Chapter 14: Wholesaling, Retailing, and Physical Distribution
GBS151, Class 12191
June 27, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
Chapter Objectives
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Identify the various channels of distribution that are used for consumer and industrial products.
Explain the concept of market coverage.
Understand how supply-chain management facilitates partnering among channel members.
Describe what a vertical marketing system is and identify the types of vertical marketing systems.
Discuss the need for wholesalers and describe the services they provide to retailers and
manufacturers.
Identify and describe the major types of wholesalers.
Distinguish among the major types of retailers.
Identify the categories of shopping centers and the factors that determine how shopping centers
are classified.
Explain the five most important physical distribution activities.
6.
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1. Channels of Distribution
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More than 2 million firms in the United States help move products from producers to consumers.
Many of these firms operate stores in which consumers make purchases. In addition, there are more
than half a million wholesalers that sell merchandise to other firms. These and other intermediaries
are concerned with the transfer of both products and ownership. They thus help create the time,
place, and possession utilities that are so important in marketing.
A channel of distribution, or marketing channel, is a sequence of marketing organizations that directs
a product from the producer to the ultimate user. Every marketing channel begins with the producer
and ends with either the consumer or the business user. A marketing organization that links producer
and user within a marketing channel is called a middleman, or marketing intermediary. A merchant
middleman (or a merchant) is a middleman that actually takes title to products by buying them. A
functional middleman helps in the transfer of ownership of products but does not take title to the
products. Different channels of distribution are generally used to move business and consumer
products. (See Figure 14.1.)
Channels for Consumer Products
o Producer to Consumer. This channel, which is often called the direct channel, includes no
marketing intermediaries.
Practically all services, but very few consumer goods, are distributed through the
direct channel.
Producers sell directly to consumers for several reasons.
• They can better control the quality and price of their products.
• They don’t have to pay (through discounts) for the services of intermediaries.
• They can maintain closer ties with customers.
o Producer to Retailer to Consumer. A retailer is a middleman that buys from producers or
other middlemen and sells to consumers.
Producers sell directly to retailers when retailers can buy in large quantities.
This channel is most often used for products that are bulky, such as furniture and
automobiles, for which additional handling would increase selling costs.
It is also the usual channel for perishable products.
o Producer to Wholesaler to Retailer to Consumer. This channel is known as the traditional
channel, because most consumer goods pass through wholesalers to retailers.
A wholesaler is a middleman that sells products to other firms.
Page 1 of 20
Chapter 14: Wholesaling, Retailing, and Physical Distribution
GBS151, Class 12191
June 27, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
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A producer uses wholesalers when its products are carried by so many retailers that
the producer cannot deal with all of them.
o Producer to Agent to Wholesaler to Retailer to Consumer. This channel is used for products
that are sold through thousands of outlets to millions of consumers. Often, these products are
inexpensive, frequently purchased items.
o Multiple Channels for Consumer Products. Often, manufacturers use different channels to
reach different market segments.
A manufacturer may use multiple channels when the same product is sold to
consumers and business users.
Multiple channels are also used to increase sales or to capture a larger share of the
market.
Channels for Business Products. Producers of business products tend to use short channels.
o Producer to Business User. This channel allows the manufacturer’s own sales force to sell
directly to business users.
Heavy machinery, large computers, and major equipment are usually distributed in
this way.
Because it is a short channel, it allows the producer to provide customers with expert
and timely services.
o Producer to Agent Middleman to Business User. This channel is employed by manufacturers
to distribute such items as operating supplies, accessory equipment, small tools, and
standardized parts.
The agent is an independent intermediary.
Generally, agents represent sellers.
Market Coverage. Like every other marketing decision, the decision about which distribution channels
to use should be based on all relevant factors.
o These factors include the firm’s production capability and marketing resources, the target
market and buying patterns of potential customers, and the product itself.
o After evaluating these factors, the producer can choose a particular intensity of market
coverage.
o Then the producer selects channels and middlemen to implement that coverage.
Intensive distribution is the use of all available outlets for a product.
• The producer who wants to give the widest possible exposure in the
marketplace chooses intensive distribution.
• Many convenience goods are distributed intensively.
Selective distribution is the use of only a portion or percentage of the available outlets
in each geographic area.
• Manufacturers of goods such as furniture, major home appliances, and
clothing typically prefer selective distribution.
• Franchisers also use selective distribution in granting franchises.
Exclusive distribution is the use of only a single retail outlet for a product in a large
geographic area.
• Exclusive distribution is usually limited to very prestigious products.
• It is appropriate for specialty goods such as upscale pianos, fine china, and
expensive jewelry.
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Chapter 14: Wholesaling, Retailing, and Physical Distribution
GBS151, Class 12191
June 27, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
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Partnering Through Supply-Chain Management. Supply-chain management is a long-term partnership
among channel members working together to create a distribution system that reduces inefficiencies,
costs, and redundancies, while creating a competitive advantage and satisfying customers.
o Supply-chain management requires cooperation among members of the channel, including
manufacturing, research, sales, advertising, and shipping.
o Supply-chain management cooperation can reduce inventory, transportation, administrative,
and handling costs; speed order cycle time; and increase profits for all channel members.
o Technology facilitates supply-chain management, especially the use of computerized
information sharing.
Vertical Marketing Systems. Vertical channel integration occurs when two or more stages of a
distribution channel are combined and managed by one firm.
o A vertical marketing system (VMS) is a centrally managed distribution channel resulting from
vertical channel integration.
This merging eliminates the need for certain intermediaries.
One member of a marketing channel may assume the responsibilities of another
member or purchase the operations of that member.
Total vertical integration occurs when a single management team controls all
operations from production to final sale.
o There are three types of VMSs.
In an administered VMS, one of the channel members dominates the other members,
perhaps because of its large size.
