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AN OVERVIEW OF MARKETING
1
Case Studies
CASE ASSIGNMENT: Netflix
Ready For Primetime
Shocked at the $40 fee he incurred for a late return of Apollo 13, Netflix founder Reed Hastings decided that in the age
of the Internet, there had to be a better way to rent videos for home viewing. Thus, in 1997, he started an Internetbased, DVD rental service that offered direct-to-home deliveries with no late fees. A mere decade and 4 million subscribers later, Netflix has taken on established video rental companies such as Blockbuster, Hollywood Video, and
Wal-Mart and emerged as the leader in innovation and customer service.
In addition to betting that the Internet would be the future of the video rental market, Hastings made a few other key predictions that helped
him develop a company with almost $700 million in revenue in under ten years. He watched as moviegoers fled public theaters for the comfort
of home theater systems, and he observed those same consumers embracing the features, capacity, and high-quality format of the DVD.
Realizing that the Internet could allow those same convenience seekers 24-hour browsing and selection access to an unprecedented volume of
movie titles in a single digital catalog, Hastings shrewdly designed a service that outperforms traditional, store-based video rentals.
Netflix allows consumers to choose from a variety of subscription plans. The most popular plan offers three DVDs for $17.99 per month.
Once a subscriber builds a list of favorite movies and TV shows from a selection of over 60,000 titles, Netflix mails out the three titles at the top
of the list, along with return-addressed prestamped envelopes. After viewing the DVDs, the customer simply mails them back to Netflix in the
supplied packaging. When the titles are scanned in at one of the distribution warehouses, the customer is simultaneously sent the next selections on the favorites list.
With 34 strategically placed distribution centers, Netflix can deliver 92 percent of its movies within one day of being ordered. That outstanding delivery service is just the tip of the iceberg. Netflix’s Web site takes personalization to new levels through its high-powered recommendation software, called Cinematch. Cinematch uses over a million lines of code and over half a billion customer-supplied ratings to suggest rental
choices upon request.
Amazingly, over 60 percent of the titles added to users’ favorites lists come from Cinematch recommendations, and over a million ratings
are sent to Netflix every day. Just how effective is Cinematch? Netflix uses fewer than 50 customer service reps to support its entire customer
base! Of those, 10 are authorized to make direct callbacks to customers with complaints to find out how the problem could have been prevented in the first place. It’s that kind of attention to customers that forced retail giant Wal-Mart to give up and turn over its entire customer list
to Netflix.
Netflix even added two key features to its service in response to customer requests. The first is the ability to generate multiple favorites lists
for a single account, allowing families to build multiple wish lists that can differ as much as Steel Magnolias and Old School. The second is the
addition of a community feature called “Friends.” Friends enables users to share the titles, ratings, and preferences for recently viewed shows
with those they invite to be part of their network.
Always looking to the future, Hastings wants to diversify Netflix by adding high-definition DVD rentals to its current service, selling previously
rented DVDs in the rapidly growing used-DVD market, and developing an on-demand video download service. Though it’s impossible to tell
exactly what blockbuster service Netflix will deliver next, it’s a safe bet its customers will applaud.
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SOURCES: Jena McGregor, “At Netflix, the Secret Sauce is Software,” Fast Company, December 2005, 48–51; Jennifer Netherby, “Netflix Delivers Big Earnings Increase: Sets
5.9 Million Subs as Modest 2006 Goal,” Video Business, January 30, 2006, 1; Steven Zeitchnik, “Download Dreams: Netflix Eager to Expand Online Efforts,” Daily Variety,
January 25, 2006, 5; Jennifer Moeller, “You’ve Got (Movies in the) Mail,” The Christian Science Monitor, December 2, 2005, 15; Ben Fritz, “Freaky Disc Biz: Netflix Grows at
Blockbuster’s Expense,” Daily Variety, October 20, 2005, 1; “All Queued Up: How the Netflix Distribution Network Supports the Company’s Business Model,” Material Handling
Management, November 2005, 9.
Discussion Questions:
1. Describe the elements of the exchange process as they occur between Netflix and its customers.
2. Which marketing management philosophy does Netflix subscribe to?
3. How does Netflix’s approach to relationship marketing increase customer satisfaction?
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Quiz Questions:
Multiple Choice
1. What is Netflix’s marketing management philosophy?
a. production orientation
b. sales orientation
c. marketing orientation
d. societal marketing orientation
e. Internet marketing orientation
2. When Hastings decided to use the Internet for his DVD rental
service he was:
a. creating value
b. delivering value
c. communicating value
d. creating exchange
e. building relationships
3. Netflix’s recommendation software, Cinematch, helps the
company to:
a. deliver sales messages
b. be socially responsible
c. communicate value
d. certify exchange
e. build relationships
4. Which mission statement best describes Netflix’s business?
a. We rent DVDs.
b. We are Internet-based.
c. We deliver videos.
d. We are a 24-hour virtual media rental store.
e. We are expanding into the used DVD market.
5. Which of the following demonstrates an outward organizational
focus?
a. Netflix promotes from within.
b. Netflix considered adding video game rentals because it
would be convenient for the company to do so.
c. Netflix added the Friends feature because of consumer
requests.
d. Wal-Mart turned its customer list over to Netflix.
e. Netflix has distribution centers in a wide range of geographic
locations.
6. Are consumers using Cinematch taking part in an exchange?
a. No, because exchange must occur in person, not online.
b. No, because consumers don’t always choose to rent the
movies it recommends.
c. Yes, because consumers are trading their time and willingness
to use the service in exchange for movie recommendations.
d. No, because consumers don’t pay extra for the service.
e. Yes, because the service used consumer-supplied ratings.
7. If Netflix refocused its expertise in supply chain management on
collecting and distributing new and used documentary DVDs to
schools, it would indicate the company was implementing a
________orientation.
a. product
b. sales
c. marketing
d. educational
e. societal marketing
8. By eliminating late fees, Netflix:
a. improves customer value
b. improves customer satisfaction
c. builds relationships with suppliers
d. increases its catalog
e. advertises to a broader range of customers
9. Netflix’s network of 34 distribution centers is a key factor in
keeping _________ high.
a. customer value
b. customer satisfaction
c. exchange ratings
d. teamwork
e. revenue
10. According to the case, one reason Wal-Mart was forced out of
the movie rental business was because of Netflix’s:
a. low pricing
b. value proposition
c. teamwork
d. customer-oriented personnel
e. attractive promotions
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STRATEGIC PLANNING FOR COMPETITIVE ADVANTAGE
2
Case Studies
CASE ASSIGNMENT: Cirque du Soleil
The Fire Within
A 27-foot-long bronze clown shoe is the only indication that there is something otherworldly within the concrete walls
of the large, rather nondescript building. Located in Montreal, the building is home to what many feel is the most successful entertainment company in the world—Cirque du Soleil. The company’s massive headquarters houses practice
rooms the size of airplane hangars where cast members work on their routines. More than 300 seamstresses, engineers, and makeup artists sew, design, and build custom materials for exotic shows with stage lives of 10 to 12 years.
In fact, the production staff often invents materials, such as the special waterproof makeup required for the production of O, a show performed
mostly in a 1.5 million-gallon pool of water that was also specially designed and engineered by Cirque employees. Another key in-house
resource is Cirque’s team of 32 talent scouts and casting staff that recruits and cultivates performers from all over the world. The department
maintains a database of 20,000 names, any of whom could be called at any time to join the members of Cirque’s cast, who number 2,700 and
speak 27 languages.
Shows with exotic names like Mystère, La Nouba, O, Dralion, Varekai, and Zumanity communicate through style and tone that they are
intended to do more than just amuse. Cirque designs productions with distinct personalities that are meant to evoke awe, wonder, inspiration,
and reflection. As one cast member put it, “The goal of a Cirque performer is not just to perform a quadruple somersault, but to treat it as some
manifestation of a spiritual, inner life. Like in dance, the goal is . . . to have a language, a conversation, with the audience.”
Audiences have responded. Even with ticket prices that start at $45 and can run as high as $360, the company sells about 97 percent of all
its seats at every show. For Cirque, that translates to about $500,000 a week in sales and yearly profits of $100 million on gross revenues of
$500 million. Incredibly, every one of the 15 shows that Cirque has produced over its 20-year history has returned a profit. In contrast, 90 percent of the high-budget Broadway shows that strive to reach the same target market fail to break even. Cirque’s statistics, however, are eyepopping. Mystère, which opened at the Treasure Island hotel and casino in Las Vegas in 1993 and still runs today, cost $45 million to produce
and has returned over $430 million; O, which opened at the Bellagio hotel and casino in 1998, cost $92 million to produce and has already
returned over $480 million. Though the company splits about half of its profits with its hotel and casino partners, those same partners sometimes absorb up to 75 percent of Cirque’s production costs.
At the helm of this incredible business machine is the dynamic duo of Franco Dragone and Daniel Lamarre. Dragone, a Belgian, is the creative force behind most of the company’s nine current productions, and Lamarre, a former television executive, presides over show and new
venture development. Together, they have transformed a one-tour, one-residence circus company into an entertainment powerhouse with five
simultaneous world tours; four permanent facilities in Las Vegas—Treasure Island, the Bellagio, New York–New York, and the MGM Grand—all
of which are part of the Mirage family of casinos; another permanent theater at Disney World; and a series of shows on the cable television
channel Bravo that has already won an Emmy.
Lamarre claims that his business is successful because he and his staff “let the creative people run it.” He guides the company with an
invisible hand, making sure that business policies do not interfere with the creative process; it is Dragone and his team of creative and production personnel, not a predetermined budget, that defines the content, style, and material requirements for each project. Because of their sound
planning, Cirque du Soleil can claim that it is one of the world’s elite businesses, as well as one of the world’s elite entertainment companies.
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SOURCES: “The Phantasmagoria Factory,” Business 2.0, January/February 2004, 103; Christopher J. Chipello, “Cirque du Soleil Seeks Partnerships to Create Entertainment
Centers,” WSJ.com, July 18, 2001; Steve Friess, “Cirque Dreams Big,” Newsweek, July 14, 2003, 42; “Bravo Announces Programming Alliance with Cirque du Soleil; Original
Series, Specials, and Documentaries to Air on Bravo, ‘The Official U.S. Network of Cirque du Soleil,’” Business Wire, June 19, 2000; “Inhibitions Take the Night Off for
International Gala Premiere of ZUMANITY™; Another Side of Cirque du Soleil™ at New York–New York Hotel and Casino,” PR Newswire, September 21, 2003; Laura Del Rosso,
“‘O’ Dazzles with Air, Underground Acrobatics,” Travel Weekly, August 5, 2002; Gigi Berardi, “Circus + Dance = Cirque du Soleil,” Dance Magazine, September 2002.
Discussion Questions:
1. Based on what you have read in the case, outline a rudimentary SWOT analysis for Cirque du Soleil.
2. List and describe three keys to Cirque du Soleil’s competitive advantage.
3. Explain how Cirque du Soleil implements, evaluates, and controls the elements of its marketing plan?
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Quiz Questions:
True/False
1. Cirque du Soleil has created a sustainable competitive advantage.
a. True
b. False
Multiple Choice
1. In conducting a SWOT analysis of Cirque du Soleil, the fact that
ticket prices may be too high for many who would like to see
one of its shows is an example of a(n):
a. opportunity
b. threat
c. strength
d. weaknesses
e. Ticket prices are not a part of a SWOT analysis.
2. Competing circuses that revamp their productions to include
Cirque-type entertainment constitute a(n)______to Cirque du
Soleil.
a. strength
b. weakness
c. opportunity
d. threat
e. control
3. Expanding Cirque du Soleil into other markets, like ready-to-wear
fashion, hotels, or resorts represents a(n)_____for Cirque du
Soleil.
a. strength
b. weakness
c. opportunity
d. threat
e. control
4. Even though tickets start at $45 and can run as high as $360,
the company sells about 97 percent of all its seats at every one
of its distinctive shows. What kind of competitive advantage
best describes the one built by Cirque du Soleil?
a. cost
b. product/service differentiation
c. niche
d. retrievable
e. assailable
5. If Cirque defined its business mission as “Performing circuses
without animals,” company managers would be suffering from:
a. marketing blockades
b. mission stigmatism
c. marketing myopia
d. experience curves
e. a niche mission
6. If Cirque expands into ready-to-wear fashion, hotels, or nightclubs, it would be an example of:
a. market penetration
b. market development
c. product development
d. diversification
e. None of these describe Cirque’s expansion into other areas.
7. When Cirque du Soleil opened permanent venues in Las Vegas,
it was practicing:
a. market penetration
b. market development
c. product development
d. diversification
e. None of these describe Cirque’s opening of permanent venues in Las Vegas.
8. When Cirque du Soleil opened permanent venues in Las Vegas,
the company was altering which element in its marketing mix?
a. Cirque’s new venues are unrelated to the marketing mix.
b. product
c. place
d. promotion
e. price
9. Extreme costumes, specialized makeup, and custom sets are all
part of which element in Cirque’s marketing mix?
a. product
b. place
c. promotion
d. price
e. None of these are related to Cirque’s marketing mix.
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SOCIAL RESPONSIBILITY, ETHICS, AND THE MARKETING ENVIRONMENT
3
Case Studies
CASE ASSIGNMENT: Rockstar Games
Rockstar—Caught in Its Own Vice
In Oakland, California, police arrest a gang of teens who now face charges for five homicides, several carjackings, and
a slew of armed robberies. Roughly 2,000 miles away in Tennessee, stepbrothers Joshua and William Buckner, ages 14
and 16, are arrested and plead guilty to reckless homicide, aggravated assault, and reckless endangerment for fatally
shooting one motorist and critically wounding a second.
The tie that binds these seemingly unrelated crimes is a video game—Rockstar Games’ Grand Theft Auto: Vice
City. When questioned about their crimes, both sets of perpetrators cited boredom and a desire to emulate the action of the main character in
Vice City as the cause of their violent behavior. In Vice City, players assume the role of Tommy Vercetti, an ex-con who loses cocaine and money
in a botched drug deal. To recoup his losses, he must accomplish various missions in an attempt to ascend the hierarchy of Vice City ’s underworld. The game awards points to players for mass shootings, graphic rapes, liaisons with prostitutes, car thefts, and drug sales. The violence
is extreme and often grotesque. In one mission, players controlling Vercetti can earn points for raping a woman in the back of a stolen car and
then deciding whether to kick her to death, cut her to pieces with a machete, or fatally shoot her.
Its graphic violence and sexually explicit material have earned Vice City an M rating from the Entertainment Software Rating Board, which
indicates to consumers that the game is intended only for gamers aged 17 or older. Younger gamers, however, are playing the game in large
numbers, and critics, parents, and politicians are horrified to find that children are being exposed to a game that glorifies such behavior. Racism
rears its head in the game too, as Vercetti at one point is instructed by a narrator to “shoot the Haitians.”
The backlash against Rockstar Games has been significant. Haitian and Cuban groups have filed suit against the company in Florida, where
state legislators have proposed a bill that would increase the fines levied against retailers who rent or sell M-rated video games to minors. The
lawmakers note that several small towns and cities have already passed such legislation.
In New York, Rockstar’s racial insensitivity aroused the ire of New York City Mayor Michael Bloomberg and the Anti-Defamation League.
Their pressure persuaded Rockstar to remove the racially offensive line from all future copies of the game. Other than that, Rockstar has officially declined to comment on any other inquiries for almost a year. The Interactive Entertainment Merchants Association, an industry group
including giant retailers such as Wal-Mart and Blockbuster, Inc., has reacted by adopting procedures intended to stop the sale of mature and
adult video games to minors.
Despite the negative reactions, the game has gained mass-market acceptance. Vice City alone accounted for nearly half of Rockstar’s $1.04
billion in revenue in 2003—a year when revenue for all M-rated video games actually declined from $910 million to $833 million. Rockstar currently dominates the adult segment of the market with the ten M-rated games it produces. Players of the game say its plot lines are pure fantasy, and the chief operating officer of Rockstar Games, Terry Donovan, defends his company by claiming that if the popular HBO television
series The Sopranos was a video game, it would be Grand Theft Auto.
His customers, he asserts, are young male professionals who are willing to spend serious money on intense simulation-type games that provide primal stress release. Donovan and many others believe that the M rating is enough to alert parents to the games’ adult content and that
legislation from the government infringes on freedom of speech. At the moment, the popular counterargument is that like drugs, alcohol, and
pornography, the games represent a threat to the psychological development of young people and should be controlled as such.
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SOURCES: http://www.rockstargames.com; http://www.take2games.com; Logan Hill, “Why Rockstar Games Rock,”Wired.com, July 2002; Michael Serazio, “Vice City
Confidential: The ‘Atari’ Generation Grows Up,” Columbia.edu, March 7, 2003; “The Games Kids Play: Are Mature Video Games Too Violent for Teens?” Current Events, February
7, 2003; “Deadly Inspiration? Teens Say Video Game Inspired Them in Deadly Highway Shooting,” ABCnews.com, September 5, 2003; “Florida Officials Take Aim at Violent
Games,” Reuters, February 6, 2004; Andrew Bushell, “Popular Video Game Instructs Players to ‘Shoot the Haitians’—New York AG Takes on Grand Theft Auto,”
VillageVoice.com, January 30, 2004; Christopher Byron, “Give Back Take-Two,” New York Post, December 29, 2003.
Discussion Questions:
1. Describe the technological, social, and political factors acting on the video game industry.
2. How is Rockstar responding to its environmental conditions? Do you agree with Rockstar’s approach? Why or why not?
3. Do you think Rockstar Games’ chief operating officer, Terry Donovan, displays adequate concern for corporate social responsibility? Explain
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Quiz Questions:
Multiple Choice
1. At what level of social responsibility is Rockstar Games operating?
a. economic
b. legislative
c. ethical
d. philanthropic
e. altruistic
2. The backlash against Rockstar Games is part of which element
of the company’s external environment?
a. technological
b. political and legal
c. social
d. demographic
e. competitive
3. According to Terry Donovan, Rockstar’s customers mostly fall
into which demographic group?
a. Older boomers
b. Generation Y
c. Older Consumers
d. Younger boomers
e. All of these.
4. Fines levied against retailers that sell M-rated video games to
minors are part of which factor of Rockstar’s external environment?
a. social
b. competitive
c. technological
d. political/legal
e. demographic
5. When Rockstar decided to delete the racially offensive line from
Grand Theft Auto: Vice City, the company was operating at
which level of morality?
a. preconventional
b. conventional
c. postconventional
d. neomodern
e. operational
6. When confronted with the objectionable content and speech in
Grand Theft Auto: Vice City, Rockstar managers did not publicly
comment for over a year. When managers did respond to external pressure and removed the offensive content, they most likely
made their decision based on:
a. potential magnitude of the consequences
b. number of people to be affected
c. length of time between the decision and the onset of the
consequences
d. probability of harmful outcome
e. social consensus
7. The high number of children and teens playing Vice City most
likely indicates shifting:
a. social values
b. economics
c. legislation
d. generations
e. ethnic markets
8. Sales of Rockstar’s Vice City account for more than half the total
market for M-rated video games, a market with declining sales
overall. That statement regards which component of Rockstar’s
external environment?
a. technological
b. demographic
c. economic
d. competitive
e. political
9. The appeal of Vice City’s violent urban storylines to young professionals is evidence of how _________ are shaping people’s
purchasing decisions.
a. technological aptitudes
b. component lifestyles
c. working women
d. regulatory agencies
e. social pressures
10. Officially, Vice City has a rating that makes it only available to
which target markets:
a. Generation Y
b. Generation X
c. Younger boomers
d. Older boomers
e. All of these segments
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DEVELOPING A GLOBAL VISION
4
Case Studies
CASE ASSIGNMENT: MTV
Rocking the World One Nation at a Time
To most people, MTV is as American as apple pie, baseball, and freedom of speech. It is a cultural icon to every
American who grew up in the 1980s or 1990s, and it is easily the most palpable influence on the behavior of the
demographic it targets with its programming. A closer look at MTV’s business, however, reveals that its true significance is its ability to translate its formula for success into the many languages of the world. The network now owns 33
distinct channels that broadcast shows in 18 languages to 1.8 billion viewers in over 160 countries.
MTV Networks International, a subsidiary of MTV that actually dwarfs its parent, took its first steps on foreign soil with MTV Europe in 1987
and soon thereafter became Europe’s largest television network. With a blueprint for success in hand, the large subsidiary turned its attention to
the global youth market, which today includes over 2.5 billion people between the ages of 10 and 34. As it watched demand for television sets
and paid programming services explode in rapidly developing markets, such as China, Latin America, and India, MTV was poised to capitalize.
Large and diverse markets, however, are difficult to understand and expensive to penetrate. Initially, MTV simply tried to export a standardized version of its American programming, but it quickly discovered that teens from around the world—while they do enjoy American music—
are mostly interested in what’s happening in their own regions. MTV responded by undertaking the costly and complex task of producing
localized content for specific markets.
Now, veejay selection, programming, and service offerings are all unique in any given market. Digital television and interactive services are
very popular in Europe, so MTV UK developed a service that allows viewers to obtain information on CDs, check concert dates, and vote for
their favorite performers during the MTV European Music Awards directly from their TV sets. In Asia, a virtual animated veejay named LiLi can
interact with viewers in five different languages. Controlled by an actor behind the image, LiLi can also interview guests and provide popular culture tips. Brazilian viewers, who also tend to be huge soccer fans, enjoy Rockgol, an MTV-produced soccer championship contested by Brazilian
record industry executives and musicians.
MTV Japan, a joint venture between MTV Networks and local investment firm H&Q Asia Pacific, operates in the world’s second largest
music market and one of the world’s most advanced mobile telecommunications markets. Identifying those two trends, MTV Japan developed a
service that lets subscribers use their mobile phones to download entertainment news and new music or vote for their favorite veejay.
The development cycle is long for such detailed international projects, but MTV Networks International president Bill Roedy is a patient man.
He spent ten years working with Chinese officials for the right to air MTV programming for just six hours a day. The payoff? Forty cable providers
now carry MTV Mandarin into 60 million Chinese homes. Roedy is also sensitive to foreign leaders’ fears that their culture will be
“Americanized” by MTV. Before his networks enter markets with extreme cultural differences, such as Israel, Singapore, Cuba, or China, Roedy
meets with key political figures to allay their fears. “We’ve had very little resistance once we explain that we’re not in the business of exporting
American culture,” he notes.
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SOURCES: Martin Lindstrom, “One Voice?” Clickz.com, February 26, 2002; Steve McClure, “New MTV Post in OZ, Japan: MTV Asia President to Assume Responsibility,”
Billboard, March 8, 2003, 59; “MTV Announces International Expansion Plans for Europe, Asia, and Latin America: Company to Add New Services in Regional Growth Markets
Worldwide,” Business Wire, March 9, 1996; Kerry Cappel, Catherine Belton, Tom Lowry, Manjeet Kripalani, Brian Bremner, and Dexter Roberts, “MTV’s World,”
BusinessWeek.com, February 18, 2002.
Discussion Questions:
1. Identify the key environmental challenges MTV has faced in its effort to expand globally, and discuss how MTV has overcome them.
2. What is MTV’s global market entry strategy? Discuss whether you agree with MTV’s approach, and identify its advantages and disadvantages.
3. Discuss MTV’s global product strategy.
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Quiz Questions:
Multiple Choice
1. The increasing numbers of television sets in homes in rapidly
developing markets such as China, India, and Brazil reflects an
increase in:
a. cultural awareness
b. purchasing power
c. American cultural hegemony
d. global vision
e. global marketing standardization
2. MTV’s first foray into international marketing can best be
described as:
a. one product, multiple messages
b. product adaptation
c. global market standardization
d. product invention
e. countertrade
3. The first business model MTV used to enter global markets was:
a. exporting
b. licensing
c. contract manufacturing
d. joint venture
e. direct investment
4. After MTV first began broadcasting its U.S. shows in foreign
markets, the company soon realized that even though teens
around the world like American music, they are mostly interested in what is happening in their own regions. MTV managers
failed to recognize that _______ factors might require them to
change how they do business in foreign markets.
a. demographic
b. economic
c. technological
d. cultural
e. political
5. MTV’s original use of global market standardization represents
which marketing mix strategy?
a. one product, one message
b. product invention
c. product adaptation
d. message adaptation
e. message and product modification
6. When MTV realized that teens around the world wanted to see
things happening in their own region, the company changed to a
_______ strategy.
a. one product, one message
b. product invention
c. product modification
d. message adaptation
e. message and product modification
7. How would you describe MTV’s joint venture with a Japanese
investment firm in comparison to MTV’s original exporting
strategy?
a. The joint venture is less risky than exporting.
b. The joint venture is more risky than exporting.
c. The joint venture is just as risky as exporting.
8. MTV Japan used which kind of strategy in the Japanese market?
a. one product, one message
b. product invention
c. product adaptation
d. message adaptation
e. message and product modification
9. MTV is an example of a ______ multinational corporation.
a. first-stage
b. second-stage
c. third-stage
d. fourth-stage
10. MTV was able to roll out novel product offerings in Europe and
Japan because of the level of _______ in those areas.
a. technological development
b. legal structure
c. political actions
d. economic feasibility
e. purchasing power
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PART 1 THE WORLD OF MARKETING
Case Studies
MARKETING MISCUES
Mental Health Advocates not Crazy about Valentine’s Day Offering
Valentine’s Day 2005 was memorable for many people in Vermont and, in particular, for those at Vermont Teddy Bear
Company. The company’s “Crazy for You” teddy bear garnered more attention than the company had anticipated. Though
the teddy bear did spark a same-period sales increase from the previous year, the company may have wondered whether
the controversy set off by the bear’s strait jacket was worth the additional sales.
Providing handcrafted, American-made teddy bears, Vermont Teddy Bear Company is a pioneer of direct marketing. The company sells direct
to consumers via its 1-800-829-BEAR phone number or online at http://www.vermontteddybear.com. The company is pursuing an aggressive
growth strategy in a competitive battle with the floral delivery providers. Every year its Bear-Gram service delivers over 450,000 Vermont Teddy
Bears. Additionally, more than 150,000 tourists each year visit the company’s two factory retail stores in Shelburne and Waterbury, Vermont,
and many purchase a bear.
The company offers over 100 bears, with special-occasion bears for special events and holidays. With 92 percent of Americans celebrating
Valentine’s Day, the holiday ranks fourth in holiday sales transactions and third in dollar volume. Thus, it is not surprising that Vermont Teddy
Bear offers a wide variety of Bear-Grams for this Valentine’s Day. Customers can choose from specialty teddy bears, such as “Fool for Love,”
“Heart Throb,” “Country Lovin,” “All Star Lover,” “Playbear Playmate,” “Playboy,” “Love Match,” “Romantic at Heart,” “Love Me Tender,”
“Jailhouse Rock,” “Redhot Lover,” and “Purple Passion,” that range in price from around $60 to $100 each. In 2005, customers could also order
the “Crazy for You” bear.
With a direct to consumer price of $69.95, the “Crazy for You” bear came with its own straitjacket to restrain its paws and a commitment
report. The accessories upset mental health advocates across the United States. In a letter to the company, the executive director of the
Vermont chapter of the National Alliance for the Mentally Ill said that these accessories were completely inappropriate. He explained that straitjackets are used as a method of involuntary restraint to prevent persons in severe psychological crisis from injuring themselves or others and
that commitment reports are used to involuntarily commit individuals to psychiatric treatment when they are temporarily incapable of making
informed decisions on their own behalf. Using these symbols of serious mental illness to sell teddy bears was tasteless. Vermont’s governor
described the “Crazy for You” bear as very insensitive and said that it stigmatized those suffering from mental health problems. Meanwhile, the
executive director of the Vermont Human Rights Commission suggested that the company divert a portion of the bear’s profits to assist those
struggling with mental illnesses.
