1. The Marketing Concept
The marketing concept is the philosophy that firms should analyze the needs of their
customers and then make decisions to satisfy those needs, better than the competition.
Today most firms have adopted the marketing concept, but this has not always been the
case.
In 1776 in The Wealth of Nations, Adam Smith wrote that the needs of producers should
be considered only with regard to meeting the needs of consumers. While this philosophy
is consistent with the marketing concept, it would not be adopted widely until nearly 200
years later.
To better understand the marketing concept, it is worthwhile to put it in perspective by
reviewing other philosophies that once were predominant. While these alternative
concepts prevailed during different historical time frames, they are not restricted to those
periods and are still practiced by some firms today.
The Production Concept
The production concept prevailed from the time of the industrial revolution until the early
1920's. The production concept was the idea that a firm should focus on those products
that it could produce most efficiently and that the creation of a supply of low-cost
products would in and of itself create the demand for the products. The key questions that
a firm would ask before producing a product were:
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Can we produce the product?
Can we produce enough of it?
At the time, the production concept worked fairly well because the goods that were
produced were largely those of basic necessity and there was a relatively high level of
unfulfilled demand. Virtually everything that could be produced was sold easily by a
sales team whose job it was simply to execute transactions at a price determined by the
cost of production. The production concept prevailed into the late 1920's.
The Sales Concept
By the early 1930's however, mass production had become commonplace, competition
had increased, and there was little unfulfilled demand. Around this time, firms began to
practice the sales concept (or selling concept), under which companies not only would
produce the products, but also would try to convince customers to buy them through
advertising and personal selling. Before producing a product, the key questions were:
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Can we sell the product?
Can we charge enough for it?
The sales concept paid little attention to whether the product actually was needed; the
goal simply was to beat the competition to the sale with little regard to customer
satisfaction. Marketing was a function that was performed after the product was
developed and produced, and many people came to associate marketing with hard selling.
Even today, many people use the word "marketing" when they really mean sales.
The Marketing Concept
After World War II, the variety of products increased and hard selling no longer could be
relied upon to generate sales. With increased discretionary income, customers could
afford to be selective and buy only those products that precisely met their changing needs,
and these needs were not immediately obvious. The key questions became:
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What do customers want?
Can we develop it while they still want it?
How can we keep our customers satisfied?
In response to these discerning customers, firms began to adopt the marketing concept,
which involves:
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Focusing on customer needs before developing the product
Aligning all functions of the company to focus on those needs
Realizing a profit by successfully satisfying customer needs over the long-term
When firms first began to adopt the marketing concept, they typically set up separate
marketing departments whose objective it was to satisfy customer needs. Often these
departments were sales departments with expanded responsibilities. While this expanded
sales department structure can be found in some companies today, many firms have
structured themselves into marketing organizations having a company-wide customer
focus. Since the entire organization exists to satisfy customer needs, nobody can neglect a
customer issue by declaring it a "marketing problem" - everybody must be concerned
with customer satisfaction.
The marketing concept relies upon marketing research to define market segments, their
size, and their needs. To satisfy those needs, the marketing team makes decisions about
the controllable parameters of the marketing mix.
2. The Marketing Process
Under the marketing concept, the firm must find a way to discover unfulfilled customer
needs and bring to market products that satisfy those needs. The process of doing so can
be modeled in a sequence of steps: the situation is analyzed to identify opportunities, the
strategy is formulated for a value proposition, tactical decisions are made, the plan is
implemented and the results are monitored.
The Marketing Process
Situation Analysis
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Marketing Strategy
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Marketing Mix Decisions
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Implementation & Control
I. Situation Analysis
A thorough analysis of the situation in which the firm finds itself serves as the basis for
identifying opportunities to satisfy unfulfilled customer needs. In addition to identifying
the customer needs, the firm must understand its own capabilities and the environment in
which it is operating.
The situation analysis thus can be viewed in terms an analysis of the external
environment and an internal analysis of the firm itself. The external environment can be
described in terms of macro-environmental factors that broadly affect many firms, and
micro-environmental factors closely related to the specific situation of the firm.