Under a contractual VMS, cooperative arrangements and the rights and obligations of
channel members are defined by contracts or other legal measures.
In a corporate VMS, ownership is the vehicle by which production and distribution are
joined.
2. Marketing Intermediaries: Wholesalers
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Wholesalers may be the most misunderstood of marketing intermediaries. Producers sometimes try
to eliminate them from distribution channels by dealing directly with retailers or consumers. Yet
wholesalers provide a variety of essential marketing services.
Justifications for Marketing Intermediaries. The press, consumers, public officials, and other marketers
often charge wholesalers, at least in principle, with inefficiency and parasitism.
o Consumers in particular feel strongly that the distribution channel should be made as short as
possible. They assume that the fewer the intermediaries, the lower the price.
o Those who believe that the elimination of wholesalers would bring about lower prices do not
recognize that the services wholesalers perform would still be needed.
• Those services would simply be provided by other means, and consumers would still
bear the costs.
• All manufacturers would have to keep extensive records and employ enough
personnel to deal with a multitude of retailers individually.
• Even with direct distribution, products might be considerably more expensive because
prices would reflect the costs of producers’ inefficiency.
• Figure 14.2 shows that sixteen contacts could result from the efforts of four buyers
and four producers.
• With the assistance of an intermediary, only eight contacts would be necessary.
Page 3 of 20
Chapter 14: Wholesaling, Retailing, and Physical Distribution
GBS151, Class 12191
June 27, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
Wholesalers are more efficient and economical not only for manufacturers but also for
consumers.
• Because pressure to eliminate them comes from both ends of the marketing channel,
wholesalers should perform only those functions that are genuinely in demand.
• Wholesalers have to be efficient and productive and provide high-quality services to
other channel members in order to stay in business.
Wholesalers’ Services to Retailers. Wholesalers help retailers by buying in large quantities and then
selling to retailers in smaller quantities and by delivering goods to retailers. Wholesalers also provide
assistance in three other vital areas.
o Promotion. Some wholesalers help promote the products they sell to retailers.
o Market Information. Wholesalers are a constant source of market information. In their
dealings with local businesses and distant suppliers, wholesalers accumulate information
about consumer demand, prices, supply conditions, new developments within the trade, and
even industry personnel.
o Financial Aid. Most wholesalers provide a type of financial aid that retailers often take for
granted.
• By making prompt and frequent deliveries, wholesalers enable retailers to keep their
own inventory investments small in relation to sales.
• In some industries, wholesalers extend direct financial assistance through long-term
loans.
• Most wholesalers also provide help through delayed billing, giving customers thirty to
ninety days after delivery to pay for merchandise.
Wholesalers’ Services to Manufacturers. Some of the services that wholesalers perform for producers
are similar to those provided to retailers. Others are quite different.
o Providing an Instant Sales Force. A wholesaler provides its producers with an instant sales
force so that producers’ sales representatives need not call on retailers.
o Reducing Inventory Costs. Wholesalers purchase goods in sizable quantities from
manufacturers and store these goods for resale. In doing so, they reduce the amount of
finished goods inventory that producers must hold and, thereby, reduce the cost of carrying
inventories.
o Assuming Credit Risks. When producers sell through wholesalers, the wholesalers extend
credit to retailers, make collections from retailers, and assume the risks of nonpayment.
o Furnishing Market Information. Just as they do for retailers, wholesalers supply market
information to the producers they serve.
Types of Wholesalers. Wholesalers generally fall into three categories. Of these, merchant wholesalers
constitute the largest portion. They account for about four-fifths of all wholesale employees and
establishments.
o Merchant Wholesalers. A merchant wholesaler is a middleman that purchases goods in large
quantities and then sells them to other wholesalers or retailers and to institutional, farm,
government, professional, or industrial users.
• Merchant wholesalers usually operate one or more warehouses where they receive,
take title to, and store goods.
• They are sometimes called distributors or jobbers.
• Merchant wholesalers may be classified as full-service or limited-service wholesalers,
depending on the number of services they provide.
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Page 4 of 20
Chapter 14: Wholesaling, Retailing, and Physical Distribution
GBS151, Class 12191
June 27, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
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Full-service wholesalers perform the entire range of wholesaler functions.
They deliver goods, supply warehousing, arrange for credit, support
promotional activities, and provide general customer assistance.
• General-merchandise wholesalers deal in a wide variety of products, such as
drugs, hardware, nonperishable foods, cosmetics, detergents, and tobacco.
• Limited-line wholesalers stock only a few product lines but carry numerous
product items within each line.
• Specialty-line wholesalers carry a select group of products within a single line.
• Limited-service wholesalers assume responsibility for only a few wholesale
services.
Commission Merchants, Agents, and Brokers. These functional middlemen do not take title to
products. They perform a small number of marketing activities and are paid a commission.
• A commission merchant usually carries merchandise and negotiates sales for
manufacturers.
• In most cases, commission merchants have the power to set prices and terms
of sale.
• After a sale is made, they either arrange for delivery or provide transportation
services.
• An agent is a middleman who expedites exchanges, represents a buyer or a seller, and
often is hired permanently on a commission basis. Producers are known as sales
agents or manufacturers’ agents.
• As a rule, the manufacturers ship the merchandise and bill the customers
directly.
• The manufacturers also set the prices and other conditions of the sales.
• A broker is a middleman who specializes in a particular commodity, represents either a
buyer or a seller, and is likely to be hired on a temporary basis.
Manufacturers’ Sales Branches and Sales Offices. A manufacturer’s sales branch is, in essence,
a merchant wholesaler that is owned by a manufacturer.
• Sales branches carry inventory, extend credit, deliver goods, and offer help in
promoting products.
• Their customers are retailers, other wholesalers, and industrial purchasers.
• A manufacturer’s sales office is essentially a sales agent owned by a manufacturer.