In response to these criticisms, Vermont Teddy Bears’ CEO Elisabeth Robert (pronounced “ro-BEAR”) announced that the company would not
withdraw the bear from the market. She pointed out that not only had the concept received a positive response in pretesting but that, once on
the market, the bear was being enthusiastically purchased by customers. Therefore, she said, the company would continue selling the bear,
which was intended for a onetime Valentine’s Day offering, until it was sold out.
The furor began on January 12, 2005, with national media attention, and the “Crazy for You” bear sold out on February 3, 2005. Though the
total number of “Crazy for You” bears sold was not reported publicly, the company did receive Valentine’s Day orders well in advance of its normal holiday selling season and reported an increase of 29 percent over the 2004 same-period sales.
Though Vermont Teddy Bear fared well, in the short term, from sales of the “Crazy for You” bear, CEO Robert was asked to give up her seat
on the board of Vermont’s largest hospital, Fletcher Allen Health Care. Her perceived disparagement of the mentally ill was thought to be contrary to the mission of the hospital. Meanwhile, critics wondered if the company would suffer longer-term damage. Would the way Vermont
Teddy Bear handled the controversy cause it to lose sales and/or investors? As one public relations expert noted, society would have forgiven a
mistake (the introduction of the bear), but it might not forgive arrogance (the company’s refusal to withdraw the bear after it was criticized as
insensitive).
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SOURCES: www.VermontTeddyBear.com; American Floral Endowment’s Consumer Tracking Study, “Valentine’s Day Statistics;” www.growerflowers.com/SEholidaystats.asp,
2003; Associated Press, “Company Won’t Pull Straightjacketed Bear,” ABC News, www.abc.news.com, 2005; Pam Belluck, “Toy’s Message of Affection Draws Anger and
Publicity,” The New York Times, www.nytimes.com, January 22, 2005; DHL Press Office, “DHL Survey Uncovers Valentine’s Day Gift-Giving Habits,” www.dhl-usa.com,
February 9, 2005; Gram, David, “Crazy for You Bear Raises Ethics Questions,” Associated Press, www.namiscc.org/Advocacy/2005/Winter/CrazyForYou.html, February 14,
2005; National Stigma Clearinghouse, “Vermont Teddy Bear Controversy,” http://community.webtv.net/stigmanet.
Discussion Questions:
1. Did Vermont Teddy Bear Co., Inc. violate the ethos of social responsibility? Why or why not?
2. Was the controversy a positive or a negative for the company? For Robert?
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Quiz Questions:
Multiple Choice
1. By choosing not to cancel its “Crazy for You” line of teddy bears,
the Vermont Teddy Bear Company chose to favor the
__________ management philosophy over the __________
management philosophy.
a. production, market
b. market, sales
c. societal, market
d. market, societal
e. production, societal
2. Which of the following companies would most likely provide
direct competition for Mother’s Day Bear-Grams?
a. Ethel’s Chocolate
b. Ty Beanie Baby
c. Toys “R” Us
d. Nike
e. PetSmart
3. A more thorough ___________ may have helped the Vermont
Teddy Bear Company anticipate the controversy surrounding the
“Crazy for You” teddy bear before bringing it to market.
a. mission statement
b. external situation analysis
c. target market strategy
d. internal situation analysis
e. product differentiation
4. Which of the following was most likely the intended target market for the “Crazy for You” bear?
a. infants and toddlers
b. the National Alliance for the Mentally Ill
c. adults who otherwise may have purchased flowers
d. people who are drawn towards controversy
e. bear hunters
5. Which of the following best describes the competitive advantage that the Vermont Teddy Bear Company seeks with its BearGrams?
a. market development
b. niche
c. sustainability
d. cost
e. product differentiation
6. Whose question, “If businesspeople do have a social responsibility other than making maximum profits for stockholders, how are
they to know what it is?”, seems to support the Vermont Teddy
Bear Company’s decision to keep selling its “Crazy for You”
bear?
a. Adam Smith
b. Elisabeth Robert
c. Milton Friedman
d. Jeffrey Immelt
e. John Maynard Keynes
7. The governor of Vermont’s description of the “Crazy for You”
bear charged the Vermont Teddy Bear Company with neglecting
its __________ responsibilities. The executive director of the
Vermont Human Rights Commission suggested that the company should fulfill its __________ responsibilities and give
some of the bear’s profits to charity.
a. legal, ethical
b. ethical, philanthropic
c. ethical, ethical
d. philanthropic, economic
e. legal, philanthropic
8. If the Vermont Teddy Bear Company outfitted its “Purple
Passion” bear in a purple and gold sari for the Indian market and
a purple and gold kimono for the Japanese market, the company
would be using:
a. dumping
b. product invention
c. message adaptation
d. product adaptation
e. distribution
9. The “Crazy for You” teddy bear represents which element of the
marketing mix?
a. promotion
b. place
c. product
d. price
e. problem child
10. If the Vermont Teddy Bear Company gave the German teddy
bear company Steiff Inc. the right to manufacture and distribute
its line of Bear-Grams in Europe in exchange for a share in profits, this would be an example of:
a. contract manufacturing
b. joint venture
c. exporting
d. direct investment
e. licensing
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PART 1 THE WORLD OF MARKETING
Case Studies
CRITICAL THINKING CASE
Pharmaceutical Marketing—Direct to Consumers or Not?
There is growing controversy over the estimated $4 billion the pharmaceutical industry spends annually on direct-to-consumer (DTC) advertising. Prior to 1997, pharmaceutical advertising and promotion focused on physicians. Companies advertised their products in professional medical journals and sent sales personnel to visit doctors (referred to as “detailing”) and
provide them with free samples, which were then passed on to their patients. Since 1997, however, when the Food and Drug Administration
(FDA) relaxed pharmaceutical advertising rules, companies have been shifting advertising dollars toward DTC advertising. The marketing issue
boils down to whether pharmaceutical companies should influence prescription choices via the physician or the patient.
According to estimates, pharmaceutical companies spend close to $25 billion a year on promoting new drugs in the United States. With an
estimated 80,000 drug company representatives visiting physicians every day, detailing accounts for around $5 billion of this amount, and free
drug samples account for slightly over $16 billion. An estimated 80–95 percent of medical doctors see drug company representatives on a regular basis. Nevertheless, research has shown that such marketing tactics have little impact on the prescribing behavior of physicians.
The question, however, is whether DTC advertising affects physician prescribing behavior. Critics say that it does and that consumer ads
prompt patients to seek medications they do not need. Additionally, they argue, advertising benefits the market leader because that company
can afford to spend the most on advertising and then gains sales from new patients seeking treatment. Some research indicates that doctors
comply with patient requests for drugs 85 percent of the time—drugs the patients learned about via DTC ads. At the same time, critics say,
creating brand awareness for a particular product makes it more difficult for physicians to prescribe equivalent drugs and plays on consumers’
lack of knowledge instead of the physician’s level of expertise. In addition, critics claim, ads may encourage overconsumption of some drugs by
creating a false impression of a drug’s capabilities and exaggerating its effect on the disease or illness. Opponents also argue that DTC advertising is driving up prescription costs which leads to higher individual drug prices as companies seek to cover expensive advertising costs.
Proponents of DTC pharmaceutical advertising contend that it offers several benefits. First, they say, the changing role of information in the
health care system has created a need for DTC advertising. Patients have much greater access to health care information (via the Internet) and
are entering into a patient-doctor relationship empowered by this information. Thus, advertising, as a major means of mass communication, is a
primary form of information dissemination. In particular, sufferers of certain diseases and medical conditions benefit from the advertising. For
example, disease awareness ads help patients recognize symptoms at an early stage when the disease can still be treated. Ads can help
remove the stigma of some illnesses, particularly mental illness. Thus, ads can serve to educate the public. Another benefit of drug advertising
is that it encourages compliance. Many conditions (e.g., high cholesterol) do not exhibit outward signs of improvement when the patient takes
the medication. These conditions require medical monitoring to determine if the drug is working. Ads can help remind patients to take their
medication and to have prescriptions refilled. Furthermore, these proponents point out, there does not appear to be a direct correlation between
advertising expenditures and product price, and the annual growth in marketing expenditures has remained relatively constant—although there
has been a shift of funds from doctor-focused to patient-focused.
Pharmaceutical advertising is regulated by the FDA’s Division of Drug Marketing, Advertising, and Communications. Division employees
review between 30,000 and 40,000 ads a year. Although the annual number of complaints received by the FDA has remained about the same
since DTC advertising began in 1997, the number of citations issued to drug manufacturers has dropped about 80 percent during this same time
period.
Prescription drug spending is projected to be one of the fastest-growing segments of health care costs. It is estimated that, by 2012, prescription drugs will account for 14.5 percent of the $3.1 trillion that the United States spends on health care (compared to 10 percent in 2001).
Is marketing the reason behind the increased expenditures? Or are knowledgeable consumers taking more drugs and thereby avoiding other
health care costs?
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SOURCES: Anonymous, “Doctors Not Influenced by Pharmaceutical Marketing Tactics,” Medical News Today, www.medicalnewstoday.com, December 8, 2004; Linda A.
Johnson, “Web Sites New Twist in Celebrity Drug Ads,” AP News, www.apnews.myway.com, July 17, 2005; Merrill Matthews, “Who's Afraid of Pharmaceutical
Advertising?,” IPI Policy Report–#155, May 17, 2001; Ray Moynihan, “Who Pays for the Pizza? Redefining the Relationships between Doctors and Drug Companies,” BMJ, May
31, 2003, 1189–1192; Julie Schmit, “FDA Races to Keep Up with Drug Ads that Go Too Far,” USA Today, www.usatoday.com, May 30, 2005; Shankar Vedantam & Marc
Kaufman, “Doctors Influenced by Mention of Drug Ads,” The Washington Post, April 27, 2005, A01.
Discussion Questions:
1. Who are the customers in the pharmaceutical drug market?
2. Is there a difference between the marketing of pharmaceuticals and the marketing of other consumer products (e.g., computers)?
Why/why not?
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Quiz Questions:
Multiple Choice
1. The emphasis on direct-to-consumer (DTC) advertising shows a
general trend towards a __________ orientation in the pharmaceutical industry.
a. production
b. sales
c. market
d. societal
e. global
2. Critics say that “consumer ads prompt patients to seek medications they do not need.” If this is the actual intention of pharmaceutical companies, what strategic alternative does it represent?
a. market penetration
b. market development
c. product development
d. diversification
e. niche
3. Which federal law would pharmaceutical companies be accused
of violating if their critics’ claim that “consumer ads prompt
patients to seek medications they do not need” were proven true?
a. Kefauver-Harris Drug Amendment of 1962
b. Consumer Product Safety Act of 1972
c. Lanham Act of 1946
d. Wheeler-Lea Amendments to the FTC Act of 1938
e. Federal Food and Drug Act of 1906
4. If the FTC (Federal Trade Commission) deemed some DTC advertising illegal for leading patients to buy medications they did not
need, which of the following actions could it NOT immediately
take?
a. cease-and-desist order
b. consent decree
c. affirmative disclosure
d. corrective advertising
e. restitution
5. By attracting new customers with controversial DTC advertising,
pharmaceutical companies have been turning the pharmaceutical drug industry into a __________ industry.
a. growth
b. global
c. competitive
d. strategic
e. mature
6. If an employee at a large pharmaceutical company did an SWOT
analysis, he or she would identify the willingness of customers
to consider medication they do not actually need as the
__________ element of SWOT and would identify critical
response to DTC advertising as the __________ element of
SWOT.
a. W, T
b. O, W
c. O, T
d. S, T
e. S, W
7. Which of the following is a well-stated marketing plan objective
for a major pharmaceutical company?
a. Our objective is to be 25% better than our leading competitor.
b. Our objective is to double our profits by selling more antidepressants than any other pharmaceutical company.
c. Our objective is to get more doctors to prescribe our medications and more customers to ask for our medications.
d. Our objective is to spend 50% more on advertising than we
did in the previous year in an effort to win 30% of all firsttime pharmaceutical customers.
e. Our objective is to spend 15% more on production of antidepressants, 8% more on production of heart medication,
and 6% less on arthritis medication.
8. Pfizer, a large pharmaceutical company based in New York, is
able to sell its products in Mexico without paying import/export
tariffs. This is because of the:
a. Uruguay Round
b. North American Free Trade Agreement
c. Central America Free Trade Agreement
d. General Agreement on Tariffs and Trade
e. Doha Round
9. If Merck & Co., a New Jersey pharmaceutical company, decided
to order the bottles for its line of Zocor drugs from a Chinese
company instead of producing its own bottles, this would be an
example of:
a. licensing
b. cooperation
c. a strategic alternative
d. a new method of service delivery
e. contract manufacturing
10. If Eli Lilly and Company, a global pharmaceutical company, provided DaimlerChrysler with a number of its pharmaceutical products (to be used by DaimlerChrysler as part of its employee
health care benefits) and received DaimlerChrysler trucks in
return (to be used by Eli Lilly and Company for moving products),
this would be an example of:
a. dumping
b. an exchange
c. product adaptation
d. countertrade
e. diversification
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CONSUMER DECISION MAKING
5
Case Studies
CASE ASSIGNMENT: Ethel’s Chocolate Boutiques
Chocolate Lounges Taste Sweet Success
The chocolate house dates back to seventeenth century London, when members of society’s elite would gather in luxurious surroundings to relax and sip on hot chocolate. Later, Europeans expanded on that idea and developed solid
chocolate treats that sold in upscale boutiques. Lacking the resources and economy of established continentals, bootstrapping American settlers pioneered the development of cheaper chocolate bars for the masses.
Centuries have passed, however, and the American palate has tired of the taste of mass-produced chocolate. The
U.S. chocolate industry has experienced growth of less than 3 percent since the turn of the millennium, and the lack of industry innovation has
left a bad taste in chocolate purveyors’ mouths, too. Enter Ethel’s Chocolate Lounges, named in honor of the matriarch of the Mars family, who
founded the candy company with her husband Frank in 1911.
Now Ethel Mars’s name adorns the signs at the company’s latest attempt to breathe fresh life into chocolate. Aware that chocolate sales at
upscale retail outlets, like Godiva and Starbucks, grew by nearly 20 percent from 2002 to 2004, Mars opened Ethel’s Chocolate Lounge in the
Lincoln Park neighborhood of Chicago in April 2005. More Ethel’s have opened since then, and the chic chocolate houses are Mars’s bet that
well-heeled and sweet-toothed consumers will take to premium chocolate the same way that well-to-do coffee lovers flock to Starbucks for
high-priced java.
Ethel’s Lounges are designed to coddle patrons in the lap of luxury, but Mars president John Haugh maintains that what makes Ethel’s special
is that it offers “approachable gourmet chocolate.” In other words, you don’t have to be a millionaire to enjoy the sweet taste of the good life.
Prices are not for everyone’s wallet, however. Truffles and Tea for Two, which features all 11 of Ethel’s truffles served on a silver platter, sells
for $15. Chocolates and Cocoa for Two includes two cocoas and 10 pieces of chocolate for $18, and a box of 48 chocolates is $42. Five
“Collections” offer over 50 individual chocolates that sell for between $.90 and $1.50 a piece.
Supporting Haugh’s claim of approachability, the menus at Ethel’s feature icons and descriptions of the chocolates’ contents so that customers won’t experience an unwanted filling surprise. A multitude of hot and cold beverages give visitors more reasons to extend their stays.
But it’s not just the chocolate that makes Ethel’s such a desirable destination. Advertising describes Ethel’s as “a place for chocolate and
chit-chat.” Generously stuffed pink couches with brown accents combine upscale modern and traditional looks to give the stores a hip and
classy feel. For those who don’t immediately get it, a sign behind the counter reads, “Chocolate is the new black.” The stores’ appeal is their
relaxing ambience and neighborhood vibe – these shops encourage socializing and extended lounging. The effect is carefully planned like a modern American coffeehouse. Mars’s research revealed that even calorie-conscious consumers will splurge for the good stuff as long as a broader
social experience comes with it.
Parallels to the Starbucks-led American coffee revival are obvious and inescapable. Confectionary industry insiders note that chocolate cafés
are taking hold, and research confirms their belief. Datamonitor, a research firm specializing in trend identification, described chocolate as “the
new coffee” on its list of the top ten trends to watch in 2006. The popularity of the Chocolate Bar in New York, billed as a “candy store for
grown-ups,” and South Bend Chocolate’s ten chocolate cafés shows that the trend is for real. Even some Hershey’s stores now offer seating for
patrons.
Joan Steuer, president of Chocolate Marketing, claims that, for women, enjoying chocolate in a luxurious lounge is like taking a candle-lit
bubble bath. She notes, too, that much of the appeal is that the experience is testimony to the person’s upward mobility. It’s a perfect way to
cater to the American desire to have the best that money can buy.
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SOURCES: Amy Chozick and Timothy Martin, “A Place for Cocoa Nuts?” Wall Street Journal, July 15, 2005, B1, B3; http://www.ethelschocolate.com; “Ethel’s Launches FirstEver Approachable, Everyday Gourmet Chocolate and Chocolate Lounges; Opens First Two Stores in Chicago, Expected to Expand to Six by End of Summer,” PR Newswire,
June 6, 2005; Karen Hawkins, “Chocolate Lounges Present Themselves as Sweet Alternatives to Coffee Shops, Bars,” Associated Press, February 13, 2006; Melinda Murphy,
“Trend Report: Chocolate Is Hot,” CBS News Online, http://www.cbsnews.com/stories/2006/02/07/earlyshow/contributors/melindamurphy/main1289922.shtml.
Discussion Questions:
1. What type of consumer buying decision best describes choosing to indulge at Ethel’s?
2. List the factors that influence a consumer to spend their money and time at Ethel’s. Which one do you think will motivate a consumer the
most? Why?
3. Review the section on Culture and Values on pages 69-70. To which core American value does the Ethel’s experience appeal to most?
Explain.
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Quiz Questions:
Multiple Choice
1. Which core American value would most likely be associated
with the ability to buy upscale chocolates?
a. freedom
b. success
c. youth
d. progress
e. independence
2. Keeping the familiar Mars brand name attached to the new
Ethel’s Chocolate Lounges allows marketers to take advantage of:
a. stimulus generalization
b. selective retention
c. stimulus discrimination
d. motivation
e. justification
3. The best way for Ethel’s Chocolate Lounges to influence ambivalent customers to purchase the company’s products would be to:
a. send post purchases thank you letters
b. offer guarantees
c. display its product superiority in advertising
d. reassure consumers that their product is just like other Mars
products
e. cater to a wide variety of consumers
4. When an Ethel’s Chocolate Boutique first opens in a city, consumers probably use ________ when deciding to spend $42 on
a box of chocolates.
a. a cognitive decision
b. routine response behavior
c. limited decision making
d. extensive decision making
e. specialty choicing
5. If a manager at Mars created a short brochure about the concept of Ethel’s Chocolate Boutiques and the products sold in the
boutiques, it would be an example of:
a. an internal information search
b. nonmarketing-controlled information
c. marketing-controlled information
d. a prepurchase shopping tool
e. evoked set
6. Katie is a college student in South Bend, Indiana. After classes,
she decides to grab a snack before going back to her apartment.
Before leaving campus, she can go to the cafeteria or a pretzel
stand. Along her walk home are an Ethel’s and a Panera. Katie
really wants a sandwich and a hot drink, so in all likelihood, her
evoked set ______ contain _______.
a. will; the pretzel stand
b. will not; the cafeteria
c. will; Ethel’s
d. will; Panera
e. will not; Panera
7. Marketers at Ethel’s hope consumers will add the new chocolate boutiques to Starbucks in their ________ for everyday luxury snacking experiences.
a. evoked matrix
b. consideration set
c. extensive decision set
d. internal information search
e. routine response mechanism
8. Because Mars has built its company on the success of massproduced chocolate candies (like Mars, Snickers, Twix, and
M&Ms), the company may have a problem overcoming consumers’ _______ as it tries to launch Ethel’s chocolates as a
luxury product.
a. perceptions
b. subliminal perceptions
c. safety needs
d. social dynamics
e. social class
9. The only one of Maslow’s needs that Ethel’s products and experiences cannot meet is:
a. physiological
b. social
c. esteem
d. safety
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BUSINESS MARKETING
6
Case Studies
CASE ASSIGNMENT: CamelBak
Hydration Packs New Stars of U.S. Armed Forces
In 1989, Michael Eidson probably never imagined that his homemade, do-it-yourself fix for dehydration during long
cycling races would evolve into the world’s premier hydration device for outdoor enthusiasts, soldiers, and law enforcement personnel. That is exactly what happened to the CamelBak backpack, however.
The first version, which used medical tubing to flow water from an intravenous drip bag that was insulated by a
sock and strapped to the back of his shirt, was born as most inventions are—out of necessity. The special pack made
it possible for Eidson to take in fluids while sitting upright without having to sacrifice speed by reaching down for a water bottle during a race.
The packs gained fame during the 1991 Gulf War as extreme sports enthusiasts in the U.S. Special Forces carried their personal CamelBaks into
combat during Desert Storm. Thereafter, the CamelBak name would be forever associated with extreme performance and the U.S. Armed
Forces.
By 1995, Eidson sold the company for $4 million. Its buyer, Kransco, introduced the first camouflaged models, and the packs continued to
gain acclaim. In 1999, two years after buying his first CamelBak pack, cyclist Chuck Hunter left Lockheed Martin to join the upstart company in
hopes of growing its military business. He promptly moved the company to the Sonoma Valley, built a research and development center, and
leveraged his experience in the defense industry to launch a military-specific line of packs.
Hunter partnered with DuPont to help CamelBak develop the Low Infrared Reflective (LIRR) system. LIRR applies specially developed materials to a pack’s compartments, buckles, and straps to shield soldiers from enemy detection systems. As advanced identification and kill technologies are increasingly being deployed on the battlefield, individual protection applications like the LIRR will be the camouflage of tomorrow.
Other CamelBak innovations include the WaterBeast reservoir, a fluid storage system that boasts 30 percent more rigidity than other packs
on the market. The WaterBeast has the ability to withstand lengthy field engagements, aided by its silver-ion reservoir and tube linings that
eliminate 99.99 percent of all fungus and bacteria in the water delivery system. The WaterBeast reservoir is now a standard feature on all
CamelBak packs, as is the company’s proprietary drinking nozzle, or bite valve, which must withstand 10,000 compressions to guarantee it will
last through three years of combat use.
Another CamelBak first is its CBR 4.0 pack system, which is specially designed to perform under a chemical or biological weapons attack.
The CBR 4.0 took five years to develop, and like all CamelBak military and law enforcement products, it was created to meet the specific
requests and requirements of the target market. Since its introduction in 2005, the U.S. Special Forces, New York Police Department, U.S.
Secret Service, Department of Health and Human Services, and a myriad of HAZMAT, law enforcement, and government agencies from around
the world have adopted and deployed the CBR 4.0.
Though CamelBak specializes in offering extreme performance packs for the military, industrial, and professional markets, it also sells a variety of products for hunting, extreme sports, recreational, and “light” law enforcement applications. Having claimed more than 90 percent of the
military market for hydration packs, product manager Shawn Cullen likens CamelBak to Kleenex: “Everyone calls a hydration system a
CamelBak,” he says. Ironically, the company’s biggest customer is its biggest competitor. While it continues to use CamelBaks, the U.S. Army is
working with a former supplier to develop its own version, most likely in an attempt to reduce costs.
At prices up to $200 for combat-ready systems, one thing CamelBaks aren’t is cheap. But then again, neither is CamelBak itself. Its strong
product lines, history of innovation, secure strategic relationships, and dominance in government and institutional markets drove its value to over
$200 million when investment bank Bear Stearns Company bought the outfit from Kransco in 2003. Not bad for a product that started life as an
intravenous fluid bag wrapped in a sock.
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SOURCES: Jonathan Karp, “How Bikers’ Water Backpack Became Soldiers’ Essential,” Wall Street Journal, July 19, 2005, B1, B2; “CamelBak Introduces New Line of
Strength/Stealth Technology Responding to Law Enforcement and Military Needs; R&D Innovations Protect against Infrared Detection, Provide Strongest Hydration Reservoir
Available,” PR Newswire, January 27, 2005; Mark Riedy, “The Birth of CamelBak,” Mountain Bike, Summer 2004, 104; “CamelBak Announces Chem-Bio Hydration Reservoir
for Military, Law Enforcement and First Responders; New Reservoir Is World’s Only Hands-Free Hydration System That Withstands Exposure to Chemical and Biological Agents
to Provide Safe Drinking Water in All Combat Environments 24/7/365.” PR Newswire, August 26, 2004.
Discussion Questions:
1. Discuss how business relationships and strategic partnerships have helped to increase the value of CamelBak’s products and the business
itself.
2. What type(s) of business market customers does CamelBak sell to?
3. Review the types of demand that most influence business markets. Which ones do you think are most important for CamelBak to consider
in their marketing strategy? Why?
4. What type of business product is a Camelbak backpack?
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Quiz Questions:
True/False
1. CamelBak was invented to be a business product.
a. True
b. False
Multiple Choice
1. The CamelBak is an example of which kind of business product?
a. major equipment
b. accessory equipment
c. processed material
d. component part
e. supply
2. The extreme sports enthusiasts who brought their CamelBaks
with them on Special Forces missions might be called:
a. gatekeepers
b. influencers
c. purchasers
d. initiators
e. deciders
3. If the U.S. Government begins manufacturing its own hydration
systems using the CamelBak as an inspiration, CamelBak might
consider it a breach of:
a. keiretsu
b. trust
c. alliance
d. demand
4. The bladder and the tubing that make up the basic CamelBak
hydration system will necessarily experience_____demand.
a. joint
b. high
c. elastic
d. inelastic
e. accelerating
5. CamelBak has experienced astronomical growth as a result of:
a. strategic alliances
b. reciprocity
c. derived demand
d. happenstance
e. government subsidies
6. When CamelBak came out with its WaterBeast technology, the
U.S. Federal Government changed from buying the old model to
buying the WaterBeast model. The first time a government purchasing agent placed an order for CamelBak hydration systems
outfitted with the new WaterBeast technology, it was an example of a(n):
a. modified rebuy
b. straight rebuy
c. new buy
d. upgraded buy
e. flat rebuy
7. The silver used in the reservoir of the WaterBeast is an example
of a(n):
a. raw material
b. supply
c. processed material
d. accessory
e. component part
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SEGMENTING AND TARGETING MARKETS
7
Case Studies
CASE ASSIGNMENT: LVCVA
Viva Las Vegas
In 2003, more than 35.5 million travelers made Las Vegas their destination of choice. It was the second largest volume
of visitors the city has ever entertained, lagging just slightly behind the 35.8 million recorded for the year 2000. Those
numbers are remarkable given the recent slump in the travel industry, and the city has the Las Vegas Convention and
Visitors Authority to thank. For almost 50 years, the LVCVA has been promoting Las Vegas in an effort to maximize
occupancy for the city’s hoteliers who suffer from the cyclical demand in the travel industry. The authority’s marketing
of the city’s convention, lodging, and entertainment facilities to convention organizers, meeting planners, and leisure travelers plays an integral
role in keeping hotel rooms and convention facilities occupied during off-peak times of the year.
Many types of visitors go to Las Vegas for a variety of reasons, and the LVCVA uses a multilevel promotions strategy to reach them all. The
organization’s promotional mix includes national television advertising, grassroots marketing, and relationship building with a variety of organizations. Each element is specifically designed to address issues within particular segments of its growing target market, such as changes in the
composition of the visitor pool, shifts in visitors’ travel preferences, the emergence of potentially lucrative metropolitan markets, and trends in
foreign visitors.