The situation analysis should include past, present, and future aspects. It should include a
history outlining how the situation evolved to its present state, and an analysis of trends
in order to forecast where it is going. Good forecasting can reduce the chance of spending
a year bringing a product to market only to find that the need no longer exists.
If the situation analysis reveals gaps between what consumers want and what currently is
offered to them, then there may be opportunities to introduce products to better satisfy
those consumers. Hence, the situation analysis should yield a summary of problems and
opportunities. From this summary, the firm can match its own capabilities with the
opportunities in order to satisfy customer needs better than the competition.
There are several frameworks that can be used to add structure to the situation analysis:
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5 C Analysis - company, customers, competitors, collaborators, climate. Company
represents the internal situation; the other four cover aspects of the external
situation
PEST analysis - for macro-environmental political, economic, societal, and
technological factors. A PEST analysis can be used as the "climate" portion of the
5 C framework.
SWOT analysis - strengths, weaknesses, opportunities, and threats - for the
internal and external situation. A SWOT analysis can be used to condense the
situation analysis into a listing of the most relevant problems and opportunities
and to assess how well the firm is equipped to deal with them.
II. Marketing Strategy
Once the best opportunity to satisfy unfulfilled customer needs is identified, a strategic
plan for pursuing the opportunity can be developed. Market research will provide specific
market information that will permit the firm to select the target market segment and
optimally position the offering within that segment. The result is a value proposition to
the target market. The marketing strategy then involves:
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Segmentation
Targeting (target market selection)
Positioning the product within the target market
Value proposition to the target market
III. Marketing Mix Decisions
Detailed tactical decisions then are made for the controllable parameters of the marketing
mix. The action items include:
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Product development - specifying, designing, and producing the first units of the
product.
Pricing decisions
Distribution contracts
Promotional campaign development
IV. Implementation and Control
At this point in the process, the marketing plan has been developed and the product has
been launched. Given that few environments are static, the results of the marketing effort
should be monitored closely. As the market changes, the marketing mix can be adjusted
to accommodate the changes. Often, small changes in consumer wants can addressed by
changing the advertising message. As the changes become more significant, a product
redesign or an entirely new product may be needed. The marketing process does not end
with implementation - continual monitoring and adaptation is needed to fulfill customer
needs consistently over the long-term.
3. Situation Analysis
In order to profitably satisfy customer needs, the firm first must understand its external
and internal situation, including the customer, the market environment, and the firm's
own capabilities. Furthermore, it needs to forecast trends in the dynamic environment in
which it operates.
A useful framework for performing a situation analysis is the 5 C Analysis. The 5C
analysis is an environmental scan on five key areas especially applicable to marketing
decisions. It covers the internal, the micro-environmental, and the macro-environmental
situation. The 5 C analysis is an extension of the 3 C analysis (company, customers, and
competitors), to which some marketers added the 4th C of collaborators. The further
addition of a macro-environmental analysis (climate) results in a 5 C analysis, some
aspects of which are outlined below.
Company
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Product line
Image in the market
Technology and experience
Culture
Goals
Collaborators
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Distributors
Suppliers
Alliances
Customers
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Market size and growth
Market segments
Benefits that consumer is seeking, tangible and intangible.
Motivation behind purchase; value drivers, benefits vs. costs
Decision maker or decision-making unit
Retail channel - where does the consumer actually purchase the product?
Consumer information sources - where does the customer obtain information
about the product?
Buying process; e.g. impulse or careful comparison
Frequency of purchase, seasonal factors
Quantity purchased at a time
Trends - how consumer needs and preferences change over time
Competitors
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Actual or potential
Direct or indirect
Products
Positioning
Market shares
Strengths and weaknesses of competitors
Climate (or context)
The climate or macro-environmental factors are:
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Political & regulatory environment - governmental policies and regulations that
affect the market
Economic environment - business cycle, inflation rate, interest rates, and other
macroeconomic issues
Social/Cultural environment - society's trends and fashions
Technological environment - new knowledge that makes possible new ways of
satisfying needs; the impact of technology on the demand for existing products.