Sales offices may sell goods manufactured by their own firms as well as certain
products of other manufacturers that complement their own product lines.
3. Marketing Intermediaries: Retailers
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Retailers are the final link between producers and consumers. They may buy from either wholesalers
or producers. They sell not only goods but also such services as auto repairs, haircuts, and dry cleaning.
Of approximately 2.6 million retail firms in the United States, about 90 percent have annual sales of
less than $1 million. Table 14.1 lists the twenty largest retail organizations in the United States, the
cities in which their headquarters are located, and their approximate sales revenues and yearly profits.
o Department Stores. According to the U.S. Bureau of the Census, a department store is a retail
store that (1) employs twenty-five or more employees and (2) sells at least home furnishings,
appliances, family apparel, and household linens and dry goods, each in a different part of the
store.
• Department stores have been traditionally service oriented.
Page 5 of 20
Chapter 14: Wholesaling, Retailing, and Physical Distribution
GBS151, Class 12191
June 27, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
•
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Along with goods they sell, they provide credit, delivery, personal assistance, liberal
return policies, and a pleasant shopping atmosphere.
Discount Stores. A discount store is a self-service, general merchandise outlet that sells
products at lower-than-usual prices.
• It does so by operating on lower markups, locating its retail showrooms in larger, lowrent areas, and offering minimal customer services.
• To keep prices low, discount stores operate on the basic principle of high turnover of
certain items.
• As competition among discount stores has increased, some discounters have improved
their services, store environments, and locations.
Catalog and Warehouse Showrooms. A catalog showroom is a retail outlet that displays wellknown brands and sells them at discount prices through catalog sales within the store.
• The customer selects the merchandise, either from the catalog or from the showroom
display.
• Then he or she fills out an order form and hands it to a clerk.
• The clerk retrieves the merchandise from a room that is located away from the selling
area and serves as a warehouse.
• Warehouse showrooms are retail facilities with five basic characteristics:
• Large, low-cost buildings
• Warehouse materials-handling technology
• Vertical merchandise displays
• Large on-premise inventories
• Minimum service
Convenience Stores. A convenience store is a small food store that sells a limited variety of
products but remains open well beyond normal business hours.
Supermarkets. A supermarket is a large self-service store that sells primarily food and
household products.
• Supermarkets are large-scale operations that emphasize low prices and one-stop
shopping for household needs.
• The first self-service food market opened over sixty years ago. It grossed only $5,000
per week, with an average sale of just $1.31.
• Today, a supermarket has minimum annual sales of $2 million.
Superstores. A superstore is a large retail store that carries not only food and nonfood
products ordinarily found in traditional supermarkets but also additional product lines that
include house wares, hardware, small appliances, clothing, personal-care products, garden
products, and automotive merchandise.
Superstores also provide a number of services to entice customers.
Warehouse Clubs. A warehouse club is a large-scale, members only operation that combines
cash-and-carry wholesaling features with discount retailing.
• For a nominal fee (about $25), small retailers may purchase products at wholesale
prices for business use or for resale.
• Warehouse clubs also sell to ultimate consumers, who pay about 5 percent more on
each item than do small business owners.
• Warehouse clubs offer the same types of products offered by discount stores, but in a
limited range of sizes and styles.
Page 6 of 20
Chapter 14: Wholesaling, Retailing, and Physical Distribution
GBS151, Class 12191
June 27, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
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To keep their prices 20 to 40 percent lower than those of supermarkets and discount
stores, warehouse clubs provide few services.
o Traditional Specialty Stores. A traditional specialty store carries a narrow product mix with
deep product lines. They are sometimes called limited-line retailers.
• If they carry depth in one particular product category, they may be called single-line
retailers.
• Traditional specialty stores usually sell products such as clothing, jewelry, sporting
goods, computers, etc.
o Off-Price Retailers. Off-price retailers are stores that buy manufacturers’ seconds, overruns,
returns, and off-season merchandise at below wholesale prices and sell them to consumers at
deep discounts. Off-price stores charge up to 50 percent less than department stores do for
comparable merchandise, but offer few customer services.
o Category Killers. Category killers are very large specialty stores that concentrate in a single
product line and compete by offering low prices on an enormous number of products.
Kinds of Nonstore Retailing. Nonstore retailing is selling that does not take place in conventional store
facilities.
o Direct Selling. Direct selling is the marketing of products to customers through face-to-face
sales presentations at home or in the workplace.
• Traditionally called door-to-door selling, direct selling has grown to a large industry.
• The “party plan” method of direct selling takes place in homes or in the workplace.
• Benefits of direct selling include product demonstration, personal attention, and
convenience.
• The primary disadvantage of direct selling is that it is the most expensive form of
retailing.
• Another disadvantage is that some people view direct selling negatively, and some
communities have local ordinances regulating or even banning direct selling.
o Direct Marketing. Direct marketing is the use of the Internet, telephones, and nonpersonal
media to communicate product and organizational information to customers, who can then
buy products by mail, by telephone, or online.
• With catalog marketing, an organization provides a catalog from which customers
make selections and place orders by mail, by telephone, or on the Internet.
• Direct-response marketing occurs when a retailer advertises a product and makes it
available through mail, telephone, or online orders.
• Telemarketing is using the telephone to perform marketing related activities.
• Television home shopping displays products to television viewers who can order them
by calling toll-free numbers and pay with credit cards.
• Online retailing makes the presentation and sale of products possible through
computer connections.
o Automatic Vending. Automatic vending is the use of machines to dispense products.
• Vending machines do not require sales personnel, and the permit twenty-four-hour
service.
• Malfunctioning is a costly and frustrating problem, as is vandalism.
• The machines must also be serviced frequently.
• Together, repairs and servicing result in a very high cost for vending-machine selling.