An LVCVA study of the area’s visitors for 2001, for example, found that African Americans, Hispanics, and Asian Americans accounted for 9,
5, and 4 percent, respectively, of the total visitor pool. The same study also revealed that the number of visitors from each of those groups had
been steadily rising and that all U.S. visitors were beginning to prefer two- or three-day stays to weeklong vacations. With those data in hand,
the LVCVA produced its award-winning “Vegas Stories” series of TV commercials for 2003 and 2004. The irreverent ads poke fun at the sticky
situations travelers may find themselves in as a result of too much revelry in the desert.
Using the tagline, “What happens here, stays here,” the spots from the “Vegas Stories” campaign include an older Asian woman trying to
alter an after-the-trip love letter while Roy Orbison’s “Only the Lonely” plays in the background and a bachelorette party of African American
women riding quietly in a limousine until the group is slowly overcome with sheepish laughter. Other commercials depict elderly couples, businesswomen, and young professional males. The LVCVA also produced its first-ever commercial recorded entirely in Spanish, which was written
specifically to appeal to Hispanics’ historical preference for family or group activities for vacations. Additionally, the authority’s director of diversity began promoting Las Vegas to ethnic chambers of commerce and organizations like the International Association of Hispanic Meeting
Planners and the National Coalition of Black Meeting Planners.
Other research performed by the LVCVA identified Portland, Oregon, and Atlanta, Georgia, as emerging regional markets based on the their
median household incomes, their available flights to Las Vegas, the cost of advertising in those markets, and the propensity of their citizens to
gamble. The LVCVA then bought billboards in each city, cruised the towns in a specially prepared van featuring an Elvis impersonator and a traditional Vegas showgirl, and promoted special travel deals to promote the entertainment options that Las Vegas offers in addition to gambling.
The authority’s message carries beyond the borders of the United States, too. When it noticed significant drops in the visitor volume from
Canada—Las Vegas’s leading source of international travelers—the LVCVA sent an official delegation to Toronto. The group canvassed Toronto’s
Canadian Meeting & Incentive Travel Symposium & Trade Show to persuade convention operators to host their future productions in the desert.
Representatives also met with private convention and leisure travel planners and attended events in Montreal and Vancouver to promote their
cause.
Las Vegas is clearly on the rise again thanks to the tireless work of the LVCVA, and the authority has the hard data to prove it. As long as
the LVCVA continues to understand its many diverse customers and communicate with them appropriately, the city of lights should continue to
shine brightly for many years to come.
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SOURCES: “Las Vegas Tourism Agency Announces 1.3 Percent Rise in Visitor Totals for 2003,” Las Vegas Review-Journal, February 14, 2004; Jennifer Bjorhus, “Las Vegas
Tourism Authorities Campaign in Portland, Ore,” Knight Ridder/Tribune Business News, June 4, 1999; Chris Jones, “Las Vegas Tourism Agency Executive Says Research,
Marketing Are Key to Success,” Las Vegas Review-Journal, April 6, 2003; Chris Jones, “Las Vegas Tourism Chief Opposes Ads; Board Members Object to ‘Sin City’ Phrase,”
Las Vegas Review-Journal, December 16, 2003; Chris Jones, “Las Vegas Tourism Officials Plan Marketing Blitz to Attract Canadian Tourists,” Travel Weekly, March 3, 2003;
Chris Jones, “New Las Vegas Tourism Ads Target Hispanics with Tradition-Focused Messages,” Las Vegas Review-Journal, July 17, 2003; Chris Jones, “Las Vegas Tourism
Authority Unveils Culturally Diverse Television Ads,” Las Vegas Review-Journal, February 11, 2004.
Discussion Questions:
1. What basis does the LVCVA use for segmenting its target market?
2. Does the LVCVA use an undifferentiated, a concentrated, or a multisegment targeting strategy? Why? Should the LVCVA be concerned with
cannibalization?
3. Think of the many reasons a person might want to travel to Las Vegas. Given a target market of all U.S. citizens aged 18 to 75, speculate
how you might segment that market by lifestyle.
4. What do you think makes the LVCVA so successful?
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Quiz Questions:
True/False
1. A list of reasons people travel to Las Vegas would be most helpful for marketers using benefit segmentation.
a. True
b. False
2. If the LVCVA began designing programs for frequent visitors to
Las Vegas, it would be using psychographic segmentation.
a. True
b. False
3. If LVCVA were to begin marketing Las Vegas as a family destination, akin to Disney, it would be an example of repositioning.
a. True
b. False
4. When LVCVA representatives went to Canada to persuade convention operators to host future events in Las Vegas, the LVCVA
was segmenting its business market by customer relationship.
a. True
b. False
5. Based on the content of the case, we can assume that LVCVA
used all six steps in the segmentation process.
a. True
b. False
4. When the LVCVA cruised through Portland, Oregon and Atlanta,
Georgia, in a customized van complete with Elvis impersonator
and Vegas showgirl, it was trying to achieve:
a. product differentiation
b. perceptual mapping
c. substantiality
d. critical mass
e. segmentation
5. Based on what you read in the case, the LVCVA is best
described as pursuing which kind of segmentation strategy?
a. concentrated
b. business
c. undifferentiated
d. one-to-one
e. multisegment
6. Children are noticeably absent from the “Vegas Stories” campaign. That would indicate that LVCVA used________in its
segmentation process.
a. perceptual mapping
b. age segmentation
c. family life cycle
d. repositioning
e. responsiveness
7. The study of the area’s visitors in 2001 revealed that the
Hispanic segment is:
a. substantial
b. identifiable
c. responsive
d. accessible
e. all of these
8. The main disadvantage to LVCVA’s segmentation strategy
would be:
a. cannibalization
b. high costs
c. segments too small
d. unimaginative product offerings
e. overreliance on a niche
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Multiple Choice
1. When the LVCVA sent a delegation to Toronto to convince convention planners to host future productions in Las Vegas, the
LVCVA was practicing _______segmentation.
a. benefit
b. demographic
c. geographic
d. one-to-one
e. psychographic
2. The results of the LVCVA’s study of the area’s visitors for 2001
identified visitors according to ethnicity, which could help with
the organization’s ______segmentation efforts.
a. benefit
b. demographic
c. geographic
d. one-to-one
e. psychographic
3. The award-winning “Vegas Stories” advertising campaign segments the market using:
a. benefits sought
b. demographics
c. geodemographics
d. psychographics
e. usage rate
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DECISION SUPPORT SYSTEMS AND MARKETING RESEARCH
8
Case Studies
CASE ASSIGNMENT: Look-Look
You can’t always believe what you hear, particularly in the fast-moving world of youth trends. That is, unless you listen
to Sharon Lee and DeeDee Gordon, founders of Look-Look, the most accurate information resource on the global youth
culture. The pair founded the company in 1999, determined to find whatever makes the cultural spider-sense tingle—
music, shoes, clothes, games, makeup, food, and technology. Lee and Gordon took Look-Look online in 2000, and the
company has since risen to be the paragon of trend forecasting in the youth market. How?
When Sharon Lee needs to know what’s cool, she taps into a network of experts the CIA would envy. It’s a Web-linked weave of over
35,000 volunteers and part-timers, aged 14 to 35, recruited over several years at clubs and hangouts around the country, from New York to Los
Angeles and points in between, to report on their world.
Look-Look’s human database brims with youthful hipsters from all over the planet who log in to the company’s Web site to answer surveys
and polls, register opinions, and communicate ideas. Some of the recruits communicate through Look-Look-supplied digital or video cameras,
from which they upload pictures, document reports, and post content to the firm’s intranet message boards.
Some, such as Portland, Oregon’s Emily Galash, receive small monthly sums—Emily’s is $125 per month—for capturing and sharing the
moments of their personal lives. Gordon and Lee welcome images from anything as private as underground parties to simple adornments like
posters on bedroom walls.
Look-Look relies on “early adopters” and “influencers” to provide depth to information that traditional research practices only skim. For LookLook, focus groups are strictly passé; such conventional tactics would not have raised its clients’ awareness of incoming trends such as undera-dollar stores, fold-up scooters, or over-the-shoulder bags. Strangely enough, however, Gordon and Lee and counterparts, such as Jane
Buckingham’s Intelligence Group, Irma Zandl’s Zandl Group, and Faith Popcorn’s BrainReserve, now run the risk of being out of date themselves.
Once known as “cool seekers” or “cool hunters,” they now prefer to refer to themselves as “futurists” and “planners.” The Web-connected
reality of instant digital feedback and content generation through blogs, text messages, and music, photo, and video hosting sites such as
MySpace.com causes trends to flash before us and dissipate before most know they existed in the first place.
“Cool” isn’t even cool anymore, and marketers to this age group must spot what’s going to be “in” before or as it develops. Look-Look’s success is well documented, however, and that’s the reason companies like Telemundo, Procter & Gamble, Nike, Kellogg’s, and Coca-Cola rely on
its help to stay in the running for the $175 billion wielded by teen consumers.
Recently, Look-Look began working with Microsoft to tap into the culture of the twenty-first-century teenager. On a project designed to help
the software giant’s PC-gaming unit connect with the growing female presence in the video gaming market, Look-Look selected 30 teens from
its database and asked them to keep blogs about their experiences with Microsoft PC games. Lisa Sikora, group product manager for Windows
gaming, acknowledged Look-Look’s relevance, noting that companies like hers need to “start talking to this audience in their way, not our way.”
But Look-Look doesn’t stop there. In addition to finding the future, Look-Look is defining it, too. Working with Virgin Mobile, an extremely youth-oriented marketer, Look-Look came up with two unique ideas. The first was to hold an art contest among members of its human database to devise cell
phone covers. The top five designs, from artists ranged 17 to 20 years old, are now officially sold in stores as covers for the Kyocera K10 Royale.
Remember Emily Galash? The money she earns is for the 30 to 40 pictures she sends to Look-Look every month. Instead of attempting to
interpret her pictures for the sake of reporting on trends, Look-Look bolts select shots directly to the pages of Virgin Mobile’s internationally
viewable Web site because they are trends. Amateur work like Emily’s and that of the artists who designed the Kyocera face plates is valued
because it maintains its authenticity, individuality, and credibility with its target audience.
Clients also ask Look-Look to identify which products are the hottest in a given market. After a small army is canvassed through online polls and
surveys, the results are arranged into categories. “The turnaround,” says Lee, “can be as little as 48 hours.” Look-Look categorizes information into
ten channels: fashion, entertainment, technology, activities, eating and drinking, health and beauty, mood of culture (how kids feel about life), spirituality, city guide, and Look Out (a “best of” findings in a snapshot). The information is put through rigorous paces. “Methodology is crucial, especially with the quantity and quality of the sample,” says Lee. “We can take a sample of 300 or thousands. That’s up to Gallup standards.”
Still, cool is as hard to pin down as a weather forecast for next week. But the real arbiters of cool are those who can afford to lead.
“Ultimately,” says Que Gaskins, chief marketing office of the avant-garde, multicultural marketing Ad*itive, “the future of cool belongs to whoever
has the most buying power.”
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SOURCES: Gina Piccalo, “Fads Are So Yesterday,” Los Angeles Times, October 9, 2005; Stephanie Kang, “Trying to Connect with a Hip Crowd,” Wall Street Journal, October 13,
2005, B01.
Discussion Questions:
1. What is Look-Look offering businesses that traditional market research firms cannot offer?
2. Describe the role of the Internet in youth trend spotting. Do you think a research firm can accurately forecast youth trends without an online
component to the research plan?
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Discussion Questions, Continued:
3. Go to Look-Look’s Web site at http://www.look-look.com and check out some of the free information in each category. How accurate do you
find the information? Have you seen any of these trends in your city or region, or among your friends and classmates?
4. Make a list of products or companies that you think could benefit from Look-Look’s form of predictive market research. Next to each item,
write a brief reason why and how you think cool-seeking would benefit the company or product.
Quiz Questions:
Multiple Choice
1. The volunteers used by Look-Look are an example of a(n)_____
sample.
a. unrestricted Internet
b. screened Internet
c. recruited Internet
d. judgment
e. quota
2. If Look-Look were to ask its volunteers to recommend other
respondents, the company would be using a ___ sample.
a. quota
b. judgment
c. convenience
d. snowball
e. cluster
3. When Look-Look researchers obtain information about the youth
market by questioning younger friends and relatives, it is an
example of which kind of sample?
a. convenience
b. cluster
c. systematic
d. stratified
e. judgment
4. Look-Look only gets information from respondents with Internet
access. This might be a source of_____.
a. random error
b. frame error
c. sampling error
d. competitive intelligence
e. secondary data
5. As described in this case, what type of marketing research is
Look-Look conducting?
a. diagnostic
b. predictive
c. prescient
d. descriptive
e. synoptic
6. Look-Look volunteers upload to the company Web site photos
that give a glimpse into their everyday lives. These photos could
most reasonably be considered a type of:
a. diagnostic research
b. multimedia sample
c. ethnographic research
d. blog
e. stratified sample
7. Look-Look, Intelligence Group, Zandl Group, and BrainReserve
specialize in collecting:
a. primary data
b. secondary data
c. competitive intelligence
8. Microsoft determined that its products had less of a following
among girls than boys, so the company engaged the services of
Look-Look. In this situation, Microsoft had a:
a. marketing research problem
b. marketing research objective
c. management decision problem
9. By collecting volunteers’ candid photos, Look-Look is able to use
the Internet to conduct a form of:
a. observation research
b. survey research
c. competitive intelligence
d. diagnostic testing
e. recruited sampling
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PART 2 ANALYZING MARKETING OPPORTUNITIES
Case Studies
MARKETING MISCUES
Has eBay Forgotten Its Faithful Followers?
By the time it celebrated its tenth anniversary in 2005, eBay had become a cultural phenomenon with a community of customers devoted to buying and selling online.
Unfortunately for eBay, however, this cultural phenomenon is no longer unique to the company, as online auction competitors have entered the marketplace.
EBay began as a weekend project for Pierre Omidyar and has evolved into one of the largest Internet companies. Based in San Jose,
California, the company has approximately 61 million active users (almost 150 million registered users worldwide), with quarterly revenue topping $1 billion in the first quarter of 2005. Collectively, merchandise sold on eBay during 2004 amounted to around $34 billion.
In 2005, however, discontent erupted among eBay’s sellers when the company announced rather steep fee increases. The changes affected
all types of sellers. The monthly cost for store owners (the larger sellers) increased 50 percent, with commissions increasing as much as 60
percent. In dollar terms, the monthly cost rose from $9.95 to $15.95, and the commission on a product selling for less than $26 increased from
5.25 percent to 8 percent. Under the new fee plan, individuals (the smaller sellers) would pay $0.35 for posting a thumbnail picture of a product, up from $0.25, and listing an item for a ten-day auction would cost $0.40, up from $0.20. Though these individual increases seemed relatively minor, the cost over hundreds or thousands of transactions for the sellers was considerable.
More interesting, however, is that the anger over the fee hike uncovered a growing discontent among sellers. Entrepreneurs expressed concern that the company was catering to the professional sellers (e.g., big-ticket electronics vendors and industrial manufacturers) and ignoring
smaller home-based sellers who might also be enthusiasts or collectors. Yet it was these faithful enthusiasts who had helped eBay grow during
its early years. In addition, sellers began grumbling about issues such as the receipt of automated messages when contacting the company, the
lack of shopping carts to enable multiple purchases at the same time, the slowing growth in a market reaching maturity, and the company’s
hands-off approach to fraud. They complained that eBay was raising prices without attempting to increase traffic or provide better service.
Regardless of whether the fee hikes were warranted, the buzz instigated by the increases was an advantage to eBay’s fledgling competitors. Combined, Overstock, Yahoo, and Bidville have only 3.5 million items listed for sale at any given time. By comparison, eBay’s listings
amount to around 50 million items. Thus, even a small piece of eBay’s business would be big business for the newcomers. Although they don’t
expect users to defect from eBay entirely, these competitors are hoping that sellers will begin listing merchandise on multiple Web-based auction sites.
Company leaders at eBay were uncertain how many of its users were unhappy. Since the company was still growing, they knew that satisfied users outnumbered dissatisfied ones. Nevertheless, the company’s earnings growth missed Wall Street expectations in the fourth quarter
of 2004. Though the shortfall was only one penny, this was the first time in recent memory that eBay had fallen short. The company’s stock,
which had soared in 2003 and 2004, lost 19 percent of its value on the earnings news. Had eBay only added salt to the wound by increasing
fees and thereby generating more negative publicity for the firm?
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SOURCES: Michael Bazeley, “EBay Nation Put to the Test,” San Jose Mercury News, June 20, 2005, K0182; Rachel Konrad, “EBay Losing Allure for Some Entrepreneurs,”
Associated Press Financial Wire, June 26, 2005; Verne Kopytoff, “EBay Bids for Harmony,” San Francisco Chronicle, June 23, 2005, C1; Paul J. Lim, “Bidding Adieu to EBay,”
U.S. News & World Report, February 28, 2005, 46.
Discussion Questions:
1. How can eBay segment its market?
2. What type of market research does an online auction company need?
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Quiz Questions:
Multiple Choice
1. A collector wants to buy a grandfather clock online. When he
sits down at his computer, he considers buying from the online
auction sites eBay, Overstock, and Yahoo, but does not consider
buying from Bidville. The customer is using:
a. an evoked set
b. a marketing controlled information source
c. routine response behavior
d. selective perception
e. an aspirational reference group
2. If an eBay customer feels she is paying an unfairly high price for
an item listing, she may experience __________ and consider
alternatives, such as selling through one of eBay’s competitors.
a. need recognition
b. an evoked set
c. cognitive dissonance
d. self-actualization
e. psychographic segmentation
3. According to the textbook, how much would eBay now have to
reduce its monthly cost for store owners (from $15.95) for the
change to be “just noticeable”?
a. $1.00
b. $1.60
c. $2.39
d. $3.19
e. $3.99
4. A loyal eBay customer one day discovers that Overstock offers
comparable services for half the price eBay charges for an online
listing. With no further information, the customer decides that
eBay must now be offering more advanced services. This is an
example of selective __________.
a. exposure
b. distortion
c. retention
d. perception
e. adaptation
5. Which of the following could be eBay’s NAICS code?
a. 32871
b. 56
c. 44
d. 45411
e. 4421941
6. “Entrepreneurs expressed concern that the company was catering to the professional sellers (e.g., big-ticket electronics vendors and industrial manufacturers) and ignoring smaller
home-based sellers who might also be enthusiasts or collectors.” If this is the case, what type of marketing segmentation is
eBay performing?
a. discriminatory
b. income
c. psychographic
d. benefit
e. usage-rate
7. By providing a monthly rate for large-scale sellers and an individual sale rate for personal sellers, eBay is using a __________
targeting strategy.
a. undifferentiated
b. concentrated
c. multisegment
d. one-to-one
e. bimodal
8. eBay e-mails an online questionnaire to a number of store owners and smaller individual sellers in order to investigate its customer’s reactions to the price increases. Many of the individual
sellers, who aren’t as concerned about a price increase because
they have such a small sales volume, choose not to respond.
However, almost all of the store owners who receive the survey
respond. What type of error has occurred?
a. measurement
b. sampling
c. frame
d. random
e. incremental
9. A paperweight manufacturer routinely makes sales on eBay.
When the sales manager discovers eBay’s price increase, he
barely gives it a thought before renewing the company’s eBay
account. This company might be called a(n):
a. satisficer
b. optimizer
c. original equipment manufacturer
d. drone
e. subcontractor
10. A seller and a buyer who often make transactions through eBay
decide to change to direct transactions after learning that eBay
had increased prices. This process is known as:
a. need recognition
b. involvement
c. A keiretsu
d. reciprocity
e. disintermediation
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PART 2 ANALYZING MARKETING OPPORTUNITIES
Case Studies
CRITICAL THINKING CASE
The Marketing Challenge at Lyon College
Lyon College (http://www.lyon.edu) is an independent, residential, coeducational, four-year undergraduate liberal arts college affiliated with the Presbyterian Church. Founded in 1872, it is the oldest independent college in Arkansas operating
under its original charter. Situated on 136 acres in the scenic foothills of the Ozark Mountains, the college is located in
Batesville, Arkansas. Batesville, which has 9,445 residents, is approximately 90 miles northeast of Little Rock (the state capital) and about 110
miles northwest of Memphis, Tennessee. A 2005 economic impact study conducted by EconImpact showed that Lyon College contributes $41
million annually to the economy of north central Arkansas. This includes $6.4 million in direct spending, $3.9 million in secondary spending,
$19.2 million in increased alumni earnings, $10.5 million in social benefits, and $1.2 million in local government benefits.
Conferring the bachelor of arts and bachelor of science degrees, Lyon College offers majors in accounting, art, biology, business administration, chemistry, computer science, early childhood/elementary education, economics, English, environmental studies, history, mathematics,
music, political science, psychology, religion and philosophy, Spanish, and theater. The college enrolls around 500 students from 20 states and
17 countries. The middle 50 percent of entering freshmen score between 21 and 28 on the American College Test (ACT), and 60 percent rank in
the top quartile of their high school graduating class. Faculty members at the college are talented teachers and scholars. Over 90 percent of the
full-time faculty hold a Ph.D. or other terminal degree appropriate to their field. In 2005, a Lyon College faculty member was named as Arkansas
Professor of the Year. This was the twelfth time in 17 years that a Lyon College professor had received this honor from the Council for
Advancement and Support of Education (CASE). This record is unmatched by any other liberal arts college in the country; no other Arkansas
institution of higher learning has won more than four times.
Lyon regularly ranks among the nation’s best liberal arts colleges in U.S. News & World Report’s annual list of “America’s Best Colleges” (the
list includes more than 200 liberal arts colleges that focus almost exclusively on offering bachelor degrees and award at least 50 percent of
these degrees in the liberal arts). Heading the U.S. News list are institutions such as Williams College and Amherst College in Massachusetts
and Swarthmore College in Pennsylvania. Joining Lyon in the third tier are institutions such as Eckerd College in Florida, Ogelthorpe University
and Morehouse College in Georgia, Cornell College in Iowa, and Guilford College in North Carolina. Based on surveys of over 110,000 students at
360 colleges, Lyon was one of 140 schools receiving the “Best in the Southeast” designation from the Princeton Review.
The college has developed a long-term strategic plan, “The Strategic Plan for Lyon College: 2005–2010,” that reaffirms its mission to offer a
liberal arts education of superior quality in a personalized setting and envisions a time when the school will be recognized as one of the finest
liberal arts colleges in the South. For the fall of 2006, the college’s objective was to enroll 160 well-qualified freshman students. The college’s
recruiting has traditionally focused on the state of Arkansas and the adjoining six states (Louisiana, Mississippi, Missouri, Oklahoma, Tennessee,
and Texas). These seven states were expected to have 485,000 high school graduates in 2006, with 30,000 of them in Arkansas. Of these
30,000 Arkansans, 18,000 were expected to attend college, andapproximately one-half of them were likely to score over 21 on the ACT.
Typically, applicants to Lyon College apply to at least four other colleges or universities. Lyon’s in-state public competitors include the
University of Arkansas (Fayetteville), the University of Central Arkansas (Conway), and Arkansas State University (Jonesboro). Major private college competitors include Hendrix College (in Conway, Arkansas) and Rhodes College (in Memphis, Tennessee); both are considerably more
expensive than Lyon. At $19,990 (tuition, room and board), Lyon is the fourth most expensive college in Arkansas, where the per capita income
is $22,000. In choosing a college, high school graduates consider many factors including the college’s size, location, and curriculum, and their
own ability or willingness to pay the tuition. One issue the college faces in recruiting students is the interactive aspect of the college choice
process. That is, the college knows that it has to target its prospects (future college students), but a multitude of influencers will affect a
prospect’s choice (parents, teachers, counselors, friends). Thus, for Lyon to meet its short-term recruitment goal as well as fulfill its longer-term
vision, the college must distinguish itself from its competitors while developing lasting relationships with these multiple constituencies.
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SOURCES: This case is based on communications with Walter Roettger, President of Lyon College, and approved for publication on December 1, 2005.
Discussion Questions:
1. Describe the consumer decision-making process employed in the college selection process.
2. How could Lyon College segment and reach its potential market(s)?
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Quiz Questions:
Multiple Choice
1. Which of the following is the first type of market segmentation
Lyon College should engage in?
a. geographic
b. age
c. gender
d. ethnic
e. income
2. According to the last paragraph of this passage, what is the
most important element of an applicant’s college choice
process?
a. the location of the college
b. how much the college costs
c. comparison with other area colleges
d. social class
e. an external information search
3. In terms of the college choice process, the U.S. News & World
Report is an example of a(n):
a. opinion leader
b. marketing-controlled information source
c. reference group
d. nonmarketing-controlled information source
e. keiretsu
4. The college choice process involves which type of decision
making?
a. routine response behavior
b. limited
c. extensive
d. derived
e. open-ended
5. One year, 30% more of the accepted student pool than is
expected decide to attend Lyon College. Lyon College does not
however wish to expand in size. Thus, the next year, it accepts
30% fewer students than it normally does. The year after, Lyon
College returns to its standard acceptance rate. This is an example of __________ demand.
a. derived
b. inelastic
c. fluctuating
d. growing
e. shrinking
6. If Lyon College decided to spend half of its advertising funds on
graduating seniors who like to go rock climbing, what element of
successful segmentation would it be violating?
a. accessibility
b. substantiality
c. viability
d. evaluation of alternatives
e. psychographic segmentation
7. Which of the following is a product class Lyon College might try
to disassociate itself from?
a. “first tier” liberal arts colleges
b. influencers, such as parents and teachers
c. its competitors
d. large state universities
e. private high schools
8. Which of the following would NOT be helpful if Lyon College
wanted to determine general opinion of their college among
potential applicants?
a. a probability sample of the entire population of Arkansas
b. a nonprobability sample of Missouri high school seniors
c. a scaled-response questionnaire given to high school
counselors
d. secondary data
e. mall intercept interviews
9. Work study, in which students who pay tuition to the college are
paid by the college for their labor, represents what business concept (if both the college and the individual student are viewed as
businesses)?
a. derived demand
b. a modified rebuy
c. cannibalization
d. disintermediation
e. reciprocity
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PRODUCT CONCEPTS
9
Case Studies
CASE ASSIGNMENT: Garage Band
Finally, A GarageBand That Really Rocks
Steve Jobs’s keynote address at the 2004 MacWorld conference was roundly criticized for being blasé and void of any
exciting new developments. It did, however, have one major and perhaps easily overlooked bright spot—the unveiling
of the latest version of Apple’s iLife software.
The standard suite of iLife products includes the popular and much heralded iTunes music management software,
as well as a digital photograph manipulator and organizer called iPhoto, a digital video-editing program named iMovie,
and a DVD mastering program called iDVD. The big news at MacWorld was that Apple has added a new program to iLife ’04 called GarageBand.
Complete with Garage-Band, iLife ’04 comes free on all new Apple computers and is available as an upgrade to owners of older systems for a
mere $49.
That $49 buys more than a thousand prerecorded Apple loops (or riffs), over 50 virtual instruments, and a virtual recording engineer (which
performs over 200 effects). Put simply, GarageBand helps any aspiring musician or hobbyist compose music, and all of those features turn any
owner’s computer into a pretty substantial home recording studio. Whether the musician needs a drumbeat to back up an external electric guitar for a jam session or a full range of orchestral instruments to provide the background to a keyboard solo, GarageBand makes sure that all
selected loops come together on time and in key. The user can even manipulate loops to create an entire song without using any instruments at
all. The loops are royalty-free, so new songwriters don’t have to worry about paying licensing fees to loop creators if they happen to make the
next Hip Hop chart topper.
