Champagne region of France can use that on the label. ❷ Is it ethical for the makers of these products to charge higher prices The British government is launching a registry of Scottish whiskey makers to when others can make or grow them just as well? Justify your answer. protect its US$4 billion industry from imitators who label their whiskey as (Learning Objective 4) (AACSB: Application of Knowledge) References 1 Based on Bunnings Warehouse website, <www.bunnings.com.au>, accessed April 2015; see also ‘Tradies crime prevention event’, <mypolice.qld.gov.au/ logan/2016/02/15/tradies-crime-prevention-event-wednesday-february-17/>, accessed April 2016. 2 R K Krishna Kumar, ‘Effective marketing must begin with customer engagement’, Marketing News, 15 April 2009, p. 15; and Lawrence A Crosby & Brian S Lunde, ‘The brand scorecard’, Marketing Management, May/June 2008, pp. 12–13. 3 For the BOQ campaign summary, see ‘Bank of Queensland launches new “It’s possible to love a bank” rebranding campaign via BWM’, Campaign Brief, 31 May 2013; see also <www.boq.com.au/love.htm>, accessed April 2016. 4 For the Amaysim campaign summary, see ‘Special group convinces David Hasselhoff to change his name to launch Amaysim campaign’, Campaign Brief, 14 November 2015; see also <www.amaysim.com.au/meet-david-hoff>, accessed May 2016. 5 Information from <www.donnahay.com.au>, accessed June 2016. 6 Information from <www.newzealand.com>, <www.destinationnsw.com.au>, <www.visitvictoria.com> and <www.vividsydney.com>, accessed June 2016. 7 Colgate Total advertising, <www.colgate.com.au/app/ColgateTotal/AU/benefits.cwsp>; social marketing information, <www.aasm.org.au/about-us/>, accessed June 2016. 8 Quotes and definitions from Philip Kotler, Marketing Insights from A to Z, Wiley: Hoboken, NJ, 2003, p. 148; and <www.asq.org/glossary/q.html>, accessed June 2016. 9 See Nathaniel Wice, ‘Sonos: The best wireless speakers’, Barrons, 3 January 2015, <http://online.barrons.com/articles/sonos-the-best-wireless-speakers-1420260626>; Tim Bradshaw, ‘Speaker maker Sonos raises $140m’, Financial Times, 3 December 2014, <www.ft.com/cms/s/0/bcf5add4-7ab0-11e4-8646-00144feabdc0. html#axzz3QhVK6ky0>; and <www.sonos.com>, accessed June 2016. 10 Alok Jha, ‘Coke or Pepsi? It’s all in the head’, The Guardian, <www.theguardian.com/ world/2004/jul/29/science.research>, accessed June 2016. 11 See ‘3 in 4 grocery purchase decisions being made in-store’, MarketingCharts, 15 May 2012, <www.marketingcharts.com/direct/3-in-4-grocery-purchase-decisions-beingmade-in-store-22094>; ‘FMI – Supermarket facts’, <www.fmi.org/research-resources/ supermarket-facts>, accessed June 2016. 12 See Mary Mazzoni, ‘Amazon continues its battle against “wrap rage”’, Triple Pundit, 9 December 2013, <www.triplepundit.com/2013/12/amazon-continues-battle-againstwrap-rage/>; and <www.amazon.com/b/?&node55521637011>, accessed June 2016. 13 See <www.tiffany.com/WorldOfTiffany/TiffanyStory/Legacy/BlueBox.aspx>, accessed June 2016. 14 Quotes from Leigh Stark, ‘Optus moves on: New plans, new logo, and a walking lemon named Ollie’, Gadget Guy, 26 June 2013; Katarina Matic, ‘The new face of Optus: New branding and new plans’, 29 June 2013, <www.comparebroadband.com.au/ article_1777_The-new-face-of-Optus-New-branding-and-new-plans.htm>, accessed June 2016; Lisa, ‘Optus – Yes or no?’, Daley Blog, 25 June 2013, <http://daleycreative. com.au/optus-yes-or-no/>, accessed June 2016; and <www.optus.com.au>, accessed June 2016. 15 See <www.crumpler.com/AU/FAQs.html#crumpler>, accessed June 2016. 16 See Bosch Australia Customer Care at <www.bosch-home.com.au/customer-care. html>, accessed June 2016. 17 See Samsung website, <www.samsung.com/au/home/>, accessed June 2016. 18 See Sony Australia website, <www.sony.com.au/section/product>, accessed June 2016. 19 See CIA, The World Factbook, <www.cia.gov/library/publications/resources/the-worldfactbook/geos/nz.html> and <www.cia.gov/library/publications/resources/the-worldfactbook/geos/as.html>, accessed June 2015; ‘Trade in services Australia’, <http:// dfat.gov.au/about-us/publications/Pages/trade-in-services-australia.aspx>, accessed June 2016. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 7 Products, services and brands: Offering customer value 20 Information from <www.nrma.com.au/>, accessed June 2016. 21 See websites <www.aami.com.au/>, <www.uber.com>, <www.uber.com/cities/ sydney/> and <www.cancer.org.au/>; accessed June 2016. 22 See James L Heskett, W Earl Sasser, Jr & Leonard A Schlesinger, The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value, Free Press: New York, NY, 1997; and James L Heskett, W Earl Sasser & Leonard A Schlesinger, The Value Profit Chain: Treat Employees Like Customers and Customers Like Employees, Free Press: New York, NY, 2003. Also see John Marshall & Dave Mayer, ‘Activate a brand internally’, Marketing Management, Winter 2012, pp. 37–44. 