Page 7 of 20
Chapter 14: Wholesaling, Retailing, and Physical Distribution
GBS151, Class 12191
June 27, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
4. Planned Shopping Centers
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The planned shopping center is a self-contained retail facility, constructed by independent owners and
consisting of a variety of stores. Shopping centers are designed and promoted to serve diverse groups
of consumers with widely differing needs. The management of a shopping center strives for a
coordinated mix of stores, a comfortable atmosphere, adequate parking, landscaping, and special
events to attract customers. The convenience of shopping for most family and household needs in a
single location is an important part of shopping-center appeal.
Lifestyle Shopping Centers. A lifestyle shopping center is an open air environment with upscale chain
specialty stores.
o Such shopping centers are more convenient than a traditional enclosed mall, but offer the
same quality of upscale retail.
o Architecture is emphasized to make the center have a pleasant environment.
Neighborhood Shopping Centers. A neighborhood shopping center usually consists of several small
convenience and specialty stores.
o These retailers serve consumers who live less than ten minutes from the shopping center.
o Because most purchases in the neighborhood shopping center are based on convenience or
personal contact, these retailers generally make only limited efforts to coordinate promotional
activities among stores in the shopping center.
Community Shopping Centers. A community shopping center includes one or two department stores
and some specialty stores, along with convenience stores.
o It attracts consumers from a wider geographic area who will drive longer distances to find
products and specialty items unavailable in neighborhood shopping centers.
o Carefully planned and coordinated community shopping centers generate traffic by holding
special events.
o The management of a community shopping center maintains a balance of tenants so that the
center can offer wide product mixes and deep product lines.
Regional Shopping Centers. A regional shopping center usually has large department stores, numerous
specialty stores, restaurants, movie theaters, and sometimes hotels. It carries merchandise offered by
a downtown shopping district.
o It carefully coordinates management and marketing activities to reach the 150,000 or more
consumers in its target market.
o National chain stores can gain leases in regional shopping centers more easily than small
independent stores, because they are better able to meet the centers’ financial requirements.
5. Physical Distribution
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Physical distribution is all those activities concerned with the efficient movement of products from the
producer to the ultimate user. Physical distribution is the movement of the products themselves—
both goods and services—through their channels of distribution. It combines several interrelated
business functions.
Inventory Management. In Chapter 8, we defined inventory management as the process of managing
inventories in such a way as to minimize inventory costs, including both holding costs and potential
stock-out costs.
o Holding costs are the costs of storing products until they are purchased or shipped to
customers.
o Stock-out costs are the costs of sales lost when items are not in inventory.
o Inventory management is thus a balancing act between stock-out costs and holding costs.
Page 8 of 20
Chapter 14: Wholesaling, Retailing, and Physical Distribution
GBS151, Class 12191
June 27, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
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Order Processing. Order processing consists of activities involved in receiving and filling customers’
purchase orders.
o Fast, efficient order processing is an important marketing service—one that can provide a
dramatic competitive edge.
o The people who purchase goods for intermediaries are especially concerned with their
suppliers’ promptness and reliability in order processing.
Warehousing. Warehousing is the set of activities involved in receiving and storing goods and
preparing them for reshipment. In addition to storage, warehousing includes the following:
o Receiving goods
o Identifying goods
o Sorting goods
o Dispatching goods to storage
o Holding goods
o Recalling, picking, and assembling goods
o Dispatching shipments
A firm may use its own warehouses or rent space in public warehouses.
o A private warehouse, owned and operated by a particular firm, can be designed to serve the
firm’s specific needs.
o However, the firm must finance the facility, determine the best location for it, and ensure that
it is used fully.
o Public warehouses offer their services to all individuals and firms.
o They provide storage facilities, areas for sorting and assembling shipments, and office and
display spaces for wholesalers and retailers.
o Public warehouses will also hold—and issue receipts for—goods used as collateral for
borrowed funds.
Materials Handling. Materials handling is the actual physical handling of goods, in warehouses as well
as during transportation.
o Proper materials-handling procedures and techniques can increase the usable capacity of a
warehouse or that of any means of transportation.
o It can also reduce breakage and spoilage.
o Modern materials-handling efforts are aimed at reducing the number of times a product is
handled.
o One method is called unit loading. Several smaller cartons, barrels, or boxes are combined into
a single standard-size load that can be handled efficiently by forklift, conveyer, or truck.
Transportation. As a part of physical distribution, transportation is simply the shipment of products to
customers. The greater the distance between seller and purchaser, the more important the choice of
the means of transportation and the particular carrier. Firms that offer transportation services are
called carriers. A common carrier is a transportation firm whose services are available to all shippers. A
contract carrier is available for hire by one or several shippers. A private carrier is owned and operated
by the shipper. In addition, a shipper can hire agents called freight forwarders to handle its
transportation.
The U.S. Postal Service offers parcel post delivery, which is widely used by mail-order houses. The Post
Office provides complete geographic coverage at the lowest rates, but it limits the size and weight of
the shipments it will accept. United Parcel Service (UPS), a privately owned firm, also provides smallparcel services for shippers.
Page 9 of 20
Chapter 14: Wholesaling, Retailing, and Physical Distribution
GBS151, Class 12191
June 27, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
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Other privately owned carriers, such as Federal Express and Airborne, offer fast—often overnight—
parcel delivery, both within and outside the United States. There are also many local parcel carriers.
There are six major criteria used for selecting transportation modes: cost, speed, dependability, load
flexibility, accessibility, and frequency. For some combinations of these factors, the cost of
transportation may be more important. For other combinations, speed may be more crucial. Other
factors in the decision are the dependability of the various modes of transportation, their availability
at points of shipment and delivery, and their ability to handle particular kinds of shipments. Table 14.2
rates transportation modes relative to several important selection criteria. Figure 14.3 shows recent
trends and a breakdown by use of the five different modes of transportation.
o Railroads. In terms of total freight carried, railroads are the most important mode of
transportation.