The software provides a synthesizer-like keyboard that displays on the screen for those who wish to play the plethora of virtual instruments
via their computer keyboards, but plugging in an external keyboard allows the aspiring or accomplished musician to seriously expand his or her
range. Whether the user selects a Stratocaster guitar, a Steinway piano, a pop organ, or a big band bass from the library of virtual instruments,
the keyboard assumes its identity. Any notes or chords played on it will produce the exact sounds that would emulate from the original version
of the virtual instrument. To the delight of guitar players, GarageBand also offers virtual amplifiers that allow them to extract the sounds of the
British invasion, arena rock, or cool jazz from their axes.
GarageBand comes with a vast array of effects that composers can apply to their arrangements, too. Loops and any recorded pieces can be
faded, reverberated, brightened, echoed, compressed, or tweaked in any number of ways to obtain just the right sound. When masterpieces are
finished, GarageBand automatically exports them to iTunes where they are filed in a playlist under the composer’s name. The program also integrates new compositions with the rest of the iLife programs so that users can match soundtracks to their slide shows and movies. In fact, the
programs are so well integrated that Apple is advertising them as “just like Microsoft Office, for the rest of your life.”
GarageBand is the latest push by Jobs and Apple to make its computers the hubs of digital home entertainment centers. Unlike iTunes,
GarageBand is compatible only with Apple computers. Jobs is betting that with an active musician in one of every two U.S. households,
Garage-Band will draw a virtually untapped market of more than a hundred million amateur musicians to Apple computers. Considering that
iTunes’ music store owns 70 percent of the legal music download market and that the iPod is the best-selling digital music playback device, that
bet looks like a sound one.
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SOURCES: http://www.apple.com; Riva Richmond, “Apple’s New GarageBand Makes Making Music Easy,” Dow Jones Newswires, January 27, 2004; Walter Mossberg,
“How to Become a Rock Star: Apple’s Latest Music Offering Lets Closet Crooners Record and Mix Their Own Tunes,” WSJ.com, February 4, 2004; Bob Massey, “Music-Making
Made Slick,” Washington Post, January 25, 2004, F07; Jonathan Seff, “Center of Attention—iPod Mini, iLife ‘04 Expand Apple’s Digital Hub,” http://www.macworld.com,
March 2004.
Discussion Questions:
1. What type of product is GarageBand?
2. To which of Apple’s product lines does GarageBand belong?
3. Is GarageBand a new product or a modification of an existing product? If it is a modification, what type of modification is it?
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Quiz Questions:
Multiple Choice
1. What type of product is GarageBand?
a. homogeneous shopping product
b. business product
c. unsought product
d. heterogeneous shopping product
e. convenience product
2. iLife can be considered a product:
a. line
b. depth
c. item
d. mix
e. placement
3. GarageBand is a product:
a. line
b. depth
c. item
d. mix
e. placement
4. Including GarageBand, iLife product line is how many products
deep?
a. 1
b. 2
c. 3
d. 4
e. 5
5. The addition of GarageBand to iLife constitutes what kind of
product modification?
a. quality
b. functional
c. aesthetic
d. style
e. extensive
6. The addition of GarageBand to iLife is best described as:
a. product line extension
b. product line contraction
c. product repositioning
d. cobranding
e. brand repackaging
7. Apple is a(n):
a. private brand
b. generic brand
c. company brand
d. manufacturer’s brand
e. cobrand
8. The image of the silver or blue apple is Apple’s:
a. trademark
b. service mark
c. brand mark
d. brand equity
e. generic mark
9. When Apple grouped GarageBand into the iLife product line of
software, the company could expect to reap benefits like:
a. niche advertising
b. specialized components
c. unique packaging requirements
d. efficient sales and distribution
e. educating consumers about quality
10. Apple inspires a devout following of customers who demonstrate a consistent preference for the brand over all others.
Therefore, Apple has high:
a. brand loyalty
b. global branding
c. brand equity
d. brand name recognition
e. brand weight
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DEVELOPING AND MANAGING PRODUCTS
10
Case Studies
CASE ASSIGNMENT: Kandy Kastle
Things Are Not What They Seem at the Kandy Kastle
Meet Larry Jones, a former toy designer for the likes of Hasbro, Mattel, and Playmates Toys. Displaced when the industry turned to electronic toys, the irrepressible Jones is hard at play designing captivating candy concepts for niche manufacturer Kandy Kastle. He is not a confectioner, nor does he aspire to be one. Instead, Jones tinkers with candy
delivery mechanisms and silly, sometimes grotesque names sure to capture the eyes, imaginations and tummies of
youngsters.
His products belong to the $250 million, nonchocolate segment of the U.S. novelty candy market. It’s the third largest segment of the
sweets market, behind chocolate and chewy treats such as gummy candies, licorice, and taffy. The market has been flat in recent years, but
several former toy designers and a slew of hobbyist designers are beginning to breathe new life into the industry.
Their creations range from the simply fun to the outright goofy, and candymakers pay handsomely in hopes of landing the next big hit. Two
of Jones’s latest hits include the Big Barf and the Big Burp. Repulsive though they sound, both are just mouth-shaped, sound-generating dispensers for harmless gumballs. Though items like the Big Barf reek of a style unique to Larry Jones, he is just one of a new breed of novelty
candy container designers who are hoping to create the next confection legend that might someday be mentioned in the same breath as the
almighty Pez.
As action figures, toy trains, and other traditional toys are increasingly overshadowed by their digital counterparts, inventors and their
employers are betting that products that combine toys with candy curiosities are positioned to capture the dollars left behind by that fading
market. Deirdre Gonzalez, vice president of marketing for Cap Candy, says the reinvigorated novelty candy market is “a hybrid business between
the two industries.” Often priced from $.99 to $1.29, candy items sold with toy novelties are now attracting dollars that used to be reserved for
low-end toy purchases.
And the competition is as fierce as children’s tastes are fickle. In addition to Kandy Kastle, companies like Cap Candy and Candy Planet race
each other to develop new products, while the likes of Willy Wonka and Jelly Belly battle to promote their lines with tie-ins to blockbuster children’s movies. Even independent entrepreneurs are getting in on the act. Two married couples quit their postal service jobs to form BAAT
Enterprises from their names: Bill, Ann, Anna, and Tom, and introduced the Spin Pop, a rotating motorized sucker. A modern take on the Ring
Pop, the Spin Pop sold almost 6 million units in under two years.
What’s cool with kids is fleeting, though. New products must be developed every month to keep up. Larry Jones, for example, did not rest on
the laurels of his gastrointestinal gumball designs. He is also the wiz behind Ear Wax, Big Toe Goo, Tar Pits, Hose Nose, Brain Drain, and glow-inthe-dark Lightning Bugs. “What I’m after is to have the kid have a little bit of magic or a little giggle while eating his candy,” Jones says. Kandy
Kastle is relying on him to come up with a host of interesting fare based on the hugely popular Hello Kitty brand, too. Originality is key. The children in this market space, aged 4 to 12 years, are increasingly savvy consumers and they are gaining in influence and even buying power.
Influence with parents is crucial, of course, but sway with other kids in the peer group is more critical. Rose Downey, marketing manager at
Au’Some Candy Company, puts extra emphasis on word-of-mouth endorsements for her company’s novelty products. “We feel that the right
way to grasp the kids’ attention is word-of-mouth advertising,” she says. “Kids trust other kids’ judgment,” she continues. “If Child A buys the
product and it tastes great and looks cool and is fun, Child B is going to want the product and so on. Trust the kids. They know best when it
comes to candy.”
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SOURCES: Neil Parmar, “Idled Toy Inventors Find a Sweet Niche: ‘Novelty’ Candy,” Wall Street Journal, July 21, 2005, B1, B3; “Novelties Engender Avid Fans,” MMR, June
13, 2005, 64; “Timing Is Everything with Licensed Novelty Candy,” Confectioner, March 2005, 32; “Securing Play Value: Novelty/Interactive Candy Isn’t Just Playing Around;
It’s Aiming for a More Stable Shelf Spot,” Confectioner, February 2005, 38.
Discussion Questions:
1. To what category of new products does the Spin Pop belong?
2. Based on what you read in the case, what do you think Kandy Kastle’s new product development strategy is? Why do you think the development of the Hello Kitty product line is so important?
3. Visit www.KandyKastle.com and review the product descriptions. Discuss the characteristics that influence their rate of adoption and predict and explain their rates of acceptance and diffusion.
4. In what part of the product life cycle are both the candy and toy categories? What kind of future do you predict for the novelty candy category?
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Quiz Questions:
True/False
1. Given the importance of new products to Kandy Kastle’s overall
business strategy, it would make sense for Larry Jones to do
test marketing on novelty candy items before widely distributing
them.
a. True
b. False
Multiple Choice
1. If Kandy Kastle were to introduce a new candy in a single city, it
would be an example of:
a. concept testing
b. test marketing
c. simulated market testing
d. commercialization
e. diffusion
2. Suppose Kandy Kastle distributed questionnaires asking schoolchildren whether or not they would eat candy shaped like vegetables. This would be an example of:
a. concept testing
b. test marketing
c. simulated market testing
d. commercialization
e. diffusion
3. What kind of new product is a Spin Pop?
a. discontinuous innovation
b. new product line
c. improvement to an existing product
d. repositioned product
e. new-to-the-world product
4. In what stage of the product life cycle is the candy category?
a. introductory
b. growth
c. maturity
d. decline
5. While developing the Hello Kitty line of candy novelties, Larry
Jones is likely to research the demand for other Hello Kitty novelty items and to estimate how many young girls would stop
buying Spin Pops and instead start buying new Hello Kitty candy
novelties. This describes the ______ stage of new-product
development.
a. business analysis
b. idea screening
c. concept testing
d. market testing
e. research & development
6. When Rose Downey talks about the influence that children have
on each other’s buying habits, she references “Child B”, who
buys a new type of candy only on the recommendation of
another child. Child B is most likely a(n):
a. innovator
b. early adopter
c. late innovator
d. laggard
e. early buyer
7. BAAT sold 6 million Spin Pops in under two years. The most
likely reason for the high rate of acceptance is the product’s:
a. compatibility
b. observability
c. relative advantage
d. trialability
e. All of these characteristics contributed to the Spin Pop’s
wide acceptance.
8. Novelty candy items like Ear Wax, Big Toe Goo, and Nose Hose
are best labeled:
a. styles
b. fashions
c. fads
9. If Larry Jones asked the children in his neighborhood to design
their fantasy candy, he would be in which phase of the newproduct development process?
a. idea generation
b. idea screening
c. business analysis
d. research & development
e. testing
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SERVICES AND NONPROFIT ORGANIZATION MARKETING
11
Case Studies
CASE ASSIGNMENT: Playbill
Cast in the Leading Role, Playbill Shines
Anyone who has ever attended live theater has probably, at some point, flipped through a copy of Playbill. Established in
New York City in 1884 as the program of choice for Broadway and off-Broadway theaters, Playbill the company publishes
and distributes the near-ubiquitous black and white program with the familiar yellow and black cover to theaters in almost
every major and medium-sized city in the United States. Over 3 million theatergoers read the programs every month.
Complete with cast rosters and biographies, show synopses, lists of prominent theater sponsors, insider gossip
columns, and various feature articles on nationally known actors and theater personalities, Playbill provides its readers with a panoramic view of
the performing arts. Playbill distributes its programs free to theaters, which, in turn, give them to show attendees as a complimentary item
included with the price of their tickets. Like most magazine publishers, Playbill earns revenue simply by selling the advertising space—a lot of
it—within its pages. Thanks to its broad distribution network and its wealth of proprietary and nationally oriented editorial content, Playbill is
able to extend its revenue base with a mix of local, regional, and national advertisers.
Although the audiences at the many performing arts centers represent a highly coveted and affluent consumer demographic, Playbill’s competition has been limited to one national and several regional program publishers. To establish itself as the lone national brand, Playbill purchased its primary rival, Stagebill, which publishes Performing Arts magazine, in 2002. Though Playbill’s purchase of Stagebill could be
interpreted as a move to exert its dominance, closer inspection of the deal and the state of the industry reveals that Playbill was motivated simply by survival. Program publishers suffer from exceptionally low profit margins, and continual pressure to cut costs left Playbill with the ability to
supply programs to only a select few of Stagebill’s most lucrative former customers.
Though Playbill has eliminated its most serious rival, fallout from the takeover emboldened the theater owners who were left behind.
Consequently, demand for locally published programs has increased. Sizable theater consortiums in major markets such as San Francisco,
Chicago, Seattle, and Los Angeles now work with local publishers who afford them more editorial control over their programs’ content. To venue
owners in those markets, providing locally focused news, information and personal profiles is the key to building audience support for live theater in their particular market. To help offset their publishing costs, some even assume responsibility for selling advertising space in their programs in exchange for a share of the ad revenue they generate.
In addition to effectively monopolizing the national market for printed programs, Playbill has further extended its appeal to advertisers by
forming the necessary business partnerships to take its product to the airwaves and into cyberspace. Recently, Playbill and Sirius Satellite Radio
formed a strategic alliance to provide daily news features, live programming, music, special programming, and information from the world of
Broadway for Sirius Radio’s Broadway’s Best channel. In return for the increased brand exposure, Playbill will promote Sirius in printed editions
of Playbill and through Playbill On-Line, at Playbill.com.
Playbill.com uses a mix of exclusive content, feature articles pulled from the printed Playbill, show schedules, and seating charts for all of
Playbill’s partner theaters around the world to generate 20 million hits each month. Playbill has used the Web site to coordinate partnerships
with ticket agencies, restaurants, and hotels that offer discounts to the hundreds of thousands of subscribers to Playbill On-Line’s Playbill Club.
Consumers can join the club for free, and it offers tremendous exposure for Playbill’s business partners who are able to place their products or
services directly in front of individuals with an average yearly income of $80,000. Clearly, Playbill is on solid ground. Nevertheless, it still faces
the challenge of finding innovative ways to earn a profit from a product that doesn’t cost its end customers a single cent.
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SOURCES: Claudia Peschiutta, “Theatres Scramble to Find New Program Publisher before Fall,” Los Angeles Business Journal, July 29, 2002; Randy Gener, “Get with the
(New) Program: There’s Been a Big Shakeup in a Business That Audiences Take for Granted,” American Theatre 20 (January 2003): 20; “Venerable Theater Guide Takes Its
Enduring Show on the Road,” PR Week, October 14, 2002, 14; Laura Weinert, “End Program: Will Acquisition of Performing Arts by National Playbill Damage West Coast Arts
Coverage?” Back Stage West, July1, 2002, 1; Leonard Jacobs, “Theatre Mag Shake-up: Playbill Buys Stagebill; Show People to Debut,” Back Stage, June 14, 2002, 2.
Discussion Questions:
1. Is Playbill a good, as service, or both?
2. Using the material in learning objective 4 as a template, outline Playbill’s marketing mix. Discuss its product, core and supplementary services, mass customization, service mix, distribution, promotion, and pricing.
3. What role does the alliance with Sirius play in Playbill’s marketing mix? Do you think the alliance will enhance demand for Playbill’s services?
Explain?
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Quiz Questions:
Multiple Choice
1. What is Playbill’s core service?
a. providing the theater playbill
b. broadcasting on Sirius Broadway’s Best channel
c. On-line Playbill Club
d. offering advertising to local companies
e. supporting arts programming
2. Playbill assembles performance-specific programs that include
cast rosters, show synopsis, lists of prominent sponsors, and
local reviews and commentary. As such, into which category of
service processes can Playbill be placed?
a. people processing
b. possession processing
c. mental stimulus processing
d. information processing
e. supplemental processing
3. Providing programs to theaters, the On-line Playbill Club, and the
Broadway satellite radio channel are all part of Playbill’s:
a. product mix
b. service mix
c. customization strategy
d. complementary services
e. core product
4. Because local and regional theaters began requesting local and
regional content in their performance programs, Playbill began
practicing:
a. regional market standardization
b. service standardization
c. special service delivery
d. mass customization
e. nonprofit service delivery
5. Playbill’s widely recognized program covers designed in yellow
and black and resembling a theater marquis help the company:
a. use personal information sources
b. use business information sources
c. engage in postpurchase communication
d. stress intangible cues
e. create a strong organizational image
6. Playbill offers its programs to art venues for free, paying for production through advertising income. Playbill’s pricing model is
most likely:
a. bundled pricing
b. based on completing a task
c. revenue oriented
d. operations oriented
e. patronage oriented
7. Playbill.com provides news and features about Broadway happenings in an _____ manner.
a. direct
b. indirect
8. When theatergoers receive a Playbill program at an art venue,
Playbill is interacting with the customer:
a. directly
b. indirectly
9. When a theater buff sits at her computer and reads on
Playbill.com what is happening on Broadway, it is an example of
the service’s:
a. intangibility
b. separability
c. homogeneity
d. imperishability
e. responsiveness
10. Playbill has been in business for roughly 125 years, providing all
manner of theatrical information to patrons of the arts. During
its 125 years in business, the company has become the industry
standard for dependable theater programming. This is evidence
of the company’s:
a. tangibles
b. empathy
c. assurance
d. reliability
e. responsiveness
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PART 3 PRODUCT DECISIONS
Case Studies
MARKETING MISCUES
Manufacturing Defect Results in Quite a Stir for iPod Nano
Innovation has been key in Apple Computer’s transition from just a computer company into a consumer electronics company as well. One of Apple’s most prominent consumer electronics product introductions has been the iPod. Though companies such as Dell countered with competing products (e.g., the Dell DJ), the iPod quickly became synonymous with MP3
players. Without a doubt, the iPod has been a runaway success for Apple. With estimated quarterly shipments of almost 7 million iPods, Apple
continues to crush competitors.
The company recognized that, as with any cool product offering, it had to keep the spotlight on the iPod. To do so, Apple introduced the iPod
Nano in the fall of 2005. Considered by some to be the coolest iPod yet, the iPod Nano was a hybrid of the iPod Shuffle, the iPod Mini, and fullsized color iPods. Combining key features from all three products, plus some new features, the iPod Nano brought new meaning to the phrase
“thin is in.” With dimensions of 3.5 by 1.6 inches and a back-to-front depth of 0.27 inches, the iPod Nano could fit into a business card wallet.
Two models of this pencil-thin player, available in black or white, were introduced. Starting at $199, the 2GB model could hold 500 songs.
The 4GB model could hold 1,000 songs and had an expected retail price starting at $249. Accessories for the Nano included lanyard headphones, an armband, tubes in five colors that looked cool and also served as safety protection, in-ear earphones, a dock, a USB power adapter,
and a USB cable. Apple expected the accessories to contribute significantly to its profits from the Nano.
The new iPod was introduced with much fanfare, including Steve Jobs literally pulling the iPod Nano out of his pocket. This demonstration of
where to carry the iPod Nano may linger in the minds of many purchasers, particularly those who retrieved their new iPod Nanos from their
pockets only to find the color display screen scratched so badly that images were distorted. One Nano owner, Matthew Peterson, did something
about the problem. Apparently, Peterson had the iPod Nano in his pocket while he was walking, only to have the screen shatter when he sat
down—and no, he didn’t sit on it. Peterson took his Nano to the nearest Apple Store for repair or replacement, but the staff at the store
declined to replace the broken unit or to admit any responsibility on the part of the company. According to Apple, the damage was not covered
under the product warranty.
At that point, Peterson felt that his only recourse was to see if there were any other disenchanted iPod Nano customers. So, he created a
Web site, http://www.flawedmusicplayer.com, where he posted an autopsy photo of the Nano that showed the damage sustained after only
four days of what should have been normal use (at least according to the way Jobs presented the product). The Web site quickly became an
online gathering place for dissatisfied iPod Nano customers. Soon, close to 300 threads were posted on the Web site’s discussion board relating
stories of damage ranging from severe scratches to shattered LCD screens. Ultimately, the Web site got Apple’s attention (which was
Peterson’s mission), and the company began investigating the problem. In the interim, however, customers became even more irate when at
least one iPod repair company, overwhelmed by the demand for its services, temporarily raised the price of repairing Nano LCD screens because
of limited screen availability.
Three weeks after introducing the iPod Nano, Apple took responsibility for the flawed product and offered to replace screens that cracked
too easily. The company attempted to downplay what it referred to as a “minor issue” by saying that the defective screens were due to a vendor quality problem that affected less than one-tenth of 1 percent of total iPod Nanos that had been sold. The company insisted that the defects
were not a design problem attributable to the size of the iPod Nano.
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SOURCES: http://www.apple.com/ipodnano/; Christopher Breen, “Review: iPod Nano,” Playlist Magazine, September 9, 2005, http://wwwplaylistmag.com; Amanda Cantrell,
“Mac Sales May Juice Apple’s Earnings,” CNN/Money, October 10, 2005, http://money.cnn.com/; Michael Bazeley, “EBay Nation Put to the Test,” San Jose Mercury News,
June 20, 2005, K0182; Michelle Meyers, “Problems Surfacing with iPod Nano Screen,” CNET News, http://www.news.com, September 24, 2005; Greg Sandoval, “Apple: Small
Number of iPod Nanos Flawed,” Associated Press, September 28, 2005, http://www.apdigitalnews.com/.
Discussion Questions:
1. Why did it take an international Web site to get Apple’s attention to this matter?
2. Will sales of the Nano be affected by the reports about defective screens?
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Quiz Questions:
Multiple Choice
1. When the original iPod was introduced to the market, what type
of product was it?
a. unsought
b. convenience
c. business
d. obsolescent
e. generic
2. Apple sells the iPod Classic, the iPod Nano, the iPod Touch, and
the iPod Shuffle. This product __________ has a(n)
__________ of four.
a. code, extension
b. mix, cycle
c. line, extension
d. mix, width
e. line, depth
3. When Apple expanded from selling just computers and moved
into the consumer electronics market, it______.
a. made a product line extension
b. made a product line contraction
c. cobranded
d. increased product mix width
e. repositioned
4. The iPod Mini was introduced in February, 2004 but discontinued
on September 7, 2005, the same day the iPod Nano was introduced. Apple could be accused of which of the following?
a. product modification
b. planned obsolescence
c. product line contraction
d. individual branding
e. heterogeneity
5. The apple that appears when one turns an iPod on or off is the:
a. brand mark
b. trademark
c. brand name
d. brand label
e. universal product code
6. On the back of an iPod Nano package, you see two statements:
(1) “1.5-inch (diagonal) color LCD with LED backlight” and (2)
“Now that you can take your music everywhere, there’s no limit
to where it will take you.” These statements represent
__________ and __________ labeling, respectively.
a. promotional, persuasive
b. accurate, exaggerated
c. informational, promotional
d. persuasive, persuasive
e. informational, persuasive
7. From your high school class of 200, 40 people ultimately decided
to buy an iPod Nano. Of these, you were the 25th. According to
the textbook, which category of adopter would you belong to?
a. innovators
b. early adopters
c. early majority
d. late majority
e. laggards
8. Matthew Peterson complained to an Apple customer service
representative about the damage his iPod Nano sustained.
Suppose the representative had answered, “It’s not covered by
warranty; if we cover yours, we’d have to cover everyone else’s,
too.” That answer is best described as a lack of which service
quality?
a. reliability
b. responsiveness
c. assurance
d. empathy
e. credence
9. Given that the original iPod essentially created the digital audio
player market (digital audio players existed before the iPod, but
only in a limited market), which stage of the product life cycle
was the iPod in when a wave of competing products, each
claiming to be an “iPod Killer”, entered the market?
a. introductory
b. growth
c. maturity
d. decline
e. competition
10. Assuming that screen damage was not covered in the iPod
Nano’s product warranty, which of the following best describes
the gap in service quality Peterson would have experienced
when the staff at an Apple Store refused to replace his broken
unit?
a. between what customers want and what management
thinks customers want
b. between what management thinks customers want the quality specifications management develops to provide the service
c. between the service quality specifications and the service
that is actually provided
d. between what the company provides and what the customer
is told it provides
e. between the service that customers receive and the service
that they want to receive
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PART 3 PRODUCT DECISIONS
Case Studies
CRITICAL THINKING CASE
Dallas Mavericks – The Total Entertainment Experience
Mark Cuban, ranked as number 327 on Forbes magazine’s list of the world’s richest people, paid $280 million for a losing
product when he bought the Dallas Mavericks in January 2000. At the time, he described the sports franchise as a beaten
organization, but one that had a culture of survival. As the new owner, Cuban began immediately to revitalize the product
by changing the face of the organization. His objective was to transform Mavericks games into a total entertainment experience that would
offer much more than just a basketball game.
Internal changes paved the way for enhancing the customer’s experience. Cuban immediately tripled the size of the sales staff. Every sales
representative was required to make 100 cold calls per day until games began to sell out. The new mantra was, “Every minute of every day, it’s
selling time.” More important, however, was what these sales reps were selling. Cuban told them that they no longer sold basketball—they
were selling fun, throats sore from yelling, and hands sore from clapping.
Within three years, Mavericks fans had a sense of pride in their team, which had developed into a winning basketball franchise. Once a perpetual loser, the team was winning games, making the playoffs, and boasting franchise-best records. Though the team’s winning record was
capturing fans, Cuban knew that he would have to offer a wide array of related products and enhancements if he was to continue to beat out
his entertainment competitors in Northeast Texas.
The Dallas Mavericks reside in a city with all of the “big four” professional sports teams. In addition to the Mavericks, Dallas is home to the
Dallas Cowboys (football), the Dallas Stars (hockey), and the Texas Rangers (baseball). The Mavericks’ entertainment competitors also include
the Texas Motor Speedway, Lone Star Park, Dallas Desperados Dancers, and Dallas Burn and Sidekicks soccer teams, as well as countless
restaurants, bars, movie theaters, and music venues. Local collegiate sports teams (e.g., Southern Methodist University, the University of North
Texas, and the University of Texas at Arlington) also compete for entertainment time and dollars.
As a competitor in this vast entertainment marketplace, the Mavericks offered not just a winning team, but a great in-arena experience. The
Mavs ManiAACs (men between the ages of 21 and 50) made their dancing debut at the first playoff game in 2001, and fans were entertained
regularly by the Mavs Man mascot and the Mavs Dancers. The entertainment experience also included the merchandise sold, the music and
videos played, the free entry of painted fans, and the team’s own version of Duke’s Cameron Crazies (allegedly some of the rowdiest, wittiest,
and best-organized college basketball fans).
The team’s attendance figures testify to Cuban’s ability to create a successful product. Since December 2001, the team has sold out every
home game at the American Airlines Center. With this goal accomplished, team management had a new objective: to increase the team’s fan
base in the Fort Worth area. Although the Mavericks consider themselves a Metroplex (Dallas-Fort Worth) team, they had not made a concentrated effort to market the team outside the city of Dallas.
Demographically, Dallas and Fort Worth are very comparable. Fort Worth is located approximately 30 miles west of Dallas, with two major
highways connecting the two cities. Like the Minnesota Timberwolves (Minneapolis and St. Paul) and the Golden State Warriors (Oakland and
San Francisco), the Mavericks have easy access to markets in two large cities. The combined population of Dallas and Fort Worth is slightly over
1.7 million (compared to a market of almost 660,000 for the Timberwolves and around 1.2 million for the Warriors).
Though Fort Worth does not boast a hometown professional team, the Texas Rangers claim Fort Worth, Dallas, and Arlington as their hometowns. Additionally, Fort Worth has minor league teams such as the Fort Worth Cats baseball team and the Fort Worth Brahmas hockey team.