23 See Kent Relocation Group, <www.businessawards.com.au/winners/2015/ServiceExcellence/Kent-Relocation-Group.php> and <www.kentrelocationservices.com.au/>; accessed June 2016. 24 For information about Camp Quality, its history and philosophy, see <www.campquality.org.au>, accessed June 2016. 25 See Australia Post, Annual Report 2015, <http://auspost.com.au/annualreport2015/ docs/australia-post-annual-report-2015.pdf>, p. 107, accessed June 2016. 26 This story and others from <www.anecdote.com/2010/02/its-how-you-recover-whenthings-fail-that-counts/>, accessed June 2016. 27 See Micah Solomon, ‘5 social media customer service best practices to handle (or prevent) customer complaints’, Forbes, 28 January 2015, <www.forbes.com/sites/ micahsolomon/2015/01/28/5-best-practices-for-social-media-customer-service-howto-handle-and-avoid-customer-complaints>. 28 See ‘McAtlas shrugged’, Foreign Policy, May–June 2001, pp. 26–37; and Philip Kotler & Kevin Lane Keller, Marketing Management, 15th edn, Pearson Publishing: Upper Saddle River, NJ, 2016, p. 316. 29 See ‘For sale: Hessian, a brand without a product’, Fast Company, 12 February 2013, <www.fastcodesign.com/1671819/for-sale-hessian-a-brand-without-a-product>. 30 For more on BrandAsset Valuator, see Philip Kotler & Kevin Lane Keller, Marketing Management, 15th edn, Pearson Publishing: Upper Saddle River, NJ, 2016, chapter 11; and ‘BrandAsset valuator’, <www.yr.com/BAV>, accessed June 2016. 31 See ‘Best global brands’, <http://interbrand.com/wp-content/uploads/2016/02/BestGlobal-Brands-2015-report.pdf>, accessed June 2016. 32 See Scott Davis, Brand Asset Management, 2nd edn, Jossey-Bass: San Francisco, CA, 2002. For more on brand positioning, see Philip Kotler & Kevin Lane Keller, Marketing Management, Global Edition, 15th edn, Pearson Higher Education: Upper Saddle River, NJ, 2015, chapter 10. 33 ’Power of love: Emotionally attached consumers worth 40–60% more’, Marketing, 17 December 2012; ‘Qantas gets emotional in NZ with latest ad campaign’, B&T 34 35 36 37 38 39 40 41 42 43 44 45 Magazine, <www.bandt.com.au/marketing/qantas-gets-emotional-in-nz-with-latestad-campaign>, 30 November 2015; and also ‘Pedigree launches beautiful campaign that shows close connection between dog and owner’, B&T Magazine, 27 April 2016, accessed June 2016. See Aaron Ahuvia Rajeev & Richard P Bagozzi, ‘Brand love’, Journal of Marketing, March 2012, pp. 1–16; Doug Grisaffe, ‘Feeling the brand love’, Marketing News, February 2014, pp. 26–7; and <http://saatchi.com/en-us/purpose/lovemarks/>, accessed June 2016. See ‘Bing’, Wikipedia, <http://en.wikipedia.org/wiki/Bing>, accessed June 2015. ’Shop ‘til the economy drops: Are private labels a public menace?’, news.com.au, 20 February 2016, <www.news.com.au/finance/business/retail/shop-til-the-economydrops-are-private-labels-a-public-menace/news-story/1ed88cc3c0283156ab91e935c bd42a17>, accessed June 2016. ’Supermarket and grocery stores in Australia’, IBIS World Industry Report G4111, <www.ibisworld.com.au>, accessed June 2016. ’Top 150 global licensors’, Global License, May 2016, 19(2), <www.licensemag.com/ license-global>, accessed June 2016. See Devin Liddell, ‘3 reasons why co-making is the future of branding’, Fast Company, 7 March 2014, <www.fastcodesign.com/3027047/3-reasons-why-co-making-isthe-future-of-branding>; and The Spotify Team, ‘Go behind the lyrics with Spotify and Genius’, Spotify News, 12 January 2016, <news.spotify.com/us/2016/01/12/ go-behind-the-lyrics-with-spotify-and-genius/>, accessed June 2016. See <www.coles.com.au> and <www.woolworths.com.au>, accessed June 2016. ’100 largest global marketers’, Advertising Age, 8 December 2014, p. 26. Quotes are from Stephen Cole, ‘Value of the brand’, CA Magazine, May 2005, pp. 39–40; and Lawrence A Crosby & Sheree L Johnson, ‘Experience required’, Marketing Management, July/August 2007, pp. 21–7; also see ‘The power of customer service’, Fortune, 3 December 2012, <www.timeincnewsgroupcustompub. com/sections/121203_Disney.pdf>, accessed June 2016. Evert Gummesson, ‘Making relationship marketing operational’, International Journal of Service Industry Management, 5(5), 1994, pp. 5, 7. David L Blenkhorn & Hugh F MacKenzie, ‘Interdependence in relationship marketing’, Asia-Australia Marketing Journal, 4(1), 1996, pp. 25–30. See Ben Ice, ‘Farmers Union Iced Coffee declares new packaging election’, Marketing Magazine, 7 June 2016, <www.marketingmag.com.au/news-c/farmers-union-icedcoffee-declares-new-packaging-election/>; and also <farmersunion.com.au/>, <www.facebook.com/farmersunion> and <lionco.com/our-brands/milk-beverages/ iced-coffee>, accessed June 2016. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 229 Chapter 8 New products: Developing and managing innovation In Chapter 7, you learned how marketers manage and develop products and brands. In this chapter, we examine two additional product topics: developing new products and managing products through their life cycles. New products are the lifeblood of an organisation. However, new-product development is risky, and many new products fail. So, the first part of this chapter lays out a process for developing and introducing successful new products. Marketers want new products to enjoy long and successful lives. In the second part of the chapter, we show that every product passes through several life-cycle stages and that each stage poses new challenges requiring different marketing strategies and tactics. We wrap up our product discussion by looking at two additional considerations: social responsibility in product decisions, and international product and services marketing. For a visual representation of the chapter, please see the concept map on the following page. Learning Objectives Learning Objective 1 Explain how companies find and develop new-product ideas. New-product development strategy p. 232 Learning Objective 2 List and define the steps in the new-product development process, and describe the main considerations in managing this process. The new-product development process pp. 232–39 Managing new-product development pp. 239–41 Learning Objective 3 Describe the stages of the product life cycle and how marketing strategies change during the product life cycle. Product life-cycle strategies pp. 241–47 Learning Objective 4 Discuss socially responsible product decisions, and international product and services marketing. Additional product and service considerations pp. 247–50 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 8 New products: Developing and managing innovation LO 1 Explain how companies find and develop new-product ideas. (p. 232) NEW-PRODUCT IDEAS ACQUISITION NEW-PRODUCT DEVELOPMENT PROCESS Customer-centered • Team based • Systematic LO 2 List and define the steps in the new-product development process, and describe the main considerations in managing this process. (pp. 232–41) Idea generation Idea screening Concept development and testing Marketing strategy development Commercialisation Test marketing Product development Business analysis PRODUCT LIFE CYCLE CHANGES Shaped by ethical and international market considerations LO 3 Describe the stages of the product life cycle and how marketing strategies change during the product life cycle. (pp. 241–47) LO 4 Discuss socially responsible product decisions, and international product and services marketing. (pp. 247–50) INTRODUCTION GROWTH MATURITY DECLINE •Innovators •Few competitors •Low sales •Negative profit •Early adopters •Growing competition •Rapidly rising sales •Rising profit •Middle majority •Stable competition •Peak sales •High profit •Laggards •Declining competition •Declining sales •Declining profit Basic product Cost–plus pricing Selective distribution Build awareness Sales promotion to entice trial Product extensions Penetration pricing Intensive distribution Build awareness and interest Leverage high demand Diversity brand Price to match competition Intensive distribution Stress brand differences Encourage brandswitching Phase out Cut price Selective distribution Reduce advertising Reduces sales promotion Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 231 232 Part 3 Designing a customer-driven strategy and mix New-product development strategy (p. 232) new-product development The development of original products, product improvements, product modifications and new brands through the company’s own research and development (R&D) efforts. A business can obtain new products in two ways. One is through acquisition – by buying a whole company, a patent or a licence to produce someone else’s product. The other is through the firm’s own new-product development efforts. By new products we mean original products, product improvements, product modifications and new brands that the business develops through its own research and development (R&D) efforts. In this chapter, we concentrate on new-product development. New products are important – to both customers and the marketers who serve them. For customers, new products bring new solutions and variety to their lives, and they are a key source of growth for companies. Yet, innovation can be very expensive and risky. New products face tough odds. For example, by one estimate, 60 per cent of all new consumer packaged products introduced by established companies fail; two-thirds of new-product concepts are never even launched.1 Why do so many new products fail? There are several reasons. Although an idea may be good, the company may overestimate the size of the market. The actual product may be poorly designed. Or it might be incorrectly positioned, launched at the wrong time, priced too high or poorly advertised. A high-level executive might push a favourite idea despite poor marketing research findings. Sometimes, the costs of product development