• They are also the least expensive for many products.
• Almost all railroads are common carriers.
• Many commodities carried by railroads could not be transported easily by any other
means.
o Trucks. The trucking industry consists of common, contract, and private carriers.
• Trucks can move goods to suburban and rural areas not served by railroads.
• They can handle freight quickly and economically, and they carry a wide range of
shipments.
• Railroad and truck carriers have teamed up to provide a form of transportation called
piggyback.
o Airplanes. Air transport is the fastest but most expensive means of transportation.
• All certified airlines are common carriers. Supplemental or charter lines are contract
carriers.
• Because of the high cost, the lack of airport facilities in many areas, and reliance on
weather conditions, airlines carry less than 1 percent of all intercity freight.
o Waterways. Cargo ships and barges offer the least expensive but slowest form of
transportation.
• They are used mainly for bulky, nonperishable goods.
• Shipment by water is limited to cities by navigable waterways.
o Pipelines. Pipelines are a highly specialized mode of transportation. They are used primarily to
carry petroleum and natural gas.
• Pipelines have become more important as the nation’s need for petroleum products
has increased.
• Such products as semiliquid coal and wood chips can also be shipped through
pipelines.
Page 10 of 20
Chapter 15: Developing Integrated Marketing Communications
GBS151, Class 12191
June 27, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
Chapter Objectives
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3.
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6.
Describe integrated marketing communications.
Understand the role of promotion.
Explain the purposes of the three types of advertising.
Describe the advantages and disadvantages of the major advertising media.
Identify the major steps in developing an advertising campaign.
Recognize the various kinds of salespersons, the steps in the personal-selling process, and the major
sales management tasks.
Describe sales promotion objectives and methods.
Understand the types and uses of public relations.
Identify the factors that influence the selection of promotion-mix ingredients.
Identify and explain the criticisms of promotion.
7.
8.
9.
10.
1. What is Integrated Marketing Communications?
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Integrated marketing communications is the coordination of promotion efforts to ensure the
maximum informational persuasive impact on customers. A major goal of integrated marketing
communications is to send a consistent message to customers. This approach fosters long-term
customer relationships and the efficient use of promotional resources. The concept of integrated
marketing communications has been increasingly accepted for a number of reasons. One is that massmedia advertising is used less today because of its high costs and less predictable audience sizes.
Another is that marketers can now take advantage of more precisely targeted promotional tools, such
as cable TV, direct mail, DVDs, the Internet, special interest magazines, and podcasts. Also, database
marketing is allowing marketers to be more precise in targeting individual customers.
Until recently, suppliers of marketing communications were specialists. Advertising agencies provided
advertising campaigns, sales promotion companies provided sales promotion activities, and materials
and public-relations organizations engaged in public-relations efforts. Today, many promotion-related
companies provide one-stop shopping to clients for all these activities. Because the overall costs
marketing communications are significant, management demands systematic evaluations of
communications efforts. Although the fundamental role of promotion is not changing, the specific
communication vehicles employed and the precision with which they are used are changing.
2. The Role of Promotion
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Promotion is commonly the object of two misconceptions. The first misconception occurs when
people take note of highly visible promotional activities, such as advertising and personal selling, and
conclude that these make up the entire field of marketing. The second misconception is that people
sometimes consider promotional activities to be unnecessary, expensive, and the cause of higher
prices. Neither view is accurate. The role of promotion is to facilitate exchanges directly or indirectly by
informing individuals, groups, or organizations and influencing them to accept a firm’s products or to
have more positive feelings about the firm. To facilitate exchanges directly, marketers convey
information about a firm’s goods, services, and ideas to particular market segments. To bring about
exchanges indirectly, marketers address certain interest groups, regulatory agencies, investors, and
the general public. The broader role of promotion, therefore, is to maintain positive relationships
between a company and groups in the marketing environment.
Page 11 of 20
Chapter 15: Developing Integrated Marketing Communications
GBS151, Class 12191
June 27, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
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Marketers must carefully plan, implement, and coordinate promotional communications to make the
best use of them. The effectiveness of promotional activities depends greatly on the quality and
quantity of information available to marketers about the organization’s marketing environment. (See
Figure 15.1.) Marketers must gather and use information about particular audiences to communicate
successfully with them.
3. The Promotion Mix: An Overview
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Marketers can use several promotional methods to communicate with individuals, groups, and
organizations. Advertising, personal selling, sales promotion, and public relations are the four major
elements in an organization’s promotion mix. (See Figure 15.2.) Two, three, or four of these
ingredients are used in a promotion mix, depending on the type of product and target market
involved. Advertising is a paid, nonpersonal message communicated to a selected audience through a
mass medium. Personal selling is personal communication aimed at informing customers and
persuading them to buy a firm’s products. Sales promotion is the use of activities or materials as direct
inducements to customers or salespersons.
Public relations is communication activities used to create and maintain favorable relations between
an organization and various public groups, both internal and external.
4. Advertising
•
•
•
In 2010, organizations spent $300 billion on advertising in the United States.
Types of Advertising by Purpose. Depending on its purpose and message, advertising may be classified
into three groups.
o Primary-Demand Advertising. Primary-demand advertising is advertising aimed at increasing
the demand for all brands of a product within a specific industry.
• Trade and industry associations are the major users of primary-demand advertising.
• Their advertisements promote broad product categories without mentioning specific
brands.
o Selective-Demand Advertising. Selective-demand (or brand) advertising is advertising that is
used to sell a particular brand of product.
• It is by far the most common type of advertising, and it accounts for the lion’s share of
advertising expenditures.
• Selective advertising that aims at persuading consumers to make purchases within a
short time is called immediate-response advertising.
• Selective advertising aimed at keeping a firm’s name or product before the public is
called reminder advertising.