On the collegiate scene, the Horned Frogs of Texas Christian University have become a national phenomenon and draw considerable support.
Other entertainment offerings in Fort Worth include Six Flags over Texas, Six Flags Hurricane Harbor, the Fort Worth Stock Show and Rodeo, the
Bass Performance Hall, and the Will Rogers Coliseum and Museum district. Despite this competition, Cuban’s goal was to make the Mavericks a
hometown brand in Fort Worth by 2005, while continuing to fill their arena to capacity.
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SOURCES: Much of this case was prepared by Matt Miller in his case study, “Marketing the Dallas Mavericks to the Fort Worth Community,” Texas Christian University, 2005.
See also, “Mark Cuban,” Billboard 2004 Digital Entertainment Conference & Awards, http://www.digitalentertainmentawards .com; Mark Cuban, “How to Win Fans and
Influence People,” Special to SportsNation, January 21, 2003, http://espn.go.com/.
Discussion Questions:
1. What is the product?
2. What does the term brand equity mean in relation to team management’s attempt to expand its fan base but not necessarily sell more
game tickets?
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Quiz Questions:
Multiple Choice
1. In competing against numerous other entertainment venues,
Mark Cuban is offering a(n) __________ product.
a. better
b. specialty
c. shopping
d. unsought
e. generic
2. Assuming the Mavericks do not currently offer any of the following services, which of the following would NOT increase the
Mavericks’ product mix width?
a. basketball camps for kids
b. afternoon games
c. a sports bar
d. a playground basketball hoop
e. a satellite radio channel
3. Even though the Mavericks already sell out every home game,
Mark Cuban is trying to recruit fans from Fort Worth so that he
can increase other sales elements (such as ticket prices and
memorabilia sales). Cuban’s efforts in Fort Worth represent an
effort to increase brand:
a. width
b. extension
c. recognition
d. intangibility
e. equity
4. Mavericks jerseys and practice shorts are manufactured by
sports-clothing companies (such as Reebok and In Zone Athletic
Wear) and sold with the logos of both the Mavericks and the
clothing company. This is an example of:
a. family branding
b. complementary branding
c. cobranding
d. ingredient branding
e. simultaneous product development
5. Fans with painted faces can attend Mavericks games for free
because these fans enhance the entertainment experience in
the arena. The enjoyment produced from seeing the painted fans
is uniquely associated with attending Mavericks games and so
demonstrates what element of services?
a. experience quality
b. inseparability
c. intangibility
d. credence quality
e. perishability
6. If Mark Cuban determines that a series of home games against
the struggling Charlotte Bobcats is not likely to sell out, what
principle might encourage him to lower ticket prices for the
series?
a. inseparability
b. intangibility
c. perishability
d. heterogeneity
e. empathy
7. The experience of a Mavericks game appeals to consumers’
__________ processing.
a. people
b. actualization
c. mental stimulus
d. information
e. experience quality
8. When Mark Cuban added new forms of entertainment (such as
the ManiAAC dancers) to Mavericks games, which of the following did he create?
a. mass customization
b. supplementary services
c. experience quality
d. new products
e. complementary positioning
9. Mavs Man, the mascot of the Dallas Mavericks, is a(n)
__________ for the Dallas Mavericks’ brand.
a. product line extension
b. convenience product
c. organizational image
d. persuasive label
e. tangible cue
10. The Mavs ManiAACs dancers give a performance at a Mavericks
game that seems unsynchronized and clumsy. Which of the of
the following best describes the gap in service quality that
needs to be remedied?
a. between what customers actually want and what management thinks they want
b. between what management thinks customers want and the
quality specifications it develops to provide the service
c. between the service quality specifications and the service
that is actually provided
d. between what the company provides and what the customer
is told it provides
e. between the service that customers receive and the service
they want to receive
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MARKETING CHANNELS AND SUPPLY CHAIN MANAGEMENT
12
Case Studies
CASE ASSIGNMENT: Current TV
Current TV Plugs into the ‘Net Generation
Ten years ago, the Internet began a revolution that has forever changed the way consumers shop for goods, send and
receive mail, find and read news, and acquire and listen to music. A relatively new electronic distribution channel, the Web
enables billions of near-instantaneous commercial, consumer, and information exchanges each day. And with the widespread dispersion of increasingly powerful and portable digital technologies, marketers are witnessing a new phenomenon–
consumers devoting considerable time to archiving and sharing the personal events of their lives.
Tech-savvy members of Generations X and Y are photographing, recording, cataloging, uploading, blogging, hyperlinking, downloading, and
sharing peer-to-peer files at an accelerating pace. Moreover, the independent Web sites where those opinions, files, and reports are located are
becoming an increasingly valid means of staying connected with the world. Quite simply, this phenomenon is turning traditional media channels
on their collective ear.
Few companies really comprehend that the digital technologies driving homemade reporting and entertainment productions are simultaneously increasing demand for them. One company that understands, and even anticipated, this trend is start-up cable channel Current TV.
Cofounded, chaired, and led by the vision of former vice president Al Gore, Current predicted the relevance of do-it-yourself (DIY) media some
time ago. Gore’s objective, as stated on Current TV’s Web site, is to democratize the production, distribution, and consumption of television.
Years ago Gore recognized that the proliferation of affordable digital technology would make it possible to create “a powerful new brand of
television that doesn’t treat audiences as merely viewers, but as collaborators.” And those collaborations, fueled by viewer-created content
(VCC), are powering the DIY media boom. Shari Anne Brill, vice president and director of programming at the Carat Group, an independent
media agency, predicts that “Current will appeal to a much younger-skewing and very unique audience. It opens up tremendous avenues
between Internet and television, and it’s a very interesting way to reach out to viewers who want to participate in the viewing experience.”
Current TV’s Web site already hosts a menu of more than 50 “pods” containing program lists chosen for their appeal to independent spirits
who have grown disenchanted with the staid format of mainstream television. Recent feature programs on Current TV have included a piece on
a man who spends his free time jumping from cliffs and bridges, a first-person perspective on the rescue efforts in the aftermath of Hurricane
Katrina, and an in-depth report on a San Francisco rock band produced by a local college student.
Most programs relate to current affairs, but other topics routinely covered include lifestyle themes such as art, fashion, culture, the environment, music, language, relationships, careers, travel, movies, and more. Regardless of subject, all Current TV programming has an intimate and
unpretentious feel. Ever mindful of past pitfalls, Current is adamant that it will not devolve into a twenty-first-century version of the public
access fiascoes that gave VCC a bad name many years ago.
In an effort to protect program quality, only one-third of Current’s programming is viewer created, but the company doesn’t think that will
dissuade viewers as long as its professionally produced work has credibility, relevance and appeal. The viewer-submitted content that is aired is
also paid for, though it is repeated quite a bit, and watchers have the ability to vote for shows at Current TV’s Web site.
What would enable Current to run more VCC? The answer, in a word, is access. At this time, Current distributes its programming to only 20
million residences in select metropolitan areas via Comcast, DIRECTV, and Time Warner. It lacks support from the major cable and satellite companies that, together, feed popular stations to around 80 million homes. Current needs access to viewers in order to appeal to their creative
alter egos and fuel the DIY cycle.
In an age when countless business models have seen explosive growth followed by a dramatic collapse, Current’s approach and situation
look promising. Its concept has recently been validated by MTV’s purchase of independent, Web-based VCC site iFilm.com. MTV Networks
Music Group president, Brian Graden, says that VCC “is obviously the next wave, and the purchase by Viacom of iFilm is probably the strongest
statement that we’re very much on to that. The more control you put of everything into the viewers’ hands in this sort of multiplatform, ondemand age, that’s the only way you’re going to win.”
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SOURCES: Christopher Lawton, “Made-by-Viewers TV,” Wall Street Journal, December 13, 2005, B1, B2; Steve Tomich, “Current TV: Think Outside, Get Inside the Box—Taking
the Leap with a ‘New TV’ Network,” Digital Video Magazine, January 1, 2006, 38; James Hibberd, “Progress Report: The New Nets; Three Rookies, All with Major Backers,
Devise Strategies That Help Them Overcome the Odds and Find Their Place,” Television Week, November 14, 2005, 26; Paul Gogh, “Gore: Current TV Aims for the Masses,”
Hollywood Reporter, October 10, 2005, 6
Discussion Questions:
1. Explain Current TV’s channel strategy. What factors influence it the most? Why?
2. Describe Current TV’s channel arrangement. What role do the intermediaries play? What potential conflicts would you predict for Current?
3. Who are Current’s channel partners? What do you think it will take to sustain those relationships?
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Quiz Questions:
True/False
1. Current uses a dual distribution strategy.
a. True
b. False
Multiple Choice
1. Using the Internet for media communication allows Current TV
to instantly overcome:
a. discrepancy of quantity
b. discrepancy of assortment
c. temporal discrepancy
d. spatial discrepancy
e. horizontal conflicts
2. The intermediaries in Current TV’s channel structure are:
a. networks
b. show producers
c. viewers
d. satellite companies
e. All of these are intermediaries for Current TV.
3. Which best describes Current TV’s distribution intensity?
a. exclusive
b. inclusive
c. intensive
d. selective
e. fractional
4. In the relationship between Current TV and its distributors, who
is the channel captain?
a. Current TV
b. the distributors
5. Limelight provides Current TV access to what it calls its big fat
content delivery network (cdn) that Current TV uses to serve its
video material online. Limelight Network and Current TV have:
a. a strategic channel alliance
b. overcome spatial discrepancy
c. created a dual distribution channel
d. outsourced logistics
e. created an agent/broker channel
6. Current TV’s selection of viewer-created content is analogous to:
a. Procter & Gamble’s innovation labs
b. Wal-Mart’s product inventory
c. T-Mobile’s service contracts
d. Ford’s dealership network
e. Century 21’s sales contracts
7. In 2006, Warner Brothers (division of Time Warner) signed an
agreement to distribute movies and TV shows online via Guba
LLC’s search engine and video-sharing community, Guba.com.
Given Current TV’s relationship with Time Warner Cable, this
new agreement could be an example of:
a. horizontal conflict
b. vertical conflict
c. channel cooperation
8. Current TV’s business model suggests that the company views
its channel partnering as more _______ based.
a. transaction
b. customer
c. supplier
d. shareholder
e. partnership
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RETAILING
13
Case Studies
CASE ASSIGNMENT: Best Buy
Thousands of Possibilities. Get Yours.
The promise of the long-awaited digital revolution has finally been fulfilled. Flat-panel televisions, MP3 players, wireless
laptops, cell phones with Internet browsing capability, wirelessly networked computing devices for the home, digitally
controlled home appliances, and more are no longer the toys of a future generation. They are here today, and Best Buy
wants to sell them—all of them—to anyone with the money to burn on such luxury items. In addition to all the geewhiz electronic merchandise, the company still sells coffee makers, vacuum cleaners, and washing machines, albeit
slightly more expensive ones than before.
The new digital gadgets, however, are fast crossing the threshold from expensive luxury items to affordable common electronics. The upside
is that more customers are able to buy such products; the downside is the negative pressure put on prices and revenues. If any retailer can find
a way to survive and turn a profit in the fiercely competitive electronics and home appliance industry, it’s Best Buy. Twenty years ago, when it
operated under the name Sound of Music, a tornado ripped through its flagship store, and the company held a “best buy” sale to liquidate its
merchandise and cover the costs of repairs. The success of the sale was the impetus for the name change to Best Buy, and the opening of its
first superstore in 1984 marked the beginning of “big box” retailing as it is known today. Nine years later, the new look national chain surpassed
Circuit City as the number one retailer in the segment. Best Buy’s stores offer a dizzying array of products (its stores have nearly 25,000 separate items) at affordable prices.
Usually located in a small- or medium-sized outdoor shopping centers with other “big box” retailers, an average 40,000-square-foot Best
Buy store is large enough to hold ample stock of all available items while still comfortably accommodating customers. Bright lights, concrete
floors, wide and easily navigated aisles, oversize shopping carts, and a helpful but unobtrusive staff dressed in blue shirts and khaki pants have
put Best Buy at the head of the retail class when it comes to customer satisfaction surveys. Best Buy’s television commercials, which feature
the tag line, “Thousands of Possibilities. Get Yours,” communicate an accurate picture of the customer experience. Inside every Best Buy store,
a canned deejay plays the latest popular music over the public address system; recently released DVDs play on big-screen TVs; and personal
computers, video game modules, home stereo systems, and more are turned on and available for customers to tinker with.
The ability to connect with its customers has brought Best Buy a 16 percent share of the $130 billion North American market for electronics and
related devices. It now operates 600 stores in the United States and plans to open 60 or so new stores each year for the near future. Competition,
however, is stiffening. Best Buy’s main threat now comes from discount superstore Wal-Mart, whose share of the market has climbed rapidly to
just 5 percentage points behind Best Buy’s. That development, combined with a downward pressure on prices for electronic devices similar to the
pressures in the PC industry, has forced Best Buy to explore new and more profitable ways of meeting the needs of the market.
The firm’s latest initiatives include selling more upscale and higher margin merchandise, hiring highly trained sales “consultants” to assist
with more complex and expensive purchases, staying open for longer hours on weekends, outsourcing lower end items to China, and selling
installation and connection services for its products. Those who prefer to shop in their pajamas can check out the possibilities online at
BestBuy.com. Best Buy is also selling home entertainment packages direct to upscale homebuilders in cities such as Minneapolis, Dallas, and
Las Vegas. For a nominal surcharge as low as $1,000, Best Buy will install, connect, and integrate the system while the house is being constructed, leaving the home’s new owner to sit back and enjoy the show.
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SOURCES: http://www.bestbuy.com; Mark Tatge, “Fun and Games,” Forbes, January 12, 2004, 138; Scott Carlson, “Best Buy Extends Weekend Store Hours,” Saint Paul
Pioneer Press, February 17, 2004; Scott Carlson, “Best Buy, Target Stores Score High in Consumer-Approval Survey,” Saint Paul Pioneer Press, January 30, 2004; Laura Heller,
“Connected Life Blooms in the Desert,” DSN Retailing News, February 9, 2004, 188.
Discussion Questions:
1. What type of retailer is Best Buy?
2. Describe the six components of Best Buy’s retailing mix. Is there anything you would change? Explain.
3. Do you agree with the strategy Best Buy has adopted to respond to its competition? Why or why not?
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Quiz Questions:
True/False
1. Like all retailers, Best Buy markets only to consumers.
a. True
b. False
2. Best Buy sells electronics in a warehouse-club format.
a. True
b. False
3. The biggest threat to Best Buy’s retailing strategy comes from
small specialty retailers with exclusive products.
a. True
b. False
4. Even though Best Buy sells appliances, electronics, and music,
the company is not using scrambled merchandising.
a. True
b. False
6. Recently, incursions by Wal-Mart into the market previously
dominated by Best Buy is prompting Best Buy to revamp which
part of its retailing strategy?
a. product assortment
b. place
c. presentation
d. price
e. promotion
7. When a tornado ripped through the original Sound of Music
store and managers rolled out a “best buy” sale to liquidate
merchandise and cover the cost of repairs, what part of Sound
of Music’s retailing strategy was involved?
a. margin
b. place
c. personnel
d. promotion
e. presentation
8. The success of the liquidation sale prompted the company to
permanently change which elements of its retailing strategy?
a. personnel and presentation
b. personnel and product
c. presentation and price
d. personnel and promotion
e. promotion and place
9. The 25,000 items stocked by the average Best Buy store are its:
a. margin
b. assortment
c. liability
d. inventory turnover
e. merchandise type and density
10. Which statement best relates to the atmosphere at Best Buy?
a. Sales associates wear blue shirts and khaki pants.
b. Each store stocks 25,000 products.
c. Best Buy stores are destination stores.
d. The company uses disc jockeys to create canned music that
is broadcast in the store.
e. Best Buy has high margins.
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Multiple Choice
1. In retailing terms, Best Buy is best described as a(n):
a. electronics supercenter
b. department store
c. off-price retailer
d. category killer
e. full-line discounter
2. Best Buy’s product assortment is:
a. broad
b. medium to broad
c. medium
d. medium to narrow
e. narrow
3. Best Buy is a(n):
a. independent retailer
b. trade name franchise
c. chain store
d. licensed store
e. business-format franchise
4. Because it sells products through its Web site,
www.bestbuy.com, Best Buy can also be considered a(n):
a. direct marketer
b. home shopping portal
c. targeted retailer
d. mail-order retailer
e. direct retailer
5. The concrete floors, bright lights, wide and easily navigated
aisles, and oversized shopping carts all combine to create Best
Buy’s unique:
a. selling proposition
b. retailing personality
c. retailing strategy
d. store density
e. atmosphere
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PART 4 DISTRIBUTION DECISIONS
Case Studies
MARKETING MISCUES
Retail Embargo of Harry Potter Book Violated
The sixth title in the magical tales of Harry Potter, Harry Potter and the Half-Blood Prince, was released on July 16, 2005,
and quickly sold 10.8 million copies. This was a world record for the first printing of a book, but the records it broke were
set by earlier books in the Harry Potter series. The fourth title, Harry Potter and the Goblet of Fire, was hailed as the “fastest-selling book in history” when it sold 3 million copies in the first 48 hours after its release in July 2000. Three years later, Harry Potter and the Order of the Phoenix
took over the record. Only eight years after the publication of the first book in the series, Harry Potter and the Sorcerer’s Stone, the Harry Potter
series has sold over a quarter of a billion copies, and the books have been translated into 61 languages and are distributed in more than 200
countries.
Like the other books in the series, the sixth title was introduced with much fanfare and secrecy. Author J. K. Rowling wants readers to be
the first to know a book’s contents. Therefore, there are no published previews of a new book, so the media cannot leak any secrets and steal
its thunder. Naturally, such secrecy increases the hype about the book. Harry Potter followers gather to wait in long lines for the 12:01 A.M.
opening of bookstores on the release date. On Thursday, July 7, 2005, however, an employee at the Real Canadian Superstore in Coquitlam,
British Columbia, sold 14 copies of the new book, nine days before the scheduled release. The employee, apparently not a Harry Potter fan, did
not know about the sales embargo and sold the books by mistake.
Scholastic, a global publishing and media giant, is the American publisher of the Harry Potter series. With revenues of over $2 billion, this
publisher of children’s material reaches a market of over 35 million children and 40 million parents. Though the company publishes over 750 new
books annually, the release of a new Harry Potter book has a significant impact on both the company’s image and its bottom line. Scholastic
says that it ships the books in steel container trucks that require retailers to use bolt cutters to open containers just before midnight at the time
of the planned release. The Real Canadian Superstore, which sold the early copies, received its books from Raincoast Books, Ltd., the distributor
of the Harry Potter books in Canada.
Raincoast learned of the illegal early sales when a customer, interested in preserving Harry mania, informed Raincoast that he had purchased a copy of the book from the superstore. Raincoast acted quickly and obtained an injunction from the British Columbia Supreme Court
that forbade the purchasers from copying or disclosing any part of the book prior to 12:01 A.M. on July 16. In addition, Raincoast attempted to
entice the purchasers of the 14 books to temporarily return their books by offering them Harry Potter memorabilia, including a J. K. Rowling
autographed book plate. This was not the first time Harry Potter’s publishers had gone to court to preserve the mystique surrounding the books.
A similar situation occurred with the fifth book, when a bookstore clerk who claimed he was unaware of the restriction sold copies that led one
newspaper to plan an early review of the book. Thus, the 2005 injunction in British Columbia included a provision prohibiting the media from
publishing advance reviews or articles discussing specific aspects of the book’s plot or characters.
Although the early sales of the 14 books were clearly just a mistake by the superstore, some wondered whether the injunction actually created even more hype about the upcoming book release. The distribution mistake ultimately led to increased publicity for Harry Potter and the
Half-Blood Prince.
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SOURCES: http://www.raincoast.com; http://www.scholastic.com; http://www.wikipedia.com; Nicholas Reed, “Harry Potter and the Vanishing Volume,” Vancouver Sun, July
12, 2005, A1; Tabassum Siddiqui, “Potter Purchases Bound to Secrecy,” Toronto Star, July 12, 2005, A01.
Discussion Questions:
1. What is the distributor’s role in creating and maintaining Harry mania?
2. Identify major players in the distribution of Harry Potter books.
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Quiz Questions:
Multiple Choice
1. Books need distributors like Raincoast Books, Ltd., to overcome
which of the following?
a. discrepancy of quantity
b. spatial discrepancy
c. channel conflict
d. scrambled merchandising
e. geographic segmentation
2. If all the copies of Harry Potter and the Half-Blood Prince had
sold out at a large bookstore, forcing customers to wait another
week until a second shipment of the book arrived, which of the
following would have occurred?
a. discrepancy of quantity
b. temporal discrepancy
c. horizontal conflict
d. vertical conflict
e. scrambled merchandising
3. What is the primary marketing channel function performed by
distributor Raincoast Books, Ltd.,?
a. transactional
b. facilitating
c. logistical
d. spatial
e. risk taking
4. The fact that Harry Potter and the Half-Blood Prince could be
bought at supermarkets and entertainment stores, not just at
bookstores, suggests that Scholastic engaged in what type of
distribution?
a. selective
b. exclusive
c. intensive
d. non-traditional
e. agent/broker
5. According to the article, the Real Canadian Superstore sold 14
Harry Potter books early as a result of an error in which of the
following?
a. distribution resource planning
b. materials-handling system
c. inventory control system
d. order processing system
e. the employee’s personal knowledge
6. If Scholastic hired Werner Enterprises, an interstate trucking
company, to transport the entire first printing of Harry Potter and
the Half-Blood Prince across the country to Scholastic-owned
warehouses, this would be an example of which of the following?
a. outsourcing
b. a wholesaler channel
c. an agent/broker channel
d. exclusive distribution
e. a direct channel
7. If Raincoast Books, Ltd., sued The Real Canadian Superstore for
breaching the sales embargo, it would be an example of which
of the following?
a. horizontal conflict
b. vertical conflict
c. a discrepancy of quantity
d. outsourcing
e. channel partnering
8. Unlike the Real Canadian Superstore, bookstores, where most
Harry Potter books are sold, are all __________.
a. independent retailers
b. chain stores
c. franchises
d. specialty stores
e. specialty discount stores
9. Almost all bookstores, from small, independent retailers to large
chain stores, offer a small product __________, but a large
product __________.
a. depth, width
b. width, depth
c. inventory, offering
d. offering, inventory
e. depth, offering
10. Part of the expected hype surrounding the release of a new book
in Rowling’s Harry Potter series includes Hogwarts- and wizardthemed parties hosted by booksellers in the hours leading up the
midnight start time for selling. Typically, children and young
adults can participate in games and activities; stores are decorated with a Harry Potter theme; and there are contests and
drawings with small prizes. These events are most closely
related to:
a. M commerce
b. direct selling
c. interactivity
d. direct channels
e. channel partnering
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PART 4 DISTRIBUTION DECISIONS
Case Studies
CRITICAL THINKING CASE
Whole Foods Thrives in a Declining Marketplace
In a marketplace in where businesses are experiencing flat to declining growth, Whole Foods Market is gaining in share of
wallet. Not only is the food chain profiting in grocery retailing, one of the toughest businesses in the world, but the company’s goal is to more than double its sales to $10 billion by 2010. Whole Foods is challenging both the way supermarkets
do business and the way consumers shop for food.
Americans spend $430 billion a year on food at approximately 34,000 supermarkets. Yet the typical grocery retailer makes only one cent on
every dollar spent in the store. This low margin is the impetus behind vendor allowances and slotting fees (fees paid by food producers to have
a supermarket carry their products), which netted grocery stores close to $100 billion in 2003. Whole Foods refuses to take slotting fees, however, and accepted only about $1 million in other inducements in 2004. The company’s niche is in organic foods that carry a price premium of
40 to 175 percent over regular goods—a niche market that provides Whole Foods with a profit margin that is triple the industry standard and
sales per square foot of $800, double the industry standard.
In the mid-1950s, consumers were spending 17 percent of their total income on groceries. By 2005, however, consumers were spending
only 6 percent of their total income on groceries. Major supermarket chains were experiencing shrinking profits or losses. Considering that
2004 profits fell nearly 30 percent at Safeway and 6 percent at Albertson’s, while A&P, Pathmark, and Winn-Dixie experienced almost $200 million in losses, can Whole Foods attain its sales goal by 2010? Just as important, how has this grocery retailer managed to increase its net
income by 32 percent when other supermarket chains are experiencing shrinking profits or losses?
Whole Foods Market started in 1987 as a health food store in Austin, Texas. The company went public in 1992, and by the beginning of
2005 it had 166 stores (157 in the United States, 7 in Britain, and 2 in Canada) and 60 more stores under development in the three countries.
Though the company ranks only twenty-first in grocery retailing sales, it ranks fourth in both profits and in total stock market value among publicly held grocery store chains. Whole Foods was ranked 479 in Fortune magazine’s list of the 500 largest publicly traded U.S. companies.
Whole Foods’ quality standards are what sets Whole Foods apart from traditional grocery retailers. With just over 12,000 organic farms in
the United States, the farmers have few opportunities to use economies of scale to reduce costs. Additionally, organic farming is much more
labor-intensive than conventional farming. Whole Foods passes these higher costs on to the consumer and does not attempt to compete on
price. Thus, Whole Foods customers are ensured a high-quality offering and are willing to pay a higher price for that quality.
To reach its sales objective for 2010, Whole Foods is making food shopping an entertainment experience. The company intends to expand
its customer base by making the shopping experience fun—one Whole Foods executive refers to its stores as food amusement parks. The company has already begun implementing its food entertainment strategy. Early in 2005, an 80,000-square-foot store opened in the company’s
hometown of Austin, Texas. Consumers can stroll the aisles with a glass of wine and watch the store’s seafood team lob salmon back and
forth, its pastry chefs roll dough, and its chefs prepare food for immediate (or later) consumption. Consumers can even become part of the
ensemble by grinding their own flour or partaking in exchanges about the culinary arts. If the entertainment experience becomes too exhausting,
the customer can take a break and get a massage (in the store, of course). Whole Foods stores in Atlanta, Georgia either already have or are
planning a chocolate fountain (with free samples), wine-tasting stations, a wine and cheese island, a caviar and champagne station, and a
grilling station with open flame to appeal to the southern love for brisket and ribs. For impatient New Yorkers, a Whole Foods store in New York
City installed 26 cash registers and a line director to speed the checkout process.
The company has decided that the grocery consumers of the future will want either the cheapest groceries in town or the best groceries in
town. Whole Foods wants to provide the best.
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SOURCES: Amy Culbertson, “The Aisles Have It!” Fort Worth Star-Telegram, March 19, 2005, K4065; Natalie Gott, “Whole Foods Offers New Ingredient to Grocery
Shopping—Fun,” Miami Herald, May 22, 2005, http://www.herald.com; Seth Lubove, “Food Porn,” Forbes, February 14, 2005, 102; Chris Price, “Prices Don’t Stop Whole
Foods Shoppers in New Orleans,” New Orleans City Business, February14, 2005, http://www.neworleanscitybusiness.com; Christine VanDusen, “A Whole New Kind of Grocery
Store,” Atlanta Journal-Constitution, April 17, 2005, 1F.