are higher than expected, and sometimes competitors fight back more vigorously than expected. So, companies face a problem: they must develop new products, but the odds weigh heavily against success. To create successful new products, a company must understand its consumers, markets and competitors, and develop products that deliver superior value to customers. The new-product development process (pp. 232–39) Rather than leaving new products to chance, a company must carry out strong new-product planning and set up a systematic, customer-driven new-product development process for finding and growing new products. Figure 8.1 shows the eight major steps in this process. Idea generation idea generation The systematic search for new-product ideas. New-product development starts with idea generation – the systematic search for new-product ideas. A company typically generates hundreds, or even thousands, of ideas in order to find a few good ones. Major sources of new-product ideas include both internal sources, and external sources such as customers, competitors, distributors and suppliers, and others. Idea generation Idea screening Concept development and testing Marketing strategy development Commercialisation Test marketing Product development Business analysis Figure 8.1 The main steps in the new-product development process Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 8 New products: Developing and managing innovation Internal idea sources Using internal sources, the company can find new ideas through formal R&D. For example, Kraft Foods has a state-of-the-art innovation facility with over 100 food scientists developing new products for the Australian and Asian markets. The facility features everything from chocolate-development equipment to a test kitchen to a customer insights facility. However, a survey of 750 global CEOs reported that only 14 per cent of their innovation ideas came from traditional R&D. Instead, 41 per cent came from employees and 36 per cent from customers.2 So, companies pick the brains of employees – from executives to scientists, engineers, manufacturing staff and salespeople. Many companies have developed successful internal social networks and intrapreneurial programs that encourage employees to develop new-product ideas. For example, Google’s Innovation Time-Off program has resulted in blockbuster product ideas, ranging from Gmail and Ad Sense to Google News. A similar program at 3M has long encouraged employees to spend 15 per cent of their working time on their own projects, resulting in Post-it® Notes and many other successful Post-it® Brand products.3 Tech companies, such as Facebook and Twitter, sponsor periodic ‘hackathons’, in which employees take a day or a week away from their day-to-day work to develop new ideas. Professional social media network, LinkedIn, which has over 460 million members, holds ‘hackdays’, a Friday each month when it encourages employees to work on whatever they want that will benefit the company. LinkedIn takes the process a step further with its InCubator program, under which employees can form teams each quarter that pitch innovative new ideas to LinkedIn executives. If approved, the team gets up to 90 days away from its regular work to develop the idea into reality.4 External idea sources Companies can also obtain good new-product ideas from any of a number of external sources. For example, distributors and suppliers can contribute ideas. Distributors are close to the market and can pass along information about consumer problems and new-product possibilities. Suppliers can tell the company about new concepts, techniques and materials that can be used to develop new products. Competitors are another important source of new-product ideas. Companies watch competitors’ ads to get clues about their new products. They buy competing new products, take them apart to see how they work, analyse their sales and decide whether they should bring out a new product of their own. Other idea sources include trade magazines, shows and seminars; government agencies; advertising agencies; marketing research firms; university and commercial laboratories; and inventors. Some companies seek the help of external new-product consultancies and design firms, such as Proen Design, for new-product ideas and designs. For example, new-product development was a key part of Sabco’s marketing campaign to reconfirm its leadership position in the market. Proen Design worked with Sabco to develop the Staxx Storage System, which is used by major retailers throughout Australia.5 Perhaps the most important source of new-product ideas is customers themselves. The company can analyse customer feedback to find new products that better solve consumer problems. For example, New Zealand manufacturer, Imake Ltd, used customer insights when it developed its new product, ‘The Grainfather’, a home-brewing