The analysis of the these four external "climate" factors often is referred to as a PEST
analysis.
Information Sources
Customer and competitor information specifically oriented toward marketing decisions
can be found in market research reports, which provide a market analysis for a particular
industry. For foreign markets, country reports can be used as a general information
source for the macro-environment. By combining the regional and market analysis with
knowledge of the firm's own capabilities and partnerships, the firm can identify and
select the more favorable opportunities to provide value to the customer.
4. Market Definition
In marketing, the term market refers to the group of consumers or organizations that is
interested in the product, has the resources to purchase the product, and is permitted by
law and other regulations to acquire the product. The market definition begins with the
total population and progressively narrows as shown in the following diagram.
Market Definition
Conceptual Diagram
Beginning with the total population, various terms are used to describe the market based
on the level of narrowing:
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Total population
Potential market - those in the total population who have interest in acquiring
the product.
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Available market - those in the potential market who have enough money to buy
the product.
Qualified available market - those in the available market who legally are
permitted to buy the product.
Target market - the segment of the qualified available market that the firm has
decided to serve (the served market).
Penetrated market - those in the target market who have purchased the product.
In the above listing, "product" refers to both physical products and services.
The size of the market is not necessarily fixed. For example, the size of the available
market for a product can be increased by decreasing the product's price, and the size of
the qualified available market can be increased through changes in legislation that result
in fewer restrictions on who can buy the product.
Defining the market is the first step in analyzing it. Since the market is likely to be
composed of consumers whose needs differ, market segmentation is useful in order to
better understand those needs and to select the groups within the market that the firm will
serve.
5. Market Segmentation
Market segmentation is the identification of portions of the market that are different from
one another. Segmentation allows the firm to better satisfy the needs of its potential
customers.
The Need for Market Segmentation
The marketing concept calls for understanding customers and satisfying their needs better
than the competition. But different customers have different needs, and it rarely is
possible to satisfy all customers by treating them alike.
Mass marketing refers to treatment of the market as a homogenous group and offering the
same marketing mix to all customers. Mass marketing allows economies of scale to be
realized through mass production, mass distribution, and mass communication. The
drawback of mass marketing is that customer needs and preferences differ and the same
offering is unlikely to be viewed as optimal by all customers. If firms ignored the
differing customer needs, another firm likely would enter the market with a product that
serves a specific group, and the incumbent firms would lose those customers.
Target marketing on the other hand recognizes the diversity of customers and does not try
to please all of them with the same offering. The first step in target marketing is to
identify different market segments and their needs.
Requirements of Market Segments
In addition to having different needs, for segments to be practical they should be
evaluated against the following criteria:
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Identifiable: the differentiating attributes of the segments must be measurable so
that they can be identified.
Accessible: the segments must be reachable through communication and
distribution channels.
Substantial: the segments should be sufficiently large to justify the resources
required to target them.
Unique needs: to justify separate offerings, the segments must respond differently
to the different marketing mixes.
Durable: the segments should be relatively stable to minimize the cost of frequent
changes.
A good market segmentation will result in segment members that are internally
homogenous and externally heterogeneous; that is, as similar as possible within the
segment, and as different as possible between segments.
Bases for Segmentation in Consumer Markets
Consumer markets can be segmented on the following customer characteristics.
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Geographic
Demographic
Psychographic
Behavioralistic
Geographic Segmentation
The following are some examples of geographic variables often used in segmentation.
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Region: by continent, country, state, or even neighborhood
Size of metropolitan area: segmented according to size of population
Population density: often classified as urban, suburban, or rural
Climate: according to weather patterns common to certain geographic regions
Demographic Segmentation
Some demographic segmentation variables include:
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Age
Gender
Family size
Family lifecycle
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Generation: baby-boomers, Generation X, etc.
Income
Occupation
Education
Ethnicity
Nationality
Religion
Social class
Many of these variables have standard categories for their values. For example, family
lifecycle often is expressed as bachelor, married with no children (DINKS: Double
Income, No Kids), full-nest, empty-nest, or solitary survivor. Some of these categories
have several stages, for example, full-nest I, II, or III depending on the age of the children.