Discussion Questions:
1. Describe niche marketing as it pertains to Whole Foods and grocery retailing.
2. Compare the characteristics of Whole Foods with those of traditional grocery retailers.
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Quiz Questions:
Multiple Choice
1. A farm in California sells artichokes to Whole Foods, but does
not ship the artichokes across country. Instead, it transports the
artichokes to the Fresno Whole Foods Market and leaves further
distribution to Whole Foods. This is an example of which of the
following?
a. dual distribution
b. a nontraditional channel
c. a wholesaler channel
d. a strategic channel alliance
e. intensive distribution
2. If a local farmer sells her strawberries directly to a Whole Foods
store, which type of channel structure is in place?
a. direct
b. retailer
c. wholesaler
d. local
e. efficient
3. An organic dairy farm decides to sell only to natural-foods stores
such as Whole Foods, Wild Oats, and local health-food stores.
The dairy farm is practicing __________.
a. exclusive distribution
b. selective distribution
c. merchant wholesaling
d. nontraditional distribution
e. channel control
4. Which of the following might enable a Whole Foods store to
limit the amount of rotten produce it must discard while also
ensuring that produce shelves are never empty?
a. just-in-time production
b. contact efficiency
c. selective distribution
d. mass customization
e. distribution resource planning
5. At a Whole Foods deli, employees make sub sandwiches only
when a customer orders a sandwich. The customer is asked to
choose from a selection of meats, breads, and condiments. This
is an example of which of the following?
a. just-in-time production
b. mass customization
c. channel cooperation
d. a discrepancy of assortment
e. dual distribution
6. According to the textbook, which of the following modes of
transportation would be the best for Whole Foods to use if it
needs to ship avocados from California to its Atlanta store
before they rot?
a. pipe
b. truck
c. rail
d. air
e. water
7. Whole Foods Market is a(n):
a. independent retailer
b. department store
c. supermarket
d. full-line discount store
e. specialty discount store
8. The executive who refers to Whole Foods stores as “food
amusement parks” is focusing on which of the following elements of the retailing mix?
a. personnel
b. product
c. promotion
d. entertainment
e. presentation
9. It is safe to assume that, compared to its competitors, Whole
Foods’ gross margin is:
a. higher
b. comparable
c. the industry standard
d. moderate
e. low
10. If Whole Foods decided it wanted to begin franchising as a way
to increase the number of stores in North America, the company
would most likely engage in which type?
a. product
b. trade name
c. business format
d. joint venture
e. contracted service
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INTEGRATED MARKETING COMMUNICATIONS
14
Case Studies
CASE ASSIGNMENT: Wicked
Wicked Awesome! Musical Enchants Record Crowds
When the curtains first lifted on the Broadway musical Wicked, it appeared that audiences had been scared away from
the box office. The Gershwin Theatre was rarely full and a production that had cost over $14 million to make posted
advance ticket sales of only $9 million. Crippled by cost overruns, cast changes, song rewriting, and a 2003 start date
that was much later than projected, excitement and enthusiasm waned for what was once a much-anticipated show.
Based on Gregory Maguire’s best-selling 1995 novel of the same name, the story is a prequel to Frank Baum’s 1939
classic, The Wizard of Oz. The musical examines the lives of two teenage witches, Glinda and Elephaba, and wonders which one is truly evil.
Glinda, a beautiful, ambitious, and popular blond, grows up to become the Good Witch; Elephaba, a green-skinned, intelligent, free-spirited rebel,
develops into the nefarious Wicked Witch of the West. Elaborate sets, lighting, and costumes and a score by Academy Award-winning songwriter
Stephen Schwartz did not impress the New York Times, however. Its scathing review claimed, “There’s trouble in Emerald City . . . [it’s] a sermon
of a musical.”
Unfazed, Wicked producer Marc Platt, a former Universal Pictures executive, never lost faith in his production. He remained convinced that
if he could just get people in the door, they would leave completely captivated by what he considered a truly exceptional experience. So, he cut
ticket prices by 30 percent and watched as patrons began to make repeat ticket purchases during intermission. After the shows, swarms of
enthralled teenage girls began to gather outside the stage door in hopes of meeting the cast.
As the target market emerged before his eyes, Platt leveraged his Hollywood experience to turn Wicked into a musical marketing machine.
The hot ticket sales during show intermissions indicated that the show’s success would hinge on word-of-mouth referrals from the show’s core
audience—teenage girls. To get more of them talking, Platt and the marketing team published feature articles on the show’s Web site and
seeded Internet chat rooms with Wicked related topics. An all-out promotions blitz ensued.
Wicked lined up character endorsement deals with makeup manufacturer, Stila, and sent hot new stars Kristen Chenoweth and Idina Menzel
to Sephora stores to give makeovers to teen fans with Glinda facial glitter and Elephaba lipstick. In an interesting twist on American Idol, Wicked
karaoke contests at malls served as fake auditions that awarded real tickets to the most passionate fans. Radio promos in New York and
Chicago were supported by advertising at Macy’s and in Elle Girl magazine for a Halloween campaign that lasted a month.
As the show became profitable, two U.S. tours were launched. The shows routinely sell out, and yearly revenues are now close to $200 million. Tickets to the shows on Broadway now command a record-tying $110, and the show’s take is about $1.3 million a week in New York
alone. Mike Isaacson, vice president of the Fox Theatre in St. Louis, sold an amazing $1.5 million of tickets a mere 48 hours after they went on
sale. “This show is a rocket because it’s attracting people from teenagers to grandparents,” he mused.
Day-of-show raffles for tickets at sold-out venues give a few lucky patrons a chance to buy $25 tickets. Those raffles generally appeal to
younger theatergoers, but those witch-wannabes bring mom and dad out for the night of mischief too. And their dollars help fund purchases of
merchandise at the traveling OzDust Boutiques. Items like Wicked-branded golf balls, T-shirts, necklaces, and CDs of the show’s musical numbers sell at the stands and at http://www.wickedthemusical.com. Sales generate weekly merchandise receipts of more than $300,000. But that
doesn’t surprise Marc Platt. Reflecting on the show’s universal premise, he quips “There’s a little green girl inside all of us.”
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SOURCES: Brooks Barnes, “How ‘Wicked’ Cast Its Spell,” Wall Street Journal, October 22, 2005, A1, A4; http://www.wickedthemusical.com; http://broadwayworld.com.
Discussion Questions:
1.
2.
3.
4.
Identify and describe the elements of Wicked’s promotional mix.
Describe how the AIDA process worked for various Wicked promotions. Which one do you think was most effective?
Did Wicked use a push or a pull promotions strategy? Explain.
As Wicked progresses through its life cycle, what changes would you recommend making to the current promotional mix? Why?
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Quiz Questions:
True/False
1. Because Wicked is a play, it is marketed best by personal selling.
a. True
b. False
Multiple Choice
1. Wicked’s day-of-show raffles for cheap tickets are a form of:
a. publicity
b. advertising
c. competitive advantage
d. sales promotion
e. personal selling
2. The show’s radio promotions and magazine advertisements are
an example of:
a. noise
b. mass communication
c. interpersonal communication
d. sales promotion
e. competitive advantage
3. Advertisements for the musical placed in radio and magazines
served as ______ for the producers’ marketing message.
a. senders
b. noise
c. channels
d. receivers
e. decoders
4. Establishing Internet chat rooms with Wicked-related topics
allowed marketers to collect:
a. decoded information
b. receivers
c. advertising
d. senders
e. feedback
5. What role in the communication process was Platt fulfilling
when he noticed that Wicked was especially popular with
teenage girls?
a. receiver
b. encoder
c. decoder
d. sender
e. promoter
6. Wicked’s character endorsements—during which the actors
offer makeovers to teenage fans—fall under which step in the
AIDA concept?
a. attention
b. initiative
c. interest
d. desire
e. action
7. The show’s marketing strategy is best described as a ______
because producers are trying to create consumer demand to see
their show.
a. pull strategy
b. push strategy
c. reflex strategy
d. mass communication
e. sales promotion
8. Keeping Wicked’s advertising messages similar across magazines, radio, and Web sites is an illustration of:
a. promotional mixing
b. integrated marketing communications
c. target marketing
d. media promotion
e. advertising organization
9. Wicked is in which stage of the product life cycle?
a. introduction
b. growth
c. maturity
d. decline
e. death
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ADVERTISING AND PUBLIC RELATIONS
15
Case Studies
CASE ASSIGNMENT: MySpace
Racy Place MySpace Makes Big-Time Advertisers Wary
Suddenly, on the Internet, it’s 1999. But instead of Hotmail, Yahoo, or ICQ, its social networking site MySpace.com that is
attracting Web surfers at a blistering pace. More than 80,000 visitors are registering every day at a Web site that attracted
its first 60 million registered users in under 30 months. Already laying claim to about half the reach that monster players
Yahoo! and Google enjoy, MySpace typically draws over 20 million unique visitors each month. And, by the time you read
this, all of these statistics will probably have been easily surpassed, given the site’s incomprehensible growth rate.
As Internet success stories go, the MySpace phenomenon is nothing short of spectacular. Rupert Murdoch’s News, Inc., bought the site
from parent company Intermix Media in 2005 for $580 million, but many observers think that was about one-fourth of what the site could have
sold for had the board and the lead investors not rushed into the deal. What reminds industry observers of 1999 though is that MySpace is such
a hot property, yet it has no visible business model beyond trading eyeballs for ad dollars. So why aren’t mega advertising dollars flooding the
doors at corporate headquarters? A quick tour of MySpace.com would probably answer that question for anyone with a brain and a pulse.
MySpace is an anything-goes, youth-oriented, social hub at the center of music, matchmaking, and social rendezvousing. Friends keep in touch
with each other by posting their profiles, photos, music preferences, social events and more to personalized Web pages. The pages they create
can host automatically loaded music videos or tracks that start to play as soon as the Web page loads. Pictures are uncensored, as are avatars
and messages posted to pages by friends or any registered visitor who happens to land there.
The only thing the site monitors is hate speech, but that may change in the wake of a 2005 controversy in which two sexual predators were
convicted of luring minors into sex acts by trolling MySpace’s public pages. Skin, lewd language, and descriptions of adult events and activities
can be found if and when users care to share or search for them. Not all of the content on MySpace is mature or off-color, however. More than
350,000 music groups or individual performers are registered there, and mainstream acts post pages there so that fans can follow their activities. The Foo Fighters even allowed their album, In Your Honor, to air free for a week on MySpace before its official release.
The site also hosts hundreds of thousands, possibly millions, of unique video clips in 16 categories. There are blog listings, independent and
user-generated film reviews, event listings, classifieds, discussion forums, and, of course, those personal pages and music samples. At least 45
percent of MySpace users are in advertisers’ coveted under-25 age bracket. The minimum age requirement is 14, and therein lies the advertisers’ rub. Advertising on MySpace raises ethical concerns and sparks fear of unwanted brand association, even though the user base is the most
valued.
Though the site claims to generate tens of millions of dollars in ad revenue each month, that pales in comparison to what it could be making. David Cohen, the senior vice president of Interpublic Group’s top ad agency, Universal McCann, considers the advertising opportunities on
MySpace “a double-edged sword.” He points out that user-generated content can be “risqué, in bad taste, et cetera.” His Fortune 100 clients
don’t like the idea of placing advertisements for their products in an environment where they have little control over what appears next to them.
Still, MySpace has its supporters. As the fifth largest Web property on the Internet, it is always going to be attractive to somebody. HSBC,
Cingular, Aquafina, and H&R Block have all bought ad space there; surely, many more deep-pocketed firms will follow. As Richard Doherty,
research director of Envisioneering Group, asks, “If you pull away from MySpace, where do you go? Do you do due diligence on the next 10
[social networking sites]? Advertisers need this audience. This is a new double-digits-minutes eyeball magnet and advertisers have to be
there.’’
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SOURCES: Ethan Smith, “Can MySpace Work as Ad Space?” Wall Street Journal, July 22, 2005, B2; Kris Oser, “MySpace: Big Audience, Big Risks; News of Sexual Predators
on Social-Networking Sites Gives Buyers Jitters,” Advertising Age, February 20, 2006, 3; “News Corp. Subsidiary Sued by Founder of Company That Created MySpace.com,”
PR Newswire, February 23, 2006; “Social Networks: More Bubble than Profit?” BusinessWeek Online, February 28, 2006; http://www.myspace.com.
Discussion Questions:
1.
2.
3.
4.
Considering the effects of advertising on consumers, what are the risks that advertisers take in placing advertisements on MySpace?
What kind of people or personalities might companies try to appeal to by advertising on MySpace?
Do you think the MySpace environment will make it easier or more difficult for advertisers to induce ad viewers to follow the AIDA plan?
Compose a list of the companies, products and services that you think would benefit from advertising on MySpace.com. Are there any in
particular that you think should stay away from MySpace, regardless of its popularity?
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Quiz Questions:
Multiple Choice
1. If Aquafina posted an advertisement emphasizing the convenience
of its bottled water on MySpace, that would be an example of:
a. institutional advertising
b. product advertising
c. advocacy advertising
d. pioneering advertising
e. competitive advertising
2. If Cingular posted an advertisement on MySpace highlighting
charitable donations it had made, that would be an example of:
a. product advertising
b. pioneering advertising
c. competitive advertising
d. advocacy advertising
e. comparative advertising
3. If Cingular posted an advertisement on MySpace comparing its
monthly rates to Verizon’s, that would be an example of:
a. product advertising
b. competitive advertising
c. comparative advertising
d. advocacy advertising
e. institutional advertising
4. If Aquafina posted an advertisement depicting children drinking
bottles of water in a park after school, which executional style
for advertising would best describe the image?
a. lifestyle
b. fantasy
c. humorous
d. mood
e. slice-of-life
5. MySpace can offer its advertisers all of the following advantages
except:
a. high flexibility
b. fast growing medium
c. easy to measure ad effectiveness
d. short lead time
e. easy to reach target audience
6. One of the risks of advertising on MySpace is that a company’s
advertisement might appear next to content or an entire page
that is against the company’s philosophy or shows objectionable
material. When that happens, the company will most likely
quickly begin:
a. press relations
b. lobbying
c. corporate communications
d. crisis management
e. product publicity
7. If an advertiser makes the decision to include advertising on
MySpace in addition to its ads in magazines, television, and
radio, the advertiser is engaging in:
a. ad awareness
b. product publicity
c. media planning
d. audience selectivity
e. comparative advertising
8. If Pepsi were to launch an aggressive advertising campaign on
MySpace and found it was not boosting sales at all, Pepsi would
be experiencing the phenomenon of:
a. law of diminishing sales
b. flawed advertising campaign
c. advertising response function
d. stagnant consumer response
e. soft market
9. The choice by H&R Block to advertise on MySpace to reach an
important segment of the popular Web site’s consumer audience is an example of:
a. media planning
b. market saturation
c. ad awareness
d. ad blitzing
e. Internet savvy
10. If H&R Block hosted a series of pages on MySpace discussing
different tax issues from January through mid-April, the company would be engaging in:
a. Internet propaganda
b. consumer education
c. Web-based media scheduling
d. Internet event planning
e. Web-based media planning
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SALES PROMOTION AND PERSONAL SELLING
16
Case Studies
CASE ASSIGNMENT: Ron Popeil
Wheels, Deals, Has Mass Appeal
At Age 71, Ron Popeil is an avid inventor, tireless entrepreneur, clever marketer, and master salesman all in one. He
just happens to be an American icon, too. The godfather of the infomercial, Popeil even has his famous Veg-O-Matic on
display in the Smithsonian Institution as an American cultural artifact. His other famous products include the food dehydrator, the Ronco spray gun and the Popeil Pocket Fisherman.
As a teenager, Popeil helped his father sell his kitchen gadgets at local Woolworth’s and later, in the 1950s, on the
Chicago fair circuit. That is probably why his famous shtick, which included such memorable catch phrases as “But wait, there’s more,” “Price
so low,” and “Operators are standing by”, always seemed like a blend between sincere eccentric inventor and excitable carnival barker. The
combination suited him well and brought him enough financial success that he could afford to take his act to television. In the 1960s he incorporated Ronco, and its name became synonymous with gadgets like the smokeless ashtray and Mr. Microphone.
Regardless of the product he is selling or the catchy pitch phrases he invents on the fly to sell them, Popeil is always sincere. “The easiest
thing to do in the world is to sell a product I believe in,” he has said. “If I spent two years creating a product, conceiving it, tinkering with it, I
can get up and sell it. Who can sell it better than the guy who invented it?” Len Green, a professor in entrepreneurship at Babson University,
says, “Ron is one of a kind. He is different from the rest because he not only invents; he sells. Most entrepreneurs come up with a concept and
then give it to others to manufacture or sell. He’s his own best salesman.”
Though Popeil suffered his fair share of flops, like spray-on hair and a brief bankruptcy in 1987, he has always managed to bounce back.
Returning from bankruptcy, he relaunched the popular food dehydrator in 1990, and eight years later he designed and sold his most successful
product ever, the Showtime Rotisserie & BBQ Oven. Having sold over seven million units, for four installments of $39.95 each, the rotisserie
alone has grossed over $1 billion in sales. During the taping of the infomercial for that product, the live studio audience was treated to yet
another of Popeil’s catch phrases that has become part of the fabric of American speech. “Just set it and forget it!” is now used to sell all kinds
of non-Popeil products, from VCRs and digital video recorders to ovens and coffee makers.
Through the medium of television, Popeil was able to reach tens of millions of people. With an innate ability to invent or improve on everyday
household products, his live product demonstrations captured the imaginations and dollars of generations of consumers. In 1976, he was even
the subject of what was probably Dan Aykroyd’s most famous bit on Saturday Night Live. Parodying Popeil, Aykroyd hawked “Rovco’s Super BassO-Matic ’76,” which was capable of turning bass or any other “small aquatic creature” into liquid without any “scaling, cutting or gutting.”
Having recently sold Ronco to an investment group for over $55 million, and accumulated a personal net worth of over $100 million, Popeil
has had the last laugh. He will continue to serve as a product developer, pitchman, and consultant for the new company and already promises
an even bigger hit than the Showtime Rotisserie. Having identified a market of over 20 million Americans who fry turkeys every year, Popeil
says he has a new fryer on the way that will make it possible to safely fry a 20-pound turkey in 70 minutes – indoors. Given that he has created
over 150 products and invented personal selling via the mass marketing medium, there is little reason to doubt him.
As Barbara Gross, professor of marketing at California State University, Northridge, states, “His success speaks for itself; probably that has
more to do with his personality. He’s comfortable and sincere. He comes across like he really believes in it. When you hear him talk, you never
feel like he’s lying to you.”
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SOURCES: “Ron Popeil, He of the Pocket Fisherman and Spray-On Hair, Has Perfected His Formula for Success: Invent, Market, and Sell with a Passion,” BusinessWeek
Online, October 3, 2005; Brent Hopkins, “How Ron Popeil Invented Himself,” Knight-Ridder/Tribune Business News, August 31, 2005; Matt Myerhoff, “Infomercial King Sells
Company, Ronco Goes Public for Expansion,” Los Angeles Business Journal, July 29, 2005, 1; http://snltranscripts.jt.org/75/75qbassamatic.phtml.
Discussion Questions:
1.
2.
3.
4.
What does Ron Popeil bring to personal selling that makes him so effective?
What trade sales promotion tools does he use? Why does he use that when he is selling direct to consumers?
Explain how Ron Popeil’s selling tactics allow him to achieve the desired objectives of sales promotions.
Do you think it is likely that America will ever see someone like Ron Popeil in the future? Why or why not?
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Quiz Questions:
True/False
1. Ron Popeil’s sales pitches are targeted to members of the marketing channel, such as wholesalers and retailers.
a. True
b. False
2. Ron Popeil has made millions of dollars capitalizing on the principle
of sales promotion having more effect on behavior than attitude.
a. True
b. False
3. Because Ron Popeil has sold his products for over 30 years on television, many viewers have gotten to know him and feel he is being
sincere about his products’ benefits. Popeil has turned his longterm familiarity with viewers into a form of relationship selling.
a. True
b. False
4. Ron Popeil has combined personal selling with advertising and
sales promotion through his infomercials.
a. True
b. False
3. Ronco could offer customers who buy more than three Ronco
products a year the chance to join the “Ronco Buyer’s Club.”
Members could get a free product once a year and discounts on
other products as part of Ronco’s:
a. consumer focus group
b. buyer’s sweepstakes
c. sales and marketing campaign
d. loyalty marketing program
e. marketing ploy
4. When Ron Popeil shows how one of his products works during a
Ronco infomercial, he is utilizing a trade promotion tool which is
similar to a(n):
a. one-to-one selling meeting
b. in-store demonstration
c. personal-selling engagement
d. online promotion
e. door to door salesman
5. Selling products through television with memorable catch
phrases such as “But wait, there’s more!” and “Operators are
standing by” has enabled Ron Popeil to turn advertising into:
a. switch and bait selling
b. cold calling
c. personal selling
d. prospecting
e. a sales proposal
6. When a customer calls Ronco’s 800 number and orders a product, which step of the selling process are Ronco representatives
involved in?
a. closing the sale
b. approaching the customer
c. handling objectives
d. needs assessment
e. qualifying leads
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Multiple Choice
1. Which type of buyer do you think would purchase one of Ron
Popeil’s products, such as the Veg-O-Matic?
a. loyal customers
b. competitor’s customers
c. brand switchers
d. price buyers
e. All of the choices are potential customers for a Veg-O-Matic.
2. One goal of infomericals is to generate quick sales. Customers
may be urged to purchase a Popeil Pocket Fisherman “in the next
24 hours” in order to receive a free package of rubber worms. In
terms of sales promotion tools, the rubber worms are a:
a. premium
b. rebate
c. coupon
d. discount
e. raffle
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PART 5 PROMOTION DECISIONS
Case Studies
MARKETING MISCUES
Burger King May Have Gone Too Far When it Sexualized Fast Food
The summer of 2005 was a rockin’ time for Burger King, as the company launched its innovative new chicken strips.
Introduced at various price points ($1.69 for six pieces, $2.69 for nine pieces, and $3.99 for a nine-piece Value Meal), BK
Chicken Fries debuted with commercials featuring the company’s Coq Roq (pronounced “cock rock”) band and an interactive band Web site (http://www.coqroq.com).
BK Chicken Fries were designed to meet consumers’ desire for great-tasting, high-quality chicken products that also offer value, portability,
and fun. Burger King utilized all white meat chicken to meet the first two qualifications, with price set at a competitive level so that consumers
would be getting good value for the money. The chicken fries were packaged in a container that had a built-in well for the dipping sauce and
would fit into a car’s cup holder. These were not the attributes that made the chicken fries famous, however. Rather, it was the way that Burger
King portrayed the fun aspect of its new product.
Created by Miami-based Crispin Porter + Bogusky, the advertising campaign’s television commercial featured a heavy metal band of
masked chickens. The remarkable resemblance to the costumed heavy metal band Slipknot prompted a cease-and-desist letter from the band’s
attorney. According to the attorney’s letter, Crispin Porter + Bogusky had approached the band’s record label, Roadrunner, about Slipknot
appearing in an unrelated Burger King ad—an offer that the band rejected because it did not want to be branded with burgers. The band
claimed that Burger King’s advertising, utilizing Slipknot’s signature masks, was an effort to influence the Slipknot generation to purchase BK
Chicken Fries.
The general public, however, was more upset about Coq Roq’s interactive Web site. The site features videos showing the fictional chickenheaded band members, downloadable ring tones, and a photo gallery. While videos showing chickens with names such as “Fowl Mouth” and
“The Talisman” trying to entice consumers to eat chicken are in questionable taste, the controversy centered on the photo gallery. When it
debuted, the photo gallery hosted Polaroid-style photos of young women with handwritten captions such as “Groupies Love the Coq” and
“Groupies Love Coq.”
Within 24 hours, the captions had been erased, but Burger King refused to take any responsibility for the captions. Instead, the company
blamed malfunctions in the Flash and XML programming for the captions appearing on the site and claimed it had no prelaunch knowledge of
their presence. Burger King’s spokesperson also said that the captions were removed as part of the tweaking involved in any new Web site and
not because the company had received complaints.
The Coq Roq campaign was not Burger King’s first advertising campaign to wander off the traditional family-oriented path. Ads for the
restaurant’s breakfast sandwiches depicted a masked BK mascot. In one spot, “Normal Joe” wakes up to find someone sharing his bed—the
BK mascot, who then offers him a breakfast sandwich. In another commercial, the BK mascot peeks in Normal Joe’s window and offers him a
breakfast sandwich. Promoting BK’s Tendercrisp Bacon Cheddar Ranch sandwiches, Darius Rucker (Hootie of Hootie and the Blowfish) sings a
revamped “have it your way” song with lyrics such as “there’s a train of ladies coming with a nice caboose.” Historically, Burger King has presented itself as a family-oriented fast-food restaurant, with the slogan “Where Kids Are King.” Parents were encouraged to bring their children
to Burger King, and the restaurant would even give the kids a crown. This family image may have been tarnished by the chicken fries campaign
and its Coq Roq band. At the same time, however, the company announced that BK Chicken Fries were one of its most successful product
launches in recent years.
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SOURCES: “Burger King Introduces Chicken Fries,” QSR Online, July 26, 2005, http://www.qsrmagazine.com; “Slipknot’s Burger King Beef,” http://www.thesmokinggun.com,
August 17, 2005; Mark Hinson, “Put on the Commercial Brake, BK,” http://www.tallahassee.com, September 11, 2005; Joe Kovacs, “Fowl-Mouthed Slogans Too Hot for Burger
King,” WorldNetDaily, July 28, 2005, http://www.worldnetdaily.com; Michael Paoletta and Susan Butler, “For Burger King and Slipknot, a Game of Chicken,” Reuters Wired
News, August 29, 2005, http://www.wireservice.wired.com; Bruce George Wingate, “‘Foq’ Burger King: Does Burger King’s Coq Roq Ad Campaign Truly Shake Up the
Establishment’s Old-Fashioned Chicken Mentality, or Are They Just Poultry Poseurs?” Lifestyles, Fairfield County Weekly, August 25, 2005, http://www.fairfieldweekly.com.
Discussion Questions:
1. While controversial, the Coq Roq Web site created considerable buzz for Burger King. Given this, was the controversy a mistake?
2. Some campaign opponents suggested that Burger King’s sexualizing of its chicken fries could lead to even greater obesity in the youth
demographic. What is Burger King’s role in this social issue?
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Quiz Questions:
True/False
1. Burger King’s Coq Roq Web site, while controversial, had a
direct influence on the sale of it’s Chicken Fries.
a. True
b. False
2. Burger King did not understand who its target audience was for
Chicken Fries when it attempted to model it’s fictional band of
masked chickens on the heavy metal band Slipknot.
a. True
b False
3. Burger King utilized the growing interest in the Internet as an
advertising medium when it put up its Coq Roq Web site.
a. True
b. False
4. Burger King needed crisis management to control the negative
publicity surrounding the Coq Roq Web site, in order to keep the
launch of Chicken Fries from being ruined.
a. True
b. False
5. An example of sales promotion for BK Chicken Fries would be to
offer customers a 50 cents off coupon when they visit the Coq
Roq Web site and click on the coupon icon.
a. True
b. False
3. Burger King used a heavy metal rock band of masked chickens
to promote its Chicken Fries. This is an example of which executional style of advertising?
a. scientific
b. demonstration
c. spokesperson/testimonial
d. real/animated product symbols
e. lifestyle
4. By using a Web site to promote Chicken Fries, Burger King
chose a_______ in which to promote their new product.
a. channel control
b. medium
c. retailer
d. product line
e. supply chain
5. Coq Roq television advertising, the interactive Web site, photo
gallery, and sound clips together functioned as ______ for
Burger King’s Chicken Fries.
a. unified targeting strategy
b. integrated marketing communication
c. executional styles
d. creative feedback decisions
e. a new media schedule
6. When customers began to complain to Burger King about the
content on the Coq Roq photo gallery, it was an example of:
a. decoding
b. encoding
c. feedback
d. pushback
e. noise
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Multiple Choice
1. Burger King used its Coq Roq Web site as a(n) _______ to
communicate the message about its new Chicken Fries.
a. marketing objective
b. online chat room
c. channel
d. informational device
e. personal selling tool
2. Which step in the AIDA concept of promotional goals was met
by the controversial Coq Roq Web site?
a. attention
b. interest
c. desire
d. action
e. The Coq Roq Web site was designed to fulfill all elements of
the AIDA concept.