• Comparative advertising compares specific characteristics of two or more identified
brands.
o Institutional Advertising. Institutional advertising is advertising designed to enhance a firm’s
image or reputation.
Advertising Media. The advertising media are the various forms of communication through which
advertising reaches its audience. Figure 15.3 shows how organizations allocate their advertising
expenditures among various media. Television is the largest advertising medium, and newspaper
advertising has slipped to number 3.
o Newspapers. Approximately 85 percent of newspaper advertising is purchased by local
retailers.
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Newspaper advertising is used extensively by retailers because it is relatively
inexpensive compared to other media.
• Because it provides only local coverage, advertising dollars are not wasted in reaching
people who are outside the market area.
• It is also timely.
• There are some drawbacks to newspaper advertising.
• It has a short life span.
• Color reproduction is usually poor.
• Marketers cannot target specific markets through newspaper ads.
• Ads are usually read once and then discarded.
Magazines. The advertising revenues of magazines have been almost flat over the last few
years. Specific market segments are targeted through ads in special-interest magazines.
• A number of magazines like Time and Cosmopolitan publish regional editions, which
provide advertisers with geographic flexibility.
• Magazine advertising is more prestigious than newspaper advertising, and it provides
high-quality color reproduction.
• Magazine advertisements have a longer life span.
• The major disadvantages of magazine advertising are high cost and lack of timeliness.
Direct Mail. Direct-mail advertising is promotional material mailed directly to individuals.
• Direct mail is the most selective medium: mailing lists are available (or can be
compiled) to reach almost any target audience.
• The effectiveness of direct-mail advertising can be measured because the advertiser
has a record of who received the advertisement and can track who responds.
• Some organizations are using direct e-mail.
• A direct-mail campaign may fail if the mailing list is outdated and the mailing does not
reach the right people.
Yellow Pages Advertising. Yellow Pages advertising appearing in print and online telephone
directories is presented under specific product categories and may appear as simple listings or
as display advertisements.
• Approximately 85 percent of Yellow Pages advertising is used by local advertisers as
opposed to national advertisers.
• Customers use Yellow Pages advertising to save time in finding products, to find
information quickly, and to learn about products and marketers.
• Unlike other types of advertising media, Yellow Page advertisements are
purchased for one year and cannot be changed.
• Advertisers often pay for their Yellow Page advertisements through monthly
charges on their telephone statements.
Out-of-Home Advertising. Out-of-home advertising consists of short promotional messages
on billboards, posters, signs, and transportation vehicles.
• Sign and billboard advertising allow the marketer to focus on a particular geographic
area, and it is fairly inexpensive.
• However, because most out-of-home advertising is directed at a mobile audience, the
message must be limited to a few words.
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The medium is especially suitable for products that lend themselves to pictorial
display.
o Television. Television ranks number one in total revenue.
• Approximately 99 percent of American homes have at least one television set that is
watched an average of 7 hours and 40 minutes each day.
• Television advertising is the primary medium for larger firms whose objective is to
reach national or regional markets.
• A national advertiser may buy network time, which means that its message
usually will be broadcasted by hundreds of local affiliated stations.
• Both national and local firms may buy local time on a single station that covers
a particular geographic selling area.
• Advertisers may sponsor an entire show, or they may buy spot time for a single 10-,
20-, 30-, or 60-second commercial during or between programs.
• To an extent, they may select their audience by choosing the day of the week and the
time of day when their ads will be shown.
• An infomercial is a program-length televised commercial message resembling an
entertainment or consumer affairs program.
• Television advertising rates are based on the number of people expected to be
watching when a commercial is aired.
• Unlike magazine advertising, and perhaps like newspaper ads, television advertising
has a short life.
o Radio. There are almost half a billion radios in the United States (about six per household),
which makes radio the most accessible medium.
• Like magazine advertising, radio advertising offers selectivity.
• Radio can be less expensive than other media.
• Actual rates depend on geographic coverage, the number of commercials
contracted for, the time period specified, and whether the station broadcasts
on AM, FM, or both.
• Even small retailers are able to afford radio advertisements.
o Internet. Spending on Internet advertising has increased significantly. Internet advertising can
take a variety of forms.
• There are four types of Internet advertisements.
• Banner ads are rectangular graphics appearing at the top of most consumer
websites.
• Sponsorship (or cobranded) ads integrate a company’s brand with editorial
comment.
• Keyword ads, featured primarily on Internet search engines, link a specific ad
to text or subject matter that an information seeker may enter.
• Interstitial ads (in-your-face ads) pop up to display a product ad when viewers
click on a website.
Major Steps in Developing an Advertising Campaign. An advertising campaign is developed in several
stages.
o Identify and Analyze the Target Audience. The target audience is the group of people a firm’s
advertisements are directed toward.
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To pinpoint the organization’s target audience and develop an effective campaign,
marketers must analyze such information as the geographic distribution of potential
customers; their age, sex, race, income, and education; and their attitudes toward
both the advertiser’s product and competing products.
• How marketers use this information will be influenced by the features of the product
to be advertised and the nature of the competition.
o Define the Advertising Objectives. The goals of an advertising campaign should be stated
precisely and in measurable terms.
o Create the Advertising Platform. An advertising platform includes the important selling points
or features that an advertiser wishes to incorporate into the advertising campaign.
o Determine the Advertising Appropriation. The advertising appropriation is the total amount
of money designated for advertising in a given period.
o Develop the Media Plan. A media plan specifies exactly which media will be used in the
campaign and when advertisements will appear.
o Create the Advertising Message. The content and form of a message are influenced by the
product’s features, the characteristics of people in the advertising target, the objectives of the
campaign, and the choice of media.
o Execute the Campaign. Execution of an advertising campaign requires extensive planning,
scheduling, and coordination because many tasks must be completed on time and many
people and firms are involved in a campaign’s execution.
o Evaluate Advertising Effectiveness. A campaign’s success should be measured before, during,
and/or after the campaign ends in terms of its original objectives.