Psychographic Segmentation
Psychographic segmentation groups customers according to their lifestyle. Activities,
interests, and opinions (AIO) surveys are one tool for measuring lifestyle. Some
psychographic variables include:
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Activities
Interests
Opinions
Attitudes
Values
Behavioralistic Segmentation
Behavioral segmentation is based on actual customer behavior toward products. Some
behavioralistic variables include:
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Benefits sought
Usage rate
Brand loyalty
User status: potential, first-time, regular, etc.
Readiness to buy
Occasions: holidays and events that stimulate purchases
Behavioral segmentation has the advantage of using variables that are closely related to
the product itself. It is a fairly direct starting point for market segmentation.
Bases for Segmentation in Industrial Markets
In contrast to consumers, industrial customers tend to be fewer in number and purchase
larger quantities. They evaluate offerings in more detail, and the decision process usually
involves more than one person. These characteristics apply to organizations such as
manufacturers and service providers, as well as resellers, governments, and institutions.
Many of the consumer market segmentation variables can be applied to industrial markets.
Industrial markets might be segmented on characteristics such as:
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Location
Company type
Behavioral characteristics
Location
In industrial markets, customer location may be important in some cases. Shipping costs
may be a purchase factor for vendor selection for products having a high bulk to value
ratio, so distance from the vendor may be critical. In some industries firms tend to cluster
together geographically and therefore may have similar needs within a region.
Company Type
Business customers can be classified according to type as follows:
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Company size
Industry
Decision making unit
Purchase Criteria
Behavioral Characteristics
In industrial markets, patterns of purchase behavior can be a basis for segmentation. Such
behavioral characteristics may include:
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Usage rate
Buying status: potential, first-time, regular, etc.
Purchase procedure: sealed bids, negotiations, etc.
6. Market Analysis
The goal of a market analysis is to determine the attractiveness of a market and to
understand its evolving opportunities and threats as they relate to the strengths and
weaknesses of the firm.
David A. Aaker outlined the following dimensions of a market analysis:
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Market size (current and future)
Market growth rate
Market profitability
Industry cost structure
Distribution channels
Market trends
Key success factors
Market Size
The size of the market can be evaluated based on present sales and on potential sales if
the use of the product were expanded. The following are some information sources for
determining market size:
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government data
trade associations
financial data from major players
customer surveys
Market Growth Rate
A simple means of forecasting the market growth rate is to extrapolate historical data into
the future. While this method may provide a first-order estimate, it does not predict
important turning points. A better method is to study growth drivers such as demographic
information and sales growth in complementary products. Such drivers serve as leading
indicators that are more accurate than simply extrapolating historical data.
Important inflection points in the market growth rate sometimes can be predicted by
constructing a product diffusion curve. The shape of the curve can be estimated by
studying the characteristics of the adoption rate of a similar product in the past.
Ultimately, the maturity and decline stages of the product life cycle will be reached.
Some leading indicators of the decline phase include price pressure caused by
competition, a decrease in brand loyalty, the emergence of substitute products, market
saturation, and the lack of growth drivers.
Market Profitability
While different firms in a market will have different levels of profitability, the average
profit potential for a market can be used as a guideline for knowing how difficult it is to
make money in the market. Michael Porter devised a useful framework for evaluating the
attractiveness of an industry or market. This framework, known as Porter's five forces,
identifies five factors that influence the market profitability:
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Buyer power
Supplier power
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Barriers to entry
Threat of substitute products
Rivalry among firms in the industry
Industry Cost Structure
The cost structure is important for identifying key factors for success. To this end,
Porter's value chain model is useful for determining where value is added and for
isolating the costs.
The cost structure also is helpful for formulating strategies to develop a competitive
advantage. For example, in some environments the experience curve effect can be used to
develop a cost advantage over competitors.
Distribution Channels
The following aspects of the distribution system are useful in a market analysis:
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Existing distribution channels - can be described by how direct they are to the
customer.