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PART 5 PROMOTION DECISIONS
Case Studies
CRITICAL THINKING CASE
NASCAR Lifts Ban on Liquor Advertising
Stock car racing is one of the most popular professional sports in terms of television ratings. NASCAR is broadcast in over
150 countries and ranks behind only the National Football League in television sports viewing in the United States (and
NASCAR has double the viewer base of the National Basketball Association). The three largest NASCAR-sanctioned racing
series are the NEXTEL Cup Series, the Busch Series, and the Craftsman Truck Series, and there are over 1,500 additional races sanctioned in
North America.
To reach the 75 million brand-loyal NASCAR fans (and possibly 75 million more “avid” fans) and an average of 125,000 spectators at each
race, Fortune 500 companies sponsor NASCAR more than any other sport. It costs $15 million to $20 million a season to be a primary sponsor
for one of the top racing teams. With a primary sponsorship, the sponsoring company gets to put company decals on the hood, the rear quarter
panel, and the TV panel (above the rear bumper) of the race car. Sponsorship for a less successful racing team costs between $6 million and
$10 million a season. With an associate sponsorship, which costs around $200,000 a season, the company gets to have one decal the size of
an index card on the race car.
Though the cost of sponsorship might seem high, the television visibility and sales to the loyal fan base are the payoff. According to
Performance Research, the average race-attending NASCAR fan is male, married, and 42 years old; he owns a home with around three cars per
household and is employed full-time with an annual income between $35,000 and $50,000. These demographics are changing rapidly, though,
as more and more women are being drawn to the sport. The television viewing fan base is even broader. Of particular interest to marketers and
sponsors is the fact that 71 percent of NASCAR fans “almost always” or “frequently” select a product from a NASCAR sponsor simply because
of the sponsorship (compared to 52 percent for tennis and 47 percent for PGA golf). In the same study, 57 percent indicated that they put more
trust in products offered by NASCAR sponsors (compared to 16 percent for Olympic sponsors and 5 percent for World Cup Soccer sponsors).
From its beginning in 1949, NASCAR did not allow hard liquor sponsorship on its race cars. Though it accepted beer, cigarette, and chewing
tobacco sponsors, there was concern that liquor sponsorships would be harmful to the sport’s family-oriented image. In November 2004, however, citing the need for more corporate sponsors to keep race teams on the track, NASCAR lifted its ban on liquor advertising. Naturally, the
decision was controversial.
Supporters of the long-standing ban on liquor advertising contended that liquor ads went against the association’s family-oriented image.
The American Medical Association suggested that the fastest-growing NASCAR audience was the 12- to 18-year-old segment and that advertising liquor on the race cars would send the wrong message to these teens. Additionally, the ban was consistent with network television’s prohibition on liquor spots.
On the flip side, however, was the fact that NASCAR allowed cars to be sponsored by beer companies (e.g., Dale Earnhardt Jr. was sponsored by Budweiser), even though one study had found that underage drinkers were nine times more likely to drink beer than other alcoholic
beverages. Another study reported that less than 1 percent of teens consumed alcohol because of advertising. NASCAR felt that attitudes
toward liquor companies had changed as the companies had developed reputations for responsible advertising and that this changing attitude
was being reflected in television advertising. In 2004, more than 600 local and cable broadcast stations had begun running liquor spots to the
tune of more than $100 million in advertising revenue.
NASCAR insisted that all advertising related to liquor sponsorship must have a strong responsible drinking component. For example, the race
car and driver’s attire sponsored by Jack Daniels said, “Pace Yourself, Drink Responsibly.” Similarly, Crown Royal’s sponsorship said, “Pacing is
everything, especially when drinking.” Additionally, merchandise bearing liquor sponsorship brands was not to be targeted to underage consumers. For example, miniature cars, which are popular among NASCAR fans, would only be marketed as collectors’ items, and clothing items
would not be available in child sizes. Purchasers would have to be of legal drinking age to buy merchandise carrying the liquor sponsor’s brand
name. On February 10, 2005, the first liquor logo crossed the finish line at a NASCAR race.
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SOURCES: Rebecca Gladden, “When the Spirits Move Them,” Insider Racing News, November 14, 2004, http://www.performanceresearch.com/; David Kiley, “A Green Flag for
Booze,” BusinessWeek, March 7, 2005, 95; Al Levine, “NASCAR Gets in the Spirit,” Atlanta Journal-Constitution, February 20, 2005, 1A; Performance Research, “Loyal
NASCAR Fans Please Stand Up,” 2005, http://www.performanceresearch.com; Ben VanHouten, “The Need for Speed,” Restaurant Business, March 15, 2005, 34+.
Discussion Questions:
1. Is NASCAR sending a mixed message to the public as it positions itself as a family-oriented sport sponsored by hard liquor companies?
2. Is liquor advertising a good fit with the NASCAR audience?
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Quiz Questions:
True/False
1. The receiver of a message (advertisement) for hard liquor on a
NASCAR stock car would be the driver of the car.
a. True
b. False
2. NASCAR’s changing target audience, which is including more
women and 12-18 year olds, are the perfect fit for a hard liquor
purveyor such as Jack Daniel’s.
a. True
b. False
3. A NASCAR fan’s negative attitude toward hard liquor could be
changed into a positive one as a result of seeing an advertisement for whiskey on a NASCAR race car.
a. True
b. False
4. Despite NASCAR’s positive image among its fans, the high cost
of corporate sponsorship has deterred advertisers from placing
company decals on race cars.
a. True
b. False
5. An example of a contest would be a Crown Royal-sponsored
weekend getaway to Charlotte, NC, to see the Winston Cup,
drawn from entry forms posted at liquor stores.
a. True
b. False
3. Liquor sponsors’ ads on NASCAR race cars carry a strong
responsible drinking message, such as Jack Daniel’s “Pace
Yourself, Drink Responsibly.” This is a form of:
a. pioneering advertising
b. comparative advertising
c. unique selling proposition
d. advocacy advertising
e. media planning
4. If a liquor retailer like Seagrams adds advertisements on
NASCAR race cars to its media planning, along with magazine,
radio, and newspaper ads, the ad on the car would be considered what type of media?
a. mass media
b. alternative media
c. mixed media
d. institutional ad
e. non-print ad
5. An example of a point-of-purchase promotion for Jack Daniel’s
whiskey that would tie in with the company’s NASCAR sponsorship is:
a. a Jack Daniel’s ad in a racing magazine.
b. a “Drink Responsibly” radio spot
c. a Jack Daniel’s Internet ad banner
d. a press release about responsible drinking
e. A Jack Daniel’s/NASCAR display at a liquor store offering a
free NASCAR race ticket with the purchase of their whiskey.
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Multiple Choice
1. If a company like Jim Beam decided to advertise their whiskey
on the hood of a NASCAR race car, in addition to handing out
tee shirts at races and placing an ad in a race day program, the
company would be using a combination of strategies called the:
a. AIDA concept
b. promotional mix
c. communication process
d. push-pull strategy
e. continuous media schedule
2. An example of “noise” associated with a NASCAR race car
being used as an advertising medium is:
a. too many competing ads on a car
b. the race announcer talking too much
c. commercial breaks on TV
d. a competitor’s commercial
e. loud race car engines
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PRICING CONCEPTS
17
Case Studies
CASE ASSIGNMENT: HDNet
HDNET Aims to Redefine Television
If billionaire entrepreneur Mark Cuban had his way, the future would be today. The Web broadcasting pioneer earned
nearly $2 billion when he and his partner sold their Broadcast.com business to Yahoo! for the princely sum of $5.7 billion at the height of the Internet frenzy in 2000. While looking to spend some of his newly found wealth on the latest
and greatest in home entertainment systems, Cuban had his first experience with high-definition television.
High-definition TV is a digital format that produces a picture resolution that can be up to ten times sharper than that
of standard TVs (depending on screen pixel count), and it is typically presented in a wide-screen format along with digital surround sound.
Cuban was so captivated by the amazing resolution on his new 100-inch projection set that he decided to start his own high-definition television
network.
With a $100 million investment from Cuban, HDNet—the first-ever all-high-definition network—was off and running less than a year later.
Three years later, HDNet boasts over 1,200 hours of original programming. In addition to the shows it produces, it has licensing contracts that
double its programming inventory. HDNet also has broadcasting agreements that allow it to carry live sporting events from the National Hockey
League, Major League soccer, and the NCAA. The company also operates HDNetMovies, which has scored deals with several major movie studios to convert their 35-millimeter films to a high-definition format.
Though HDNet’s current subscriber base is estimated at around 1 million, industry statistics suggest that 60 million U.S. homes have television sets capable of delivering high-definition programming. With prices that started near $5,000 a couple of years ago, the prohibitive cost of
the special television sets required to transmit high-definition programming was one of the company’s major early hurdles. The other was the
lack of available programming. High-definition shows must be produced on special equipment, and only a few major networks, such as NBC,
CBS, ABC, HBO, Showtime, and the Discovery channel, have made the investment to do so.
Cuban has stayed the course, patiently waiting for prices of high-definition TV sets to drop to where they would have mass-market appeal.
As with his Internet business, his timing appears to be perfect. Electronics retailer Best Buy now sells 27-inch high-definition TV sets for as low
as $500. Of course, the discerning customer can spend as much as $9,000 in the same store for a top-of-the-line 60-inch model; but now that
the television sets are affordable, adoption rates could be on the verge of exploding. Cuban, therefore, has turned his attention to securing distribution deals with major cable operators and satellite programmers.
His company has already locked in deals with all but three of the nation’s largest cable television providers and with satellite broadcasters
DIRECTV and DISHNET. Both satellite programmers and the heavyweight cable-operating trio of Time Warner, Charter Communications, and
Adelphia have begun to sell subscriptions to HDNet, which comes packaged with HDNet Movies. Those companies pay an as yet undisclosed
amount of money back to Cuban for the rights to carry the channel and license HDNet’s exclusive content. To reduce some of the technical confusion for customers, the satellite companies offer subscribers package deals. DIRECTV’s includes a dish, a high-definition receiver (required to
transmit the signal to the high-definition TV), professional installation, and a year’s worth of high-definition programming for $399. DISHNET
offers a similar package, but throws in a TV for a total start-up cost of $1,000. Its subscriptions are priced separately and start at $110 per year.
Cable operators charge a premium for HDNet and include it only with their high-end digital offerings, which generally cost around $100 per
month. To entice skeptical consumers into signing up, some cable companies are offering 30-day free trials.
Mark Cuban truly believes that the story of high-definition television services will someday mirror that of FM radio or basic cable television.
Of course, only time will tell if he is right, but one thing is for sure—with high-definition television, the future certainly appears brighter.
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SOURCES: http://www.hd.net/; http://www.DirectTV.com; http://www.Adelphia.com; http://www.timewarner.com; Leigh Gallagher, “The Big Picture,” Forbes, March 1, 2004,
78; Allison Roman, “All HD All the Time: Mark Cuban’s HDNet Is Typically Offered on Operators’ Premium Tier,” Broadcasting & Cable, January 26, 2004, 20; Meredith Amdur,
“New Definition at TW; Cuban’s HDNet Lands Carriage with Cabler,” Daily Variety, December 18, 2003, 6.
Discussion Questions:
1. Based on how resellers are pricing HDNet for their subscribers, how would you characterize HDNet’s pricing objectives?
2. How will demand and supply trends in the high-definition industry affect the price for HDNet’s programming?
3. From what you can discern about its stage in the product life cycle, competition, distribution, resellers’ sales promotion strategies, customer demands, and perception of quality, submit a projection of what you think HDNet should charge carriers for access to its channels
and original programming. Defend your answer.
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Quiz Questions:
True/False
1. Mark Cuban is counting on HDNet’s market share in the television industry increasing if the price of high-definition televisions
stays fixed.
a. True
b. False
2. HDNet may have to consider status quo pricing if another highdefinition television network enters the market.
a. True
b. False
3. The supply of HDNet subscriptions offered to the market is not
affected by the price cable and satellite television providers
charge for the service, only by the number of broadcasters willing to sign agreements with HDNet.
a. True
b. False
4. Mark Cuban is counting on more consumers subscribing to
HDNet as the price of high-definition television sets becomes
more affordable. He is counting on what determinant of price?
a. supply
b. demand
c. competition
d. fixed costs
e. baby boomers’ buying power
5. A factor that could affect the elasticity of demand that HDNet
has is:
a. availability of substitutes (other networks)
b. price relative to purchasing power
c. product durability
d. product’s other uses
e. all of these
6. HDNet could utilize what pricing tool to help them know when to
adjust prices to maximize their revenues and fill unused capacity
(in this case, subscriptions)?
a. penetration pricing
b. SWOT analysis
c. yield management systems
d. ROI
e. market research study
7. Based on the prices that cable and satellite broadcasters are
charging for HDNet’s subscription service, at what stage in the
product life cycle would HDNet be?
a. introductory
b. growth
c. maturity
d. decline
e. sustained
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Multiple Choice
1. Mark Cuban of HDNet counted on the cost of high-definition television sets dropping to stimulate demand for his network. This
is an example of:
a. inelastic demand
b. elastic demand
c. supply and demand
d. switch and bait tactics
e. on-demand television
2. By charging customers a premium for HDNet and grouping it
with their high-end digital channel offerings, cable and satellite
providers are taking advantage of what type of pricing strategy?
a. prestige pricing
b. best price strategy
c. price point
d. inflated pricing
e. bait pricing
3. If HDNet used target return on investment as its pricing objective, what would its return on investment be, given that Cuban
made a $100 million initial investment and projecting that they
will make a net profit of $10 million in their first year.
a. 10%
b. 100%
c. 99%
d. 0%
e. They would lose money.
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SETTING THE RIGHT PRICE
18
Case Studies
CASE ASSIGNMENT: CABLE TV PRICING
Disconnecting Cable Channels from Pricing Bundles
When people go shopping, the grocery store doesn’t make them buy broccoli if they are buying milk. Why then do
cable and satellite TV companies make people pay for channels they don’t watch, for example, highly targeted channels
like Home and Garden Television (HGTV), Spike, and ESPN? Congressional lawmakers are interested in the cable industry’s answer to this question. Several lawmakers are pushing for legislation that would prevent the cable industry from
forcing consumers to buy a prix fixe menu of channels and would require the industry instead to offer á la carte service,
or individual channels, in lieu of traditional packages. And the idea is gaining popularity.
This idea, and complaints about cable television service and rising rates, emerged at a Senate subcommittee hearing where legislators pilloried
the cable industry for being unresponsive to consumers. One senator went so far as to say that cable subscribers “are being force-fed channels and
features they don’t want,” and encouraged the industry to give consumers a choice. Another warned, “Do something about your rising rates or
you’re going to have trouble.” The senators aren’t alone in their frustration. Bipartisan members of the Federal Communications Commission have
also signaled support for more personalized cable options. The industry, however, insists that such options will end up costing consumers more.
Fueling the debate is the spiraling price of cable TV service. According to a recent General Accounting Office study, cable programming rates
jumped at least 34 percent during a recent three-year period, far outpacing the general rate of inflation. The report attributed higher cable rates
at least partially to billions of dollars of investments made by cable companies in original programming and upgraded technology. Cable companies are also paying more for sports programming; such fees rose 59 percent during the same period because of the higher prices being paid to
sports teams and leagues to carry games.
Unbundling cable channels appeals to some consumers who hope it would lower monthly bills and give them more control over what their
families are watching. Besides, the idea of paying for an individual channel isn’t altogether new in the cable industry: plenty of consumers
already pay extra for commercial-free channels such as HBO and Showtime. Proponents of the á la carte plan say most cable subscribers watch
the same channels all the time, so why should they pay for all the others? “The average household watches no more than a dozen to 17 channels,” says Gene Kimmelman, head of Consumers Union, citing a report compiled by the FCC.
The movement to change how cable service is priced alarms the industry. Both programmers and operators say offering personalized selections to more then 70 million cable subscribers would shatter the economics of their business, forcing less popular channels out of business and
potentially costing consumers more.
Cable operators say their entire business model is predicated on packaged offerings. That setup affords cable networks two revenue streams;
advertising revenue and per-subscriber license fees from cable and satellite operators that distribute the programming. Any change in audience figures for a cable channel after it was removed from a package would severely hamper both revenue sources, they say. Furthermore, some industry
members contend that an á la carte plan would severely limit individual networks’ ability to generate original programming. This is a serious concern
for companies like Scripps Networks, parent of the Food Network and HGTV, and Viacom, parent of Nickelodeon. For example, if Nickelodeon, which
is available in 88 million homes including satellite customers, saw its distribution drop dramatically because of an á la carte system, the network
would be making less money to put back into programming. Unbundling cable packages could have some serious unforeseen consequences.
“It could really destroy a business that is monumentally successful,” adds Andy Heller, president of distribution for Time Warner’s Turner
Broadcasting, parent of TNT, the Cartoon Network, and CNN. He notes that the average monthly cable bill is less than the cost for a family of
four to go to a baseball game nowadays.
Ironically, a cable operator in the New York City area tried to offer a channel on an á la carte basis but was not allowed to do so. An arbitration panel ruled against Cablevision Systems Corporation’s effort to offer the New York sports channel YES individually to subscribers. YES challenged Cablevision’s original decision not to bundle the channel with its basic service. The cable operator had said the YES channel, which
carries Yankees games, was too costly.
Cable operators also say that selling channels separately presents technological problems. Only one-third of the country gets digital cable.
The rest of the nation has older, analog systems in which it is more difficult to break down individual channel signals for each household. Given
the technological costs of implementing an individualized system and the likelihood that fees would increase to make up for lost subscribers,
subscribers could end up getting only a dozen or so channels for the same price they currently pay for a bundle.
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SOURCES: Anne Maria Squeo and Joe Flint, “Should Cable Be à la Carte, Not Flat Rate?” Wall Street Journal, March 6, 2004, B1. Used with permission.
Discussion Questions:
1. What other pricing strategies could cable operators use that would maintain their revenue stream and check the escalating price of cable
service?
2. Is it legal for the government to intervene in industries whose prices outpace inflation? Is it appropriate?
3. What would happen to the cable industry if it was deregulated in the same way as the telecommunications industry?
4. Would you prefer an à la carte or bundle pricing strategy for your cable service?
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Quiz Questions:
True/False
1. The fixed-price menu of channels that cable and satellite TV
companies force their customers to buy is considered valuebased pricing.
a. True
b. False
2. If DIRECTV charged $10 a month less than DISHNET for a comparative channel package in order to capture a larger share of
the market, DIRECTV would be using price skimming.
a. True
b. False
5. To make money under an à la carte pricing system, cable companies might consider having subscribers sign contracts. If a
subscriber canceled a contract before the term of the agreement, the cable company could use _______ to make up for
the lost revenue.
a. assessment fees
b. retention fees
c. pricing penalties
d. contract-obligation fees
e. consumer penalties
6. A cable company could add several more channels to its packages and actually increase subscriptions, despite criticism of
forcing unwanted channels on consumers. During what type of
economic trend is this kind of bundling most effective?
a. strong economy
b. recession
c. bull market
d. bear market
e. stock market crash
7. Suppose marketing managers from two small regional cable
operators met and agreed that company A would charge a
lower price for its premium cable package, but company B
would charge a proportionally lower price for its basic cable
package. This is an example of:
a. status quo pricing
b. joint demand
c. countertrade
d. price fixing
e. derived demand
8. Suppose a cable company removed several channels from each
of its 3 sports packages (because of the increasing costs associated with paying sports teams and leagues to carry their games)
and then charged subscribers a separate fee to add the channels back into the package. The cable company would be utilizing what price tactic?
a. value-based pricing
b. unbundling
c. loss-leader pricing
d. price gouging
e. keystoning
9. If a cable company charges subscribers in the suburbs more
than subscribers who live in the city limits, the company is probably using:
a. demand-oriented pricing
b. zone pricing
c. fob pricing
d. basing-point pricing
e. price lining
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Multiple Choice
1. Currently, the cable industry uses price bundling as their pricing
strategy. If the government passes legislation allowing customers to choose only which stations they want (à la carte pricing), what could happen to the cable industry?
a. competition among channels would drive up quality of programming and revenues
b. individual networks would have less money to put back into
programming
c. cable networks would see increased viewership
d. cable companies would be forced to enter bidding wars for
their customers
e. all of these
2. If the cable industry were forced by the government to offer à la
carte pricing to its customers, what step would a cable company need to take to set the right price for each of the networks
it offered?
a. establish pricing goals
b. estimate demand, costs, and profits
c. choose a price strategy to help determine a base price
d. fine-tune the base price with pricing tactics
e. all of these
3. The general price level that a satellite TV company expects to
sell its subscription packages at is its:
a. base price
b. functional price
c. arbitrary price
d. non-negotiable price
e. pricing tactic
4. If a cable TV company offers subscribers its 20-channel package
for $24.95 and a 35-channel package for only $5 more, the company is utilizing:
a. flexible pricing
b. a media schedule
c. a quantity discount
d. marketing objectives
e. a promotional strategy
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PART 6 PRICING DECISIONS
Case Studies
MARKETING MISCUES
Pricing Execution Error at Dell
In a rare slip at Dell, Inc., a company known for its low-cost business model and close attention to operational detail, poor
management of the average selling price resulted in a revenue shortfall in the second quarter of 2005. Basically, the company priced its computers too low. Though it shipped an industry-record 9.1 million computers during the quarter, the company failed to meet its quarterly revenue target.
According to Dell’s Web site, the company’s climb to market leadership has been the result of a persistent focus on delivering the best possible customer experience by the direct selling of computer products and services. The company was founded in 1984 by Michael Dell, and its
corporate headquarters are in Round Rock, Texas. A worldwide supplier of computer systems, Dell manufactures computers in the United
States, Brazil, Ireland, Malaysia, and China. The company holds the number one market position in the United States, the number three position
in the Asia Pacific/Japan market, and the number two position in Europe. Worldwide, the company employs about 64,000 people.
Dell’s products include servers, storage, printing and imaging systems, workstations, notebook computers, desktop computers, networking
products, and software and peripheral products (e.g., plasma TVs, MP3 players, handhelds). Dell’s service offerings include managed, professional, deployment, support, and training and certification services. Dell’s pricing miscalculations occurred in its computer lines.
In 2005, personal computer makers were facing a mature market where continued growth was difficult. Worldwide PC sales were expected
to grow 12.7 percent in 2005, but revenues were expected to grow only 0.5 percent. Such tepid growth prospects were squeezing PC makers
from large (Dell) to small (Gateway). Desktop pricing was being forced down to new levels. Additionally, the notebook marketplace, which
tends to generate higher margins, was experiencing price declines faster than anticipated. According to one industry expert, the quest for
growth was forcing companies to test the limits of PC price elasticity.
During the second quarter, Dell’s average selling price for its consumer computers dropped 13 percent, and the company experienced an
average price decrease of 8 percent across all products and markets. Essentially, Dell was advertising its super-cheap machines and offering
revenue-draining promotions on the low-end machines (e.g., giving away printers with the purchase of even cheap computers). Dell would have
met expectations if it had priced the 9.1 million computers it sold in the second quarter just $10 to $15 higher. But the company was operating
in a share-building model of growth and was not focusing on selling the more profitable machines. This was considered an unusual marketing
strategy for the industry leader—a leader that did not need to slash prices to remain competitive with rival offerings. Thus, Dell’s second quarter unit volume was high, but it undermined revenue growth.
Though Dell executives insisted that these were onetime, easily fixable pricing problems, industry analysts wondered whether Dell was losing its tactical edge. In their view, the company needed to return to selling higher-end, more profitable systems and be less aggressive in the
battle for market share. In a marketplace where PC pricing had become more and more competitive, with low-end desktops priced as low as
$299 and notebooks dipping below $500, there was concern that the company had not been able to quickly adjust its pricing model to drive
revenue and meet expectations.
With competition heating up among notebook competitors (e.g., Hewlett-Packard, Gateway, Averatec), analysts expected that margins in
the notebook market would be driven down. Though Dell had met industry expectations for profit margins on its notebooks, the analysts were
concerned about its future profit margins in that sector. If they were to decline, Dell would be under additional pressure to get its pricing model
back in line, while steering customers toward its more expensive computer products. Although the pricing error was a rare slipup for the company, it brought considerable attention to the operational detail required by a company as large as Dell.
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SOURCES: www.dell.com; Louise Lee, “Dell’s Shortfall, Dell’s Challenge,” BusinessWeek Online, www.businessweek.com, August 16, 2005; Scott Morrison, “Pricing Pressures
Squeeze Profits on PCs Computers,” Financial Times, London Edition, August 23, 2005, 21; Richard Waters, “PC Pricing Mistake Hits Dell Revenues,” Financial Times, London
Edition, August 12, 2005, 28; Dan Zehr, “Dell’s Profit Rises, but Sales Fall Short,” The Austin American Statesman, August 12, 2005, D1.
Discussion Questions:
1. What type of marketing strategy was Dell pursuing? What was the role of pricing in this strategy?
2. How important are pricing decisions to the overall welfare of a company such as Dell, Inc.?
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Quiz Questions:
Multiple Choice
1. Dell earned $799 million in the second quarter of 2005, yet it did
not reach its goals. However, if Averatec, a much smaller computer manufacturer recorded the same profits in the second
quarter, it most likely would far surpass its target profits. This
can be explained by which of the following principles?
a. return on investment
b. predatory pricing
c. elasticity of demand
d. yield management
e. leader pricing
2. According to the article, Dell was the leader of which of the following in the second quarter of 2005?
a. return on investment
b. market share
c. elastic demand
d. leader pricing
e. keystoning
3. Because of the perceived quality attached to Dell’s brand name,
Dell might have been able to increase prices on all its products
by $10 or $15 without suffering a noticeable loss in demand.
This means that Dell has which of the following?
a. unitary elasticity
b. high elasticity
c. inelastic demand
d. price equilibrium
e. low price relative to purchasing power
4. Direct channel marketing enables Dell to avoid which of the following?
a. price lining
b. markup pricing
c. price skimming
d. price fixing
e. predatory pricing
5. Which of the following is most likely a variable cost for Dell?
a. executive salaries
b. executive vacation benefits
c. Web site maintenance
d. factory worker salaries
e. shipping
6. Which stage of the product life cycle is Dell’s personal computer in?
a. introductory
b. growth
c. maturity
d. decline
e. inefficient
7. After Dell’s poor profit performance in the second quarter of
2005, industry analysts criticized Dell for engaging in
__________, or sacrificing profits to seek market share.
a. price skimming
b. predatory pricing
c. keystoning
d. penetration pricing
e. leader pricing
8. Dell underperformed in the second quarter of 2005 largely
because it sold far more inexpensive low-end computers than
pricey high-end computers. This information suggests that Dell
engages in the practice of:
a. flexible pricing
b. two-part pricing
c. predatory pricing
d. price lining
e. selling against the brand
9. When Dell includes a free printer with the purchase of a computer, it is offering a __________.
a. bundled price
b. promotional allowance
c. rebate
d. functional discount
e. quantity discount
10. Dell failed to meet its revenue goals in the second quarter of
2005 largely because it sold a great number of low-end computers. This was bad for the company because:
a. of leader pricing
b. of price shading
c. of escalator pricing
d. its computers are complementary to one another
e. its computers are substitutes for one another
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PART 6 PRICING DECISIONS
Case Studies
CRITICAL THINKING CASE
Yahoo Music Unlimited’s Aggressive Pricing
In May 2005, Yahoo! Inc., introduced its Music Unlimited service for a low introductory price of $60 for a year’s subscription
or $7 for a month. For this fee, subscribers would receive unlimited listening access to a library of more than one million
tracks. Subscribers who wanted to own a song, instead of just renting it, would pay 79 cents a song. A free seven-day trial
of the service was included in the introductory offer.