Advertising Agencies. Advertisers can plan and produce their own advertising with help from media
personnel, or they can hire advertising agencies.
o An advertising agency is an independent firm that plans, produces, and places advertising for
its clients.
• The media usually pay a commission of 15 percent to advertising agencies. Thus, the
cost to the agency’s client can be quite moderate.
• The client may be asked to pay for selected services that the agency performs.
o Firms that do a lot of advertising may use both an in-house advertising department and an
independent agency.
o Table 15.1 provides advertising expenditures and sales volume for the top twenty national
advertisers.
5. Personal Selling
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•
Personal selling is the most adaptable of all promotion methods because the person who is presenting
the message can modify it to suit the individual buyer. However, personal selling is also the most
expensive promotion method.
Kinds of Salespersons. Salespersons may be order getters, order takers, and support personnel. A
single individual can, and often does, perform all three functions.
o Order Getters. An order getter is responsible for what is sometimes called creative selling:
selling the firm’s products to new customers and increasing sales to present customers.
• An order getter must perceive buyers’ needs, supply customers with information
about the firm’s product, and persuade them to buy the product.
• Order-getting activities fall into two groups.
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Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
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In current-customer sales, salespeople concentrate on obtaining additional
sales.
• In new-business sales, sales personnel seek out new prospects and convince
them to make an initial purchase.
o Order Takers. An order taker handles repeat sales in ways that maintain positive relationships
with customers.
• Inside order takers receive incoming mail and telephone orders; they also include
salespersons in retail stores.
• Outside (or field) order takers travel to customers.
o Support Personnel. Sales support personnel aid in selling but are more involved in locating
prospects, educating customers, building goodwill for the firm, and providing follow-up
service.
• A missionary salesperson usually works for a manufacturer and visits retailers to
persuade them to buy the manufacturer’s products.
• A trade salesperson generally works for a food producer or processor and assists its
customers in promoting products, especially in retail stores.
• A technical salesperson assists the company’s current customers in technical matters.
The Personal-Selling Process. Most salespeople follow the six-step procedure illustrated in Figure 15.4.
o Prospecting. The first step in personal selling is to research potential buyers and choose the
most likely customers, or prospects.
o Approaching the Prospect. Because first impressions are often lasting impressions, the
salesperson’s first contact with the prospect is crucial to successful selling.
o Making the Presentation. The next step is the actual delivery of the sales presentation. In
many cases, this includes demonstrating the product.
o Answering Objections. The prospect is likely to raise objections or ask questions. This gives the
salesperson a chance to eliminate objections that might prevent a sale, point out additional
features, or mention special services the company offers.
o Closing the Sale. To close the sale, the salesperson asks the prospect to buy the product. This
is considered the critical point in the selling process.
o Following Up. The salesperson must follow up on the order to ensure that the product is
delivered on time, in the right quantity, in good condition, and in proper operating condition.
Managing Personal Selling. A firm’s success often hinges on the competent management of its sales
force.
o Without a strong sales force—and the sales revenue it brings in—a business will soon fail.
o Sales managers have responsibilities in a number of areas.
• They must set sales objectives in concrete, quantifiable terms.
• They must adjust the size of the sales force as changes in the firm’s marketing plan and
marketing environment occur.
• They must attract and hire effective salespersons.
• They must develop a training program.
• They must formulate a fair and adequate compensation plan.
• They must motivate salespersons to boost their productivity.
• They must define sales territories and determine scheduling and routing of the sales
force.
• They must evaluate the operation as a whole.
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Chapter 15: Developing Integrated Marketing Communications
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June 27, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
6. Sales Promotion
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•
•
Sales promotion consists of activities or materials that are direct inducements to customers or
salespersons. Sales promotion techniques are used to enhance and supplement other promotional
methods.
Sales Promotion Objectives. Sales promotion activities may be used singly or in combination, both
offensively and defensively, to achieve one goal or a set of goals.
o Marketers use sales promotion activities and materials for a number of purposes. (The specific
purposes are listed in the text.)
o Any sales promotion objective should be in keeping with the organization’s general goals and
with its marketing and promotion objectives.
Sales Promotion Methods. Most sales promotional methods can be classified as promotion techniques
either for consumer sales or for trade sales. A consumer sales promotion method attracts consumers
to particular retail stores and motivates them to purchase certain new or established products. A trade
sales promotion method encourages wholesalers and retailers to stock and actively promote a
manufacturer’s products. A number of factors enter into marketing decisions about which and how
many sales promotion methods to use.
o Rebates. A rebate is a return of part of the purchase price of a product.
• Usually, the rebate is offered by the producer to consumers who send in a coupon
along with a specific proof of purchase.
• Rebating is a relatively low-cost promotional method.
o Coupons. A coupon reduces the retail price of a particular product by a stated amount at the
time of purchase.
• These coupons may be worth anywhere from a few cents to a few dollars.
• They are made available to customers through newspapers, magazines, direct mail,
online, and in shelf dispensers in the store.
• Coupons may also offer free merchandise, either with or without an additional
purchase of the product.
o Samples. A sample is a free product given to customers to encourage trial.
• Samples may be offered via online coupons, through direct mail, or in stores.
• Samples are the most expensive sales promotion technique.
o Premiums. A premium is a gift that a producer offers the customer in return for using its
product.
o Frequent-User Incentives. Frequent-user incentives are programs developed to reward
customers who engage in repeat (frequent) purchases.
• Frequent-user incentives build customer loyalty.
• An airline’s frequent-flyer program is one example of a frequent-user incentive.
o Point-of-Purchase Displays. A point-of-purchase display is promotional material placed within
a retail store.