Trends and emerging channels - new channels can offer the opportunity to
develop a competitive advantage.
Channel power structure - for example, in the case of a product having little brand
equity, retailers have negotiating power over manufacturers and can capture more
margin.
Market Trends
Changes in the market are important because they often are the source of new
opportunities and threats. The relevant trends are industry-dependent, but some examples
include changes in price sensitivity, demand for variety, and level of emphasis on service
and support. Regional trends also may be relevant.
Key Success Factors
The key success factors are those elements that are necessary in order for the firm to
achieve its marketing objectives. A few examples of such factors include:
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Access to essential unique resources
Ability to achieve economies of scale
Access to distribution channels
Technological progress
It is important to consider that key success factors may change over time, especially as
the product progresses through its life cycle.
7. Target Market Selection
Target marketing tailors a marketing mix for one or more segments identified by market
segmentation. Target marketing contrasts with mass marketing, which offers a single
product to the entire market.
Two important factors to consider when selecting a target market segment are the
attractiveness of the segment and the fit between the segment and the firm's objectives,
resources, and capabilities.
Attractiveness of a Market Segment
The following are some examples of aspects that should be considered when evaluating
the attractiveness of a market segment:
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Size of the segment (number of customers and/or number of units)
Growth rate of the segment
Competition in the segment
Brand loyalty of existing customers in the segment
Attainable market share given promotional budget and competitors' expenditures
Required market share to break even
Sales potential for the firm in the segment
Expected profit margins in the segment
Market research and analysis is instrumental in obtaining this information. For example,
buyer intentions, sales force estimates, test marketing, and statistical demand analysis are
useful for determining sales potential. The impact of applicable micro-environmental and
macro-environmental variables on the market segment should be considered.
Note that larger segments are not necessarily the most profitable to target since they
likely will have more competition. It may be more profitable to serve one or more smaller
segments that have little competition. On the other hand, if the firm can develop a
competitive advantage, for example, via patent protection, it may find it profitable to
pursue a larger market segment.
Suitability of Market Segments to the Firm
Market segments also should be evaluated according to how they fit the firm's objectives,
resources, and capabilities. Some aspects of fit include:
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Whether the firm can offer superior value to the customers in the segment
The impact of serving the segment on the firm's image
Access to distribution channels required to serve the segment
The firm's resources vs. capital investment required to serve the segment
The better the firm's fit to a market segment, and the more attractive the market segment,
the greater the profit potential to the firm.
Target Market Strategies
There are several different target-market strategies that may be followed. Targeting
strategies usually can be categorized as one of the following:
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Single-segment strategy - also known as a concentrated strategy. One market
segment (not the entire market) is served with one marketing mix. A singlesegment approach often is the strategy of choice for smaller companies with
limited resources.
Selective specialization- this is a multiple-segment strategy, also known as a
differentiated strategy. Different marketing mixes are offered to different
segments. The product itself may or may not be different - in many cases only the
promotional message or distribution channels vary.
Product specialization- the firm specializes in a particular product and tailors it
to different market segments.
Market specialization- the firm specializes in serving a particular market
segment and offers that segment an array of different products.
Full market coverage - the firm attempts to serve the entire market. This
coverage can be achieved by means of either a mass market strategy in which a
single undifferentiated marketing mix is offered to the entire market, or by a
differentiated strategy in which a separate marketing mix is offered to each
segment.
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The following diagrams show examples of the five market selection patterns given three
market segments S1, S2, and S3, and three products P1, P2, and P3.
Single
Segment
Selective
Specialization
S1 S2 S3
Product
Specialization
S1 S2 S3
Market
Specialization
S1 S2 S3
Full Market
Coverage
S1 S2 S3
S1 S2 S3
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P
P
P
P
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P
P
P
P
P
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P
P
P
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A firm that is seeking to enter a market and grow should first target the most attractive
segment that matches its capabilities. Once it gains a foothold, it can expand by pursuing
a product specialization strategy, tailoring the product for different segments, or by
pursuing a market specialization strategy and offering new products to its existing market
segment.