At the time of the introduction, there were two product segments in the marketplace: the pay-per-download segment and the subscription
services segment. Probably the best-known pay-per-download segment was Apple’s iTunes, which charged 99 cents for a music download.
Analysts believed that iTunes was the leading download service because of its relationship to the iPod. Although the average iPod owner purchased only around 25 songs, there were over 17 million iPod owners in 2005, and that number was expected to increase by another 5 million
in 2006.
Yahoo Music Unlimited’s competitors in the subscription services market were RealNetworks’ Rhapsody and Napster. They charged about
$10 a month for basic subscription and $15 a month for a portability subscription. One critical question for all three competitors was whether
online music providers could change consumer behavior: Would music listeners readily switch from buying music to renting music? Would subscription services replace or even change the entire music purchasing experience? Another critical question was whether online music providers
could actually make money on subscriptions: Could the online providers attract a sufficient number of subscribers to survive, given that the
providers had to pay the music label about $6 per person a month for a subscription that allowed users to listen to music only on their PC? For
subscriptions that allowed downloads to portable players, label fees were around $8 per person per month. The music subscriber base was only
1.5 million in 2004, but that was twice as many as in 2003.
Competitively, Yahoo Music Unlimited had its advantages and disadvantages. For one thing, Yahoo was not relying solely on Music Unlimited
for cash flow. Yahoo was a widely diversified company, with a potential audience of 370 million visitors a month via its network of Web portals.
Music Unlimited offered features that linked with many of Yahoo’s other services. These features included: Yahoo Music Engine, Large Music
Library, Yahoo Messenger Integration, Personalization & Community, Music Portability, Instant Playlists, LAUNCHcast Integration, Access From
Any PC, and Download Purchases. In contrast, the music service was the only business at Napster, and online subscriptions made up about 30
percent of RealNetworks’ revenue. Yahoo Music Unlimited could work on 10 different portable MP3 players. It was not compatible with Apple’s
iPod, however, and Apple had no incentive to make the iPod compatible with subscription service offerings.
With online music representing approximately 2 percent of total music sales, there was room for growth. According to data collected by
Nielsen/NetRatings, almost 62 million people visited an online music site in April 2005. Male visitors slightly outnumbered female visitors;
approximately 60 percent of the visitors were under the age of 45; and the majority had a household income of over $50,000. Some projections
even suggested that downloads and subscriptions would make the online music industry a $1 billion business in the United States by 2007.
Would Yahoo be a major player in the subscription services marketplace? Would the fact that the costly infrastructure (e.g., servers, credit
card fees) was already in place at Yahoo help the company move to the top of the online music industry? Or, was Yahoo Music Unlimited’s low
introductory price essentially de-valuing music, and, if so, would this spark more battles with the music labels? Was the company also starting a
price war with RealNetworks and Napster? If so, how long would this introductory price have to remain in place? Was this a sustainable business model for any company in the online music industry?
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SOURCES: Peter Burrows, Ben Elgin, Ronald Grover, Jay Greene, Heather Green, & Tom Lowry, “Online Music: Rewriting the Score,” BusinessWeek, May 30, 2005, 34+;
eMarketer, “New eMarketer Report Finds Digital Music Advances Substantially Changing Music Industry Landscape,” Market Wire, www.marketwire.com, July 14, 2005; Gale
Group, Inc., “Yahoo Shakes up Music Subscription Market,” Business and Industry Online Reporter, May 14, 2005, 1; Scott Kessler (interview), “Yahoo’s Music Rivals Sing the
Blues,” BusinessWeek Online, www.businessweek.com, May 12, 2005.
Discussion Questions:
1. What pricing objective is driving Yahoo Music Unlimited?
2. What is the company’s pricing strategy?
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Quiz Questions:
Multiple Choice
1. Calculate Yahoo’s revenue from a one-month subscription to
Yahoo Music Unlimited at the introductory fee?
a. $1.00
b. $6.00
c. $7.00
d. $60.00
e. $1.17
2. Which of the following is the main reason that music subscription services are likely to have elastic demand?
a. low price relative to purchasing power
b. high availability of substitutes
c. the product’s other uses
d. product durability
e. price equilibrium
3. Which of the following is the $6 per person per month fee for
Yahoo Music Unlimited?
a. revenue
b. marginal revenue
c. profit margin
d. a variable cost
e. cash discount
4. Yahoo Music Unlimited’s year-long subscription for $60, in relation to its $7 month-long subscription, is an example of which of
the following?
a. a cumulative quantity discount
b. a noncumulative quantity discount
c. price discrimination
d. flexible pricing
e. product line pricing
5. If Yahoo offered a second service, Yahoo Music Unlimited Plus,
which included more features, such as the ability to buy songs
for 49 cents instead of 79 cents, but charged $14 a month and
$120 a year for subscription, this would be an example of
__________ pricing.
a. product line
b. markup
c. flexible
d. escalator
e. predatory
6. Yahoo Music Unlimited entered the market with which of the following price strategies?
a. price skimming
b. price shading
c. predatory pricing
d. flexible pricing
e. penetration pricing
7. If Yahoo discovered that it was actually losing money on every
Music Unlimited subscription, but decided to maintain the low
introductory fee on the principle that Music Unlimited attracts
customers to Yahoo’s other services, this would be an example
of __________ pricing.
a. bait
b. penetration
c. predatory
d. leader
e. status quo
8. If Yahoo Music Unlimited and competitors RealNetworks’
Rhapsody and Napster all suddenly raised their music subscription fees to $20 per month, they might be charged with:
a. price skimming
b. unfair trade practices
c. price fixing
d. bait pricing
e. price discrimination
9. Because of its low price in comparison to its competitors, Yahoo
Music Unlimited would likely be ranked first in:
a. leader pricing
b. flexible pricing
c. product line pricing
d. a yield management system
e. a shopping bot list
10. If the break-even quantity for Yahoo Music Unlimited is 1 million
one-month subscriptions, and Yahoo’s profit margin is $80,000
after 1.1 million one-month subscriptions have been sold, what
is the average variable cost for the first 1.1 million subscriptions
sold (assuming the marginal cost remains the same for the first
1.1 million units)?
a. $6.93
b. $6.20
c. $6.82
d. $6.92
e. $6.40
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CUSTOMER RELATIONSHIP MANAGEMENT (CRM)
19
Case Studies
CASE ASSIGNMENT: Kroger
They Should Have ‘DUNN’ This Much Sooner! U.K. Firm Leads Kroger Turnaround
Supermarkets have long engaged in an intense struggle to interpret the mountains of data they compile from customer
loyalty and frequent buyer cards. Though many are good at collecting information, few are actually effective at targeting
appealing promotions based on what they learn from those cards. Falling behind on this important aspect of such a
marketing-driven business almost cost Kroger its business life. Thankfully, little-known, London-based, relationship marketing specialist DunnHumby was willing to come to the rescue.
Founded in 1989 by husband-and-wife team Edwina Dunn and Clive Humby, the firm gained acclaim for the work it did with cutting-edge
U.K. grocer Tesco. The key to their success was the Tesco Club Card program that DunnHumby created. The program boasts a reach of 10 million U.K. households and drives 85 percent of weekly store sales. Amazingly, the coupons Tesco sends to customers through the card program
redeem at rates in the 20 to 40 percent range, compared to 1 to 2 percent for mass-marketed coupons.
Inspired by the DunnHumby/Tesco success story, Kroger, the second largest U.S. retailer, convinced DunnHumby to enter a joint venture
based in the United States. In 2003, the two launched DunnHumbyUSA in an office down the street from Kroger’s world headquarters in
Cincinnati, Ohio, and immediately began the monumental task of trying to analyze the data from every transaction made on a Kroger Plus card.
Kroger claims that of the 42 million households that shop at its stores, more than 40 million have Kroger Plus cards. However, just 6.5 million of those provide over 50 percent of the company’s sales. About 100 DunnHumbyUSA marketing strategists and mathematicians crunch
Kroger’s data on a daily basis, examining 27 sample products and developing categories by which to segment the top 15 percent of Kroger’s
customer base. Considering when and how they buy products from that special group, DunnHumby develops what it calls a shopper’s “DNA.”
Cardholders are then placed in one of seven segments. The Traditional Homes group is so named for its members’ affinity for scratch cooking and conventional fare; Budgeters are value-conscious shoppers; and the Finest category includes customers who frequently purchase gourmet, fresh, and imported foods. Adding yet another level of sophistication, DunnHumby cross-references the original seven groups by another
seven interest groups with names such as Family Care, Home Living, and Specialty Tastes shoppers.
Organizing shopper data into much more focused and detailed categories allows Kroger to send its core customers more relevant product
offers. Instead of blasting them with weekly mailers, Kroger now issues just four two-piece mailers a year. The first piece is a letter to the shopper with several targeted coupons aimed at increasing spending in the store. The second is a brochure designed especially for the interest
group that the household belongs to. It contains a vendor-sponsored page and a few more branded coupons based on the customer’s second
set of segmentation characteristics.
DunnHumbyUSA provides Kroger with more than analytics, however. Its U.S. office houses graphic designers and packaged goods specialists who work together with the technical staff to convert data tables into targeting strategies, in-store promotions, and carefully chosen product selections. DunnHumbyUSA assists Kroger in working better with its suppliers, too. The grocery giant has introduced its strategic partners
to critical vendors such as Coca-Cola, Hershey, and General Mills.
The close interaction between Kroger and its largest vendors allows all parties involved to review more data and react quicker to developments in the marketplace so that they can create more value for the customer. DunnHumby doesn’t stop there, either. The firm’s specialists
coach Kroger’s upper management to develop a strong customer focus, offer guidance in enhancing the effectiveness of Kroger employees, and
supervise Kroger’s development of its employee rewards program.
DunnHumby’s work is clearly paying off. After a miserable 2004, when Kroger lost over $100 million, the struggling supermarket experienced
a dramatic reversal of fortune. Its 2005 net income tally was an astounding $958 million, and the company paid out is first dividend since 1988.
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SOURCES: Laura Baverman, “Kroger’s Card Sharks,” Cincinnati Business Courier, November 4, 2005, 1, 46; Lucia Moses, “Diving for Data; With DunnHumby’s Loyalty
Marketing Know-How, Kroger Hopes to Unlock Valuable Secrets of Its Loyalty Card Data,” Supermarket News, September 26, 2005, 72; “Kroger Ups 2005 Earnings; Will Pay
Dividend,” Columbus Business First, March 6, 2006, 11; Steven Gray, “Kroger Fights Goliath, and Investors Freeze,” Wall Street Journal, June 14, 2006, C1.
Discussion Questions:
1.
2.
3.
4.
Describe the CRM system, including each of its components, that DunnHumbyUSA has implemented with Kroger.
What type of list does DunnHumbyUSA interpret to better its Plus Card program?
Describe DunnHumbyUSA’s approach to data mining.
How does DunnHumbyUSA leverage customer information? What other opportunities do you think exist for them to explore in the future?
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Quiz Questions:
Multiple Choice
1. The customer relation management system that DunnHumby
created for Kroger can best be described as:
a. empowerment
b. interaction
c. customer-centric
d. touch point
e. point-of-sale
2. The DunnHumbyUSA marketing strategists who analyze the
Kroger customer base are creating:
a. knowledge management
b. a data warehouse
c. interaction
d. empowerment
e. a campaign
3. Collecting comments from drop boxes in Kroger stores would be
an example of:
a. learning
b. knowledge management
c. an interaction
d. empowerment
e. campaign management
4. If Kroger gave every employee the authority to refund badly
packaged food, the company would be engaging in employee:
a. interaction
b. knowledge management
c. complaint prevention
d. quality control
e. empowerment
5. The interaction that occurs when a customer swipes her Kroger
Plus card at the checkout line after buying yogurt, granola, and
fresh fruit, is best described as:
a. empowerment
b. delegation
c. response listing
d. point-of-sale
e. campaigning
6. If Kroger made a list containing names and address of every
shopper who registered for a Plus card, that information might
be called a:
a. data warehouse
b. compiled list
c. response list
d. customer relations management system
e. predictive model
7. If Kroger decided not to collect its own information but rather to
purchase a list of potential customers from a large list company,
the information Kroger would buy would most likely be a:
a. data warehouse
b. compiled list
c. response list
d. customer relations management system
e. predictive model
8. Kroger’s strategy of dividing shoppers into groups like
“Traditional Homes” and “Budgeters” is a form of:
a. compiled listing
b. response listing
c. predictive modeling
d. customer segmentation
e. campaign management
9. When Kroger managers send specifically designed brochures to
each of the company’s interest groups, the managers are
engaging in:
a. knowledge management
b. campaign management
c. customer segmentation
d. predictive modeling
e. response listing
10. If Kroger sends out a mailing containing coupons for P&G laundry
products to only certain groups of Plus Card customers, Kroger is:
a. cross-selling
b. data mining
c. managing knowledge
d. pirating
e. modeling
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PART 7 TECHNOLOGY-DRIVEN MARKETING
Case Studies
MARKETING MISCUES
Game Code Violates Industry Rating
According to the Entertainment Software Association (ESA), the five top-selling video games by units sold in 2004 were
Grand Theft Auto: San Andreas, Halo 2, Madden NFL 2005, ESPN NFL 2K5, and Need for Speed: Underground 2. Total video
game sales in the United States in 2004 amounted to $6.2 billion or an estimated 203 million units. Demographically, 75
percent of heads of households play computer or video games. Approximately 35 percent of gamers are under 18 years old, 45 percent are 18
to 49 years old, and 20 percent are 50 or older. The average age of a gamer is 30.
The ESA was formed in 1994 to serve the business and public affairs needs of video and computer game companies. It has 25 game company members, including such well-known names as Activision, Electronic Arts, Konami, Microsoft, Nintendo, SEGA, Sony, Take-Two, Vivendi,
and Warner Brothers. The ESA established the Entertainment Software Rating Board (ESRB) in 1994. The board’s purpose is to apply and
enforce ratings, advertising guidelines, and online privacy principles adopted by the computer and video game industry. In essence, the ESRB
serves as a self-regulatory body for the interactive entertainment software industry. Unfortunately, in the summer of 2005, the ESRB had to slap
the potentially crippling Adults Only (AO) rating on a member’s game—the game that was the hottest-selling video game in 2004, Grand Theft
Auto: San Andreas.
The ESRB has a two-part rating system. Appearing on a game’s front cover is a rating symbol that indicates ages for which the game is
appropriate: EC (Early Childhood, ages 3+), E (Everyone, ages 6+), E10+ (Everyone 10 and older), T (Teen, ages 13+), M (Mature, ages
17+), AO (Adults Only, ages 18+), and RP (Rating Pending). On a game’s back cover is the content descriptor rating, which indicates contentspecific elements of the game that led to a particular rating (e.g., alcohol, blood, crude humor, drugs, language, nudity, sexual violence, sexual
content, violence). The ESRB rates more than 1,000 games a year. Approximately 54 percent of the games receive one of the Everyone ratings,
33 percent the Teen rating, and 12 percent the Mature rating. In 2004, less than 1 percent of reviewed games received the Adults Only rating,
which is reserved for titles with prolonged scenes of intense violence or graphic sexual content or nudity.
Ratings are issued before a game enters the market, but the ESRB took the unprecedented step of changing the rating of Grand Theft Auto:
San Andreas from M to AO after the game had been on store shelves for nine months. The problem was the game’s sexual content. The
board’s reviewers had not made an error in rating the game. In fact, the reviewers did not know that the sex scenes were in the game.
Apparently, a gamer was able to crack the game’s code and unlock information hidden in the program. This hidden code, referred to as the “hot
coffee mod” (modification), allowed players to access sexually explicit minigames via an Internet download. Initially, Take-Two Interactive
Software, the parent company of the game’s publisher Rockstar Games, denied that the explicit material existed on the game discs prior to
modification, insisting that the material was the work of hackers. Eventually, the company took responsibility for the sex scenes, acknowledging
that the scenes were created by internal developers and included on final copies distributed to retail outlets. Supposedly, the scenes were the
result of dead code that did not make the final cut for the game but were too labor intensive to delete completely. Instead, the code was programmed to be inaccessible to gamers.
Take-Two Interactive Software develops and publishes games through its wholly owned labels, Rockstar Games and Global Star Software.
The Grand Theft Auto game series is one of its most popular brand franchises. The rating change cost the company an estimated $40 million to
$50 million in sales because it drastically reduced the number of outlets that would carry the game. Wal-Mart, which controls around half of the
video game market in the United States, refuses to sell AO-rated games, as does Best Buy. Other video game retail outlets including Target,
Blockbuster, and Hollywood Video pulled the game from their shelves and were uncertain as to the game’s future in their stores.
Not only did Take-Two suffer financially, but the U.S. House of Representatives passed a resolution to launch an investigation into whether
Rockstar Games knew about the sex scenes prior to release of the game.
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SOURCES: “Sex Scenes? Now, That’s Going Too Far . . . ,” The News Tribune, July 22, 2005, B06; Entertainment Software Association, http://www.theesa.com; Entertainment
Software Rating Board, http://www.esrb.org; Victor Godinez, “Hidden Sex Scenes Bump Up New Grand Theft Auto Game to Adults Only,” Dallas Morning News, July 21, 2005;
Rachel Sa, “Grand Theft Auto Slapped with Severe AO Rating: Future Shop and Best Buy Will Pull Sexually Explicit Game from Shelves,” National Post (Canada), July 21, 2005,
A6; Anna Zaijka, “Explicit Video Game Vanishes from Shelves,” Vallejo Times-Herald, July 28, 2005.
Discussion Questions:
1. Describe the marketing relationships that may have been damaged by technology’s role in product development.
2. What could the rating fiasco do (if anything) to the ESRB’s image?
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Quiz Questions:
True/False
1. An entertainment-based company like Take-Two would not benefit by implementing a customer relationship management (CRM)
system.
a. True
b. False
2. If Take-Two marketers gather data and then generate a computer
file about each customer that is available through their customer
support center and their Web site, they are utilizing knowledge
management.
a. True
b. False
3. Recency-Frequency-Monetary Analysis (RFM) would enable a
company like Take-Two to project the future value of the customer over a period of years.
a. True
b. False
4. If a Take-Two customer support representative received a complaint from a 17-year-old customer who can’t buy Grand Theft
Auto: San Andreas because of its new AO rating, and then
offered the customer a $5 off rebate on a comparable game
with an M rating, the customer service rep has used her
_____________ to solve the customer’s problem.
a. Internet training
b. customer service
c. empowerment
d. persuasion
e. phone skills
5. A touch point for Take-Two would be:
a. a customer buying a competitor’s video game
b. a customer registering a complaint on the Take-Two Web site
c. a magazine article about the rating change on Grand Theft
Auto
d. a recall of one of Take-Two’s games
e. None of the these are touch points.
6. If Take-Two developed a new video game based on its best-selling games, as well as customer feedback from callers and the
company Web site, Take-Two marketers would probably utilize
____________ to achieve that.
a. campaign management
b. innovation
c. market segmentation
d. optimizers
e. retailing
7. If Take-Two used the problem it experienced with the ratings
change in the Grand Theft Auto game to help identify which customers would only buy games with M ratings or lower, the company would be engaging in a process called:
a. market planning
b. AIDA
c. consumer decision-making process
d. product differentiation
e. modeling
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Multiple Choice
1. Take-Two Interactive Software has honed in on video game players who are approximately 30 years old and enjoy intense,
action-filled video games. Being able to identify such a precise
target market shows that the company is poised to capitalize on
what marketing trend?
a. market penetration
b. customer relationship management
c. electronic distribution
d. co-branding
e. marketing myopia
2. If Take-Two implemented a CRM system to enhance its customer relationships, what key point would the company need to
take into account?
a. customers take center stage in the organization
b. company profitability is a priority
c. employees come first
d. the need to drive out the competition
e. customers are not to be trusted
3. If Take-Two hosted a Web site for its customers with new
games to try, a message board to talk to other gamers, customer support, and news and events in the video game industry,
the company would have a ________________ focus.
a. strategic
b. marketing
c. global
d. customer-centric
e. value-based
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PART 7 TECHNOLOGY-DRIVEN MARKETING
Case Studies
CRITICAL THINKING CASE
Scripps Provides E-Offering With HGTVPRO.COM
By 2005, more than 10 million households in the United States had selected television programs by using video-on-demand
services, and this number was expected to quadruple by 2010. Nevertheless, programmers and cable operators have had
difficulty finding a business model that satisfies all parties in the video-on-demand relationship, including networks, distributors, advertisers, and viewers. Now, however, E. W. Scripps Company may have found the solution—video-on-demand online. Headquartered in
Cincinnati, Ohio, E. W. Scripps was founded in 1878 with a newspaper called The Penny Press. The newspaper’s target audience was the
emerging mass market of urban workers. The company grew to become a diverse media corporation with expertise in newspaper publishing,
national lifestyle television networks, broadcast television, interactive media, and licensing/syndication. Today, Scripps operates daily and community newspapers in 18 markets and has ten broadcast television stations and five cable/satellite programming networks. Additionally, the
company owns the Shop at Home Network, a television retailing offering, and Shopzilla, an online comparison shopping service.
In early 2005, E. W. Scripps set out to create a new television network without the television and without the cable. To do this, it used
broadband, which allows viewers to access information via personal computers and cell phones. With an estimated 55 percent of homes having
access to the Internet and 85 percent of offices having high-speed broadband, Scripps believed that the time was right to enter the world of
broadband. It did this through Scripps Networks, its lifestyle network subsidiary, which is available in 95 countries on six continents. Already one
of the biggest producers of cable content, Scripps Networks was the first major programmer to move into broadband with original content, taking content from its popular television brands into broadband channels. Because it was already producing 3,000 hours of content annually and
thousands of Web-based video projects (with an average of 12 million visits a month), Scripps Networks could move into broadband channels
at a relatively low cost.
Initially, Scripps’s move into broadband focused on the Home & Garden Television network (HGTV) with HGTVPro.com. Scripps planned to follow this with Fine Living and the Food and DIY (do-it-yourself) networks. The company owns a library of 25,000 hours of television programming
that enabled it to quickly harness the broadband initiative. To get the broadband channels up and running, it reformatted this existing programming for broadband viewing. Unlike half-hour programs on cable television, however, for broadband viewing the informative content has to be
condensed into three to five minutes of streaming video. The broadband capability also gives viewers access to content beyond the video in
case they need more help for a particular project. For example, video viewers can access the “Best Practices” section of the Web site to supplement the streaming video. Viewers can also subscribe to HGTVProFile, the company’s construction-related newsletter.
In its new venture, Scripps has had to deal with several issues related to advertising. The introduction of HGTVPro.com was supported by
advertising, and users were not charged a fee for access. Although Scripps Networks does not allow product placement in its shows, it does
permit online advertising on the Web site. GMC Truck, Lending Tree.com, and Whirlpool were three of the initial advertisers on the broadband
Web site. Scripps recognizes that it needs to develop links for advertisers to reach viewers in a more efficient, relationship-oriented manner.
Thus, it is considering a subscription model for its broadband channels. Subscribers would pay a fee to join an affinity group or club. Members
would then be entitled to more extensive Web site access on the channel as well as to discounts from the advertisers. Another issue is that
advertisers are demanding far greater broadband inventory than is available. Knowing this, Scripps does not want to lose potential advertising
clients to its competitors. By the end of 2004, three other companies had made potentially threatening moves into the Internet mass communications marketplace: Dow Jones & Co. had acquired online financial publisher MarketWatch, Inc.; the Washington Post Company had purchased
the online magazine Slate; and the New York Times Company had purchased About.com, which offers a diverse network of Web sites from food
to sports.
Although not all of these issues have been resolved, Scripps’s initiative appears to be successful. In its first 19 days of existence, there were
380,000 unique visits to HGTVPro.com. Within three months, more than 110,000 contractors and over one million consumers had registered for
the free electronic newsletter. Thus, HGTVPro.com has allowed Scripps Networks to build on its recognized strength with the enormous success
of its HGTV brand and maintain a competitive lead in the new video-on-demand online marketplace.
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SOURCES: http://www.hgtvpro.com; http://www.scripps.com; Bill Brewer, “Scripps Is Going Broadband,” Knoxville News-Sentinel, May 16, 2005, C1; Allison Fass, “Advertising on
Demand,” Forbes, July 25, 2005, 72; Jon Lafayette, “Broadband on Scripps’ Menu,” Television Week, May 16, 2005, 1+; Duncan Mansfield, “Scripps Takes Latest Channel Direct
to Web,” BusinessWeek Online, March 21, 2005; Linda Moss, “Raging Debate on VOD Still Hasn’t Delivered the Hits,” Multichannel News, April 11, 2005, 1.
Discussion Questions:
1. Should HGTVPro.com allow product placement in its streaming videos? Why/why not?
2. What risks would be posed by moving to a fee-based subscription service?
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Quiz Questions:
True/False
1. Because it’s a Web site, HGTVPro.com could not use a customer
relationship management (CRM) system to improve customer
service.
a. True
b. False
2. Lifetime Value Analysis (LTV) could help Scripps identify those customers most likely to visit the HGTVPro.com Web site again
because they have already visited the site recently, visit it frequently, or purchased products or services offered through the site.
a. True
b. False
3. If Scripps collects information from HGTVPro.com viewers’ comments and feedback on the features of the site, the company is
engaged in a process called learning.
a. True
b. False
4. Scripps used modeling to create a Web site based on the success of their cable channel HGTV.
a. True
b. False
3. Assume Scripps Network uses a customer relationship management (CRM) system to better serve the visitors of the
HGTVPro.com site. What is an important step in this process?
a. identifying the competition
b. understanding interactions with current customers
c. writing a mission statement
d. registering with the BBB
e. stating an advertising objective
4. Scripps Network developed a Web site based on the popularity
of its HGTV network. If the company used viewer ratings numbers, as well as the number of people using the video-ondemand service, to gauge the viability of the new Web site,
Scripps managers have utilized __________ to develop their
new product.
a. internal marketing
b. co-branding
c. a competitive advantage
d. campaign management
e. predictive modeling
5. If Scripps Network received a customer’s complaint from
HGTVPro.com stating he or she could not bring up the free
newsletter, that interaction is called a(n):
a. touch point
b. marketing objective
c. point of reference
d. Internet glitch
e. customer service blunder
6. If Scripps Network uses information collected on viewers from
all its cable networks and Web sites and combines all that information in order to improve the HGTVPro.com Web site, the company is using a process called:
a. market segmentation
b. information utilization
c. knowledge management
d. data warehousing
e. profiling
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Multiple Choice
1. Leveraging the customer base it already had from its HGTV
viewership, Scripps Network used _______________ when it
focused on that distinct group of viewers to launch the new
HGTVPro.com Web site.
a. reality TV programming
b. a media mix
c. marketing channel
d. broadband marketing
e. customer relationship marketing
2. An example of a customer-centric focus for HGTVPro.com
would be:
a. extended Web site access for subscribers
b. discounts on advertisers’ products
c. a free 3-month trial subscription
d. free monthly newsletter for subscribers
e. all of the choices