• It may actually hold merchandise or inform customers of what the product offers and
encourage them to buy it.
• Most point-of-purchase displays are prepared and set up by manufacturers and
wholesalers.
o Trade Shows. A trade show is an industry-wide exhibit at which many sellers display their
products.
• Some trade shows are organized exclusively for dealers—to permit manufacturers and
wholesalers to show their latest lines to retailers.
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• Others are promotions designed to stimulate consumer awareness and interest.
Buying Allowances. A buying allowance is a temporary price reduction to resellers for
purchasing specified quantities of a product.
• A buying allowance may serve as an incentive to resellers to handle new products and
stimulate purchase of items in large quantities.
• Buying allowances are simple, straightforward, and easily administered.
• They can easily be copied by competitors.
Cooperative Advertising. Cooperative advertising is an arrangement whereby a manufacturer
agrees to pay a certain amount of the retailer’s media costs for advertising the manufacturer’s
product.
• A retailer must show proof that the advertisements did appear before being
reimbursed.
• A large percentage of all cooperative advertising dollars are spent on newspaper
advertising.
7. Public Relations
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•
Public relations is a broad set of communication efforts used to create and maintain favorable
relationships between an organization and its public. Public-relations efforts can be directed toward the
internal and external public. An organization’s public can include customers, employees, stockholders,
suppliers, educators, the media, government officials, and society in general.
Types of Public-Relations Tools. Organizations use a variety of public-relations tools to convey messages
and to create images.
o Public-relations professionals prepare written materials such as brochures, newsletters, company
magazines, annual reports, and news releases.
o Corporate identity material such as logos, business cards, signs, and stationery are also publicrelations tools.
o Event sponsorship is a public-relations tool in which a company pays for all or part of a special
event such as a concert, sports competition, festival, or play.
o Sponsoring special events is an effective way for an organization to increase brand recognition and
receive media coverage with relatively little investment.
o Public-relations personnel sometimes organize events, such as grand openings, to create news
about a company.
o
o
Some public-relations tools are associated specifically with publicity. Publicity is communication in
news story form about an organization, its products, or both. Publicity-based public-relations tools
include the following:
News release—a typed page of about 300 words provided by an organization to the media
as a form of publicity. Table 15.2 lists some of the issues news releases can address.
Feature article—a piece (of up to 3,000 words) prepared by an organization for inclusion
in a particular publication.
Captioned photograph—a picture accompanied by a brief explanation.
Press conference—a meeting at which invited media personnel hear important news
announcements and receive supplementary textual materials and photographs.
The specific types of public-relations tools chosen depend on several factors.
Composition of the target audience
Response of media personnel
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Chapter 15: Developing Integrated Marketing Communications
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Significance of the news item
Nature and quantity of information to be communicated
The Uses of Public Relations
o Public relations is used to promote people, places, activities, ideas, and even countries.
o It can enhance the reputation of the total organization by increasing people’s awareness of a
company’s products, brands, or activities.
o Public relations also helps a company maintain positive public visibility.
o Effective public-relations management can reduce the unfavorable effects of negative events.
8. Promotion Planning
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A promotional campaign is a plan for combining and using the four promotional methods—advertising,
personal selling, sales promotion, and public relations—in a particular promotion mix to reach one or more
marketing goals. When selecting promotional methods, it is important to coordinate promotional
elements to maximize total informational and promotional impact on customers. In planning a promotion,
marketers must answer two basic questions: (1) What will be the role of promotion in the overall
marketing mix? (2) To what extent will each promotional method be used in the promotion mix?
Promotion and Marketing Objectives. Promotion is naturally better suited to some marketing objectives
than to others. Some objectives that would require the use of promotion as a primary ingredient of the
marketing mix are as follows:
o Providing Information. This is the main function of promotion.
o Increasing Market Share. Promotion can be used to convince new customers to try a product,
while maintaining the product loyalty of established customers.
o Positioning the Product. The sales of a product depend, to a great extent, on its competition. The
stronger the competition, the more difficult it is to maintain or increase sales.
For this reason, many firms go to great lengths to position their products in the
marketplace.
Positioning is the development of a product image in buyers’ minds relative to the images
they have of competing products.
• Promotion may be used to position a product away from a competing product.
• Promotion may be used to position one product directly against another product.
o Stabilizing Sales. Special promotional efforts can be used to increase sales during slack periods,
such as the “off season.” Promotion is also used to increase the sales of products that are in the
declining stage of their life cycle.
9. Developing the Promotion Mix
•
Developing the Promotion Mix. Once the role of promotion is established, the various promotion methods
may be combined in a promotional campaign.
o As in many other areas of business, promotion planning begins with a set of specific objectives.
The promotion mix is then designed to accomplish these objectives.
o Marketers often use several promotion mixes simultaneously if a firm sells multiple products.
o The amount of promotional resources available in an organization influences the number and
intensity of promotion methods that marketers can use.
A firm with a limited budget for promotion will probably rely on personal selling, because
the effectiveness of personal selling can be measured more easily than that of advertising.
An organization’s objectives also have an effect on its promotional activities.
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Chapter 15: Developing Integrated Marketing Communications
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Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
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The size, geographic distribution, and socioeconomic characteristics of the target market play a
part in the composition of a product’s promotion mix.
o
In general, industrial products require a considerable amount of personal selling, whereas
consumer goods depend on advertising.
The cost and availability of promotion methods are important factors in the development of a
promotion mix.
o
10. Criticisms of Promotion
•
Even though promotional activities can help customers to make informed purchasing decisions,
promotion has come under criticism.
o It is a highly visible business activity that pervades our daily lives.
o People complain that there is too much promotional activity.
o Promotion has been blamed for raising prices, being deceptive, manipulating consumers into
buying products they don’t need, creating a more materialistic society, and causing other
social problems. These are discussed in Table 15.3 in the text.
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