Another strategy whose use is increasing is individual marketing, in which the
marketing mix is tailored on an individual consumer basis. While in the past impractical,
individual marketing is becoming more viable thanks to advances in technology.
8. The Product Life Cycle
A product's life cycle (PLC) can be divided into several stages characterized by the
revenue generated by the product. If a curve is drawn showing product revenue over time,
it may take one of many different shapes, an example of which is shown below:
Product Life Cycle Curve
The life cycle concept may apply to a brand or to a category of product. Its duration may
be as short as a few months for a fad item or a century or more for product categories
such as the gasoline-powered automobile.
Product development is the incubation stage of the product life cycle. There are no sales
and the firm prepares to introduce the product. As the product progresses through its life
cycle, changes in the marketing mix usually are required in order to adjust to the evolving
challenges and opportunities.
Introduction Stage
When the product is introduced, sales will be low until customers become aware of the
product and its benefits. Some firms may announce their product before it is introduced,
but such announcements also alert competitors and remove the element of surprise.
Advertising costs typically are high during this stage in order to rapidly increase
customer awareness of the product and to target the early adopters. During the
introductory stage the firm is likely to incur additional costs associated with the initial
distribution of the product. These higher costs coupled with a low sales volume usually
make the introduction stage a period of negative profits.
During the introduction stage, the primary goal is to establish a market and build primary
demand for the product class. The following are some of the marketing mix implications
of the introduction stage:
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Product - one or few products, relatively undifferentiated
Price - Generally high, assuming a skim pricing strategy for a high profit margin
as the early adopters buy the product and the firm seeks to recoup development
costs quickly. In some cases a penetration pricing strategy is used and
introductory prices are set low to gain market share rapidly.
Distribution - Distribution is selective and scattered as the firm commences
implementation of the distribution plan.
Promotion - Promotion is aimed at building brand awareness. Samples or trial
incentives may be directed toward early adopters. The introductory promotion
also is intended to convince potential resellers to carry the product.
Growth Stage
The growth stage is a period of rapid revenue growth. Sales increase as more customers
become aware of the product and its benefits and additional market segments are targeted.
Once the product has been proven a success and customers begin asking for it, sales will
increase further as more retailers become interested in carrying it. The marketing team
may expand the distribution at this point. When competitors enter the market, often
during the later part of the growth stage, there may be price competition and/or increased
promotional costs in order to convince consumers that the firm's product is better than
that of the competition.
During the growth stage, the goal is to gain consumer preference and increase sales. The
marketing mix may be modified as follows:
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Product - New product features and packaging options; improvement of product
quality.
Price - Maintained at a high level if demand is high, or reduced to capture
additional customers.
Distribution - Distribution becomes more intensive. Trade discounts are minimal
if resellers show a strong interest in the product.
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Promotion - Increased advertising to build brand preference.
Maturity Stage
The maturity stage is the most profitable. While sales continue to increase into this stage,
they do so at a slower pace. Because brand awareness is strong, advertising expenditures
will be reduced. Competition may result in decreased market share and/or prices. The
competing products may be very similar at this point, increasing the difficulty of
differentiating the product. The firm places effort into encouraging competitors'
customers to switch, increasing usage per customer, and converting non-users into
customers. Sales promotions may be offered to encourage retailers to give the product
more shelf space over competing products.
During the maturity stage, the primary goal is to maintain market share and extend the
product life cycle. Marketing mix decisions may include:
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Product - Modifications are made and features are added in order to differentiate
the product from competing products that may have been introduced.
Price - Possible price reductions in response to competition while avoiding a price
war.
Distribution - New distribution channels and incentives to resellers in order to
avoid losing shelf space.
Promotion - Emphasis on differentiation and building of brand loyalty. Incentives
to get competitors' customers to switch.
Decline Stage
Eventually sales begin to decline as the market becomes saturated, the product becomes
technologically obsolete, or customer tastes change. If the product has developed brand
loyalty, the profitability may be maintained longer. Unit costs may increase with the
declining production volumes and eventually no more profit can be made.