system. Customer feedback revealed that home-brewers like to add features and personalise their brewing system – so Imake developed upgrades and additional features so that customers could build their perfect system. Customers can even turn their micro-brewery into a distillery by adding a condenser and dome.6 Or, the company can invite customers to share suggestions and ideas. For example, The LEGO Group, maker of the classic LEGO® plastic bricks that have been fixtures in homes around the world for more than 60 years, systematically taps users for new-product ideas and input via the LEGO® Ideas website. The website invites customers to submit their ideas and to evaluate and Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 233 234 Part 3 Designing a customer-driven strategy and mix vote on the ideas of others. Ideas supported by 10 000 votes head to the LEGO® Review Board for an internal review by various departments, including marketing and design. Ideas passing the review are made into official LEGO® products. Customers whose ideas reach production earn 1 per cent of total net sales of the product and receive credit as the LEGO® Ideas set creator inside every set sold. So far, LEGO® Ideas has resulted in 10 major new products, including the likes of LEGO® Minecraft, LEGO® Maze, LEGO® Wall-E and LEGO® Doctor Who.7 Crowdsourcing More broadly, many companies are now developing crowdsourcing or open-innovation new-product idea programs. Crowdsourcing throws the innovation doors wide open, inviting broad communities of people – customers, employees, independent scientists and researchers, and even the public at large – into the new-product innovation Product ideas: The LEGO® Ideas website invites customers to submit process. Tapping into a breadth of sources – both inside and vote on new-product ideas. So far, LEGO® Ideas has resulted in and outside the company – can produce unexpected and 10 major new products. powerful new ideas. LEGO and the LEGO logo are trademarks of The LEGO Group, used here by permission. © 2016 The LEGO Group, all rights reserved. Companies large and small, across all industries, are crowdsourcing product innovation ideas rather than relying only on their own R&D labs. For example, Samsung crowdsourcing Inviting broad recently launched an Open Innovation Program, which breaks down the walls surrounding Samsung’s communities of people own innovation process and opens the doors to fresh new-product and technology ideas from outside the – customers, employees, company. Through the program, Samsung creates alliances with top industry and university researchers independent scientists around the world, participates actively in industry-wide forums, works with suppliers on innovation and and researchers, and even the public at large seeks out and invests in promising start-up companies. ‘In the 21st century, no company can do all the – into the new-product research alone,’ says a Samsung executive, ‘and we see it as critically important to partner with [others] innovation process. across the world to build and strengthen a vibrant research community.’8 Rather than creating and managing their own crowdsourcing platforms, companies can use third-party crowdsourcing networks, such as InnoCentive, Kaggle and jovoto. For example, Australian start-up, Kaggle, brings together businesses with big data and a global network of over half a million data scientists (Kagglers) to solve problems. In the highly competitive telecommunications market, understanding if a service fault is just a glitch or a total outage helps ensure a positive customer experience. So, in a recent competition, Telstra invited Kagglers to help predict the severity of service faults on its network. The winner, a self-taught data scientist from Brazil, is a competition grandmaster on Kaggle with two top-ranked solutions in the last year.9 Truly innovative companies do not rely only on one source or another for new-product ideas. Instead, they develop extensive innovation networks that capture ideas and inspiration from every possible source, from employees and customers to outside innovators and multiple points beyond. idea screening Screening new-product ideas in order to identify good ideas and discard poor ones as soon as possible. Idea screening The purpose of idea generation is to create a large number of ideas. The purpose of the succeeding stages is to reduce that number. The first idea-reducing stage is idea screening, which helps identify good ideas and discard poor ones as soon as possible. Product-development costs rise greatly in later stages, so the company wants to proceed only with the product ideas that will turn into profitable products. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e Chapter 8 New products: Developing and managing innovation 235 Many companies require their executives to write up new-product ideas in a standard format that can be reviewed by a new-product committee. The write-up describes the product or service, the proposed customer value proposition, the target market and the competition. It includes rough estimates of market size, product price, development time and costs, manufacturing costs and rate of return. The committee then evaluates the idea against a set of general criteria. One marketing expert proposes an R-W-W (‘real, win, worth it’) new-product screening framework that asks three questions: (1) Is it real? Is there a real need and desire for the product, and will customers buy it? Is there a clear product concept and will the product satisfy the market? (2) Can we win? Does the product offer a sustainable competitive advantage? Does the company have the resources to make the product a success? (3) Is it worth doing? Does the product fit the company’s overall growth strategy? Does it offer sufficient profit potential? The company should be able to answer ‘yes’ to all three R-W-W questions before developing the new-product idea further.10 Concept development and testing An attractive idea must be developed into a product concept. It is important to distinguish between a product idea, a product concept and a product image. A product idea is an idea for a possible product that the company can see itself offering to the market. A product concept is a detailed version of the idea, stated in meaningful consumer terms. A product image is the way consumers perceive an actual or potential product. product concept A detailed version of the new-product idea, stated in meaningful consumer terms. Concept development Suppose a car manufacturer has developed a practical battery-powered all-electric car. Its initial prototype is a sleek, sporty convertible that sells for about $100 000.11 However, in the near future, the manufacturer plans to introduce more-affordable, mass-market versions that will compete with recently introduced hybrid-electric or all-electric cars, such as the Nissan Leaf, Holden Volt and Mitsubishi’s i-MiEV. This 100 per cent electric car will accelerate from 0 to 100 kilometres per hour in 3.0 seconds, and will travel nearly 400 kilometres on a single charge. Looking ahead, the marketer’s task is to develop this new product into alternative product concepts, determine how attractive each concept is to customers and choose the best one. It might create the following product concepts for the electric car: concept testing Testing new-product concepts with a group of target consumers to determine if the concepts have strong consumer appeal. • Concept 1: An affordably priced mid-size car designed as a second family car to be used around town for running errands and visiting friends. • Concept 2: A mid-priced sporty compact appealing to young singles and couples. • Concept 3: A ‘green’ car appealing to environmentally conscious people who want practical, low-polluting transportation. • Concept 4: A high-end, mid-size, all-wheel-drive vehicle appealing to those who love the space that SUVs provide but do not like their high levels of fuel consumption. Concept testing Concept testing calls for testing new-product concepts with groups of target consumers. The concepts may be presented to consumers symbolically or physically. Here, in words, is the electric car, concept 3: An efficient, fun-to-drive, battery-powered compact car that seats four. This 100 per cent electric wonder provides practical and reliable transportation with no pollution. It goes nearly Concept development: Tesla’s Model S is available in Australia. The company plans to introduce a more-affordable mass-market model by 2018. Justin Pritchard/AP/AAP Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e 236 Part 3 Designing a customer-driven strategy and mix 350 kilometres on a single charge and costs just a few cents per kilometre to operate. It’s a sensible, environmentally responsible alternative to today’s pollution-producing gas-guzzlers. It’s priced, fully equipped, at $40 000. Many firms routinely test new-product concepts with consumers before attempting to turn them into actual new products. For some concept tests, a word or picture description might be sufficient. However, a more concrete and physical presentation of the concept will increase the reliability of the concept test. After being exposed to the concept, consumers then may be asked to react to it by answering questions, such as those presented in Table 8.1. The answers to such questions will help the company decide which concept has the strongest appeal. For example, the last question asks about the consumer’s intention to buy. Suppose that 2 per cent of consumers say they ‘definitely’ would buy, and another 5 per cent say ‘probably’. The company could project these figures to the full population in this target group to estimate sales volume. Even then, the estimate is uncertain because people d