During the decline phase, the firm generally has three options:
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Maintain the product in hopes that competitors will exit. Reduce costs and find
new uses for the product.
Harvest it, reducing marketing support and coasting along until no more profit can
be made.
Discontinue the product when no more profit can be made or there is a successor
product.
The marketing mix may be modified as follows:
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Product - The number of products in the product line may be reduced. Rejuvenate
surviving products to make them look new again.
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Price - Prices may be lowered to liquidate inventory of discontinued products.
Prices may be maintained for continued products serving a niche market.
Distribution - Distribution becomes more selective. Channels that no longer are
profitable are phased out.
Promotion - Expenditures are lower and aimed at reinforcing the brand image for
continued products.
Limitations of the Product Life Cycle Concept
The term "life cycle" implies a well-defined life cycle as observed in living organisms,
but products do not have such a predictable life and the specific life cycle curves
followed by different products vary substantially. Consequently, the life cycle concept is
not well-suited for the forecasting of product sales. Furthermore, critics have argued that
the product life cycle may become self-fulfilling. For example, if sales peak and then
decline, managers may conclude that the product is in the decline phase and therefore cut
the advertising budget, thus precipitating a further decline.
Nonetheless, the product life cycle concept helps marketing managers to plan alternate
marketing strategies to address the challenges that their products are likely to face. It also
is useful for monitoring sales results over time and comparing them to those of products
having a similar life cycle.
9. Brand Equity
A brand is a name or symbol used to identify the source of a product. When developing a
new product, branding is an important decision. The brand can add significant value
when it is well recognized and has positive associations in the mind of the consumer.
This concept is referred to as brand equity.
What is Brand Equity?
Brand equity is an intangible asset that depends on associations made by the consumer.
There are at least three perspectives from which to view brand equity:
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Financial - One way to measure brand equity is to determine the price premium
that a brand commands over a generic product. For example, if consumers are
willing to pay $100 more for a branded television over the same unbranded
television, this premium provides important information about the value of the
brand. However, expenses such as promotional costs must be taken into account
when using this method to measure brand equity.
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Brand extensions - A successful brand can be used as a platform to launch
related products. The benefits of brand extensions are the leveraging of existing
brand awareness thus reducing advertising expenditures, and a lower risk from the
perspective of the consumer. Furthermore, appropriate brand extensions can
enhance the core brand. However, the value of brand extensions is more difficult
to quantify than are direct financial measures of brand equity.
Consumer-based - A strong brand increases the consumer's attitude strength
toward the product associated with the brand. Attitude strength is built by
experience with a product. This importance of actual experience by the customer
implies that trial samples are more effective than advertising in the early stages of
building a strong brand. The consumer's awareness and associations lead to
perceived quality, inferred attributes, and eventually, brand loyalty.
Strong brand equity provides the following benefits:
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Facilitates a more predictable income stream.
Increases cash flow by increasing market share, reducing promotional costs, and
allowing premium pricing.
Brand equity is an asset that can be sold or leased.
However, brand equity is not always positive in value. Some brands acquire a bad
reputation that results in negative brand equity. Negative brand equity can be measured
by surveys in which consumers indicate that a discount is needed to purchase the brand
over a generic product.
Building and Managing Brand Equity
In his 1989 paper, Managing Brand Equity, Peter H. Farquhar outlined the following
three stages that are required in order to build a strong brand:
1. Introduction - introduce a quality product with the strategy of using the brand as
a platform from which to launch future products. A positive evaluation by the
consumer is important.
2. Elaboration - make the brand easy to remember and develop repeat usage. There
should be accessible brand attitude, that is, the consumer should easily remember
his or her positive evaluation of the brand.
3. Fortification - the brand should carry a consistent image over time to reinforce its
place in the consumer's mind and develop a special relationship with the
consumer. Brand extensions can further fortify the brand, but only with related
products having a perceived fit in the mind of the consumer.
Alternative Means to Brand Equity
Building brand equity requires a significant effort, and some companies use alternative
means of achieving the benefits of a strong brand. For example, brand equity can be
borrowed by extending the brand name to a line of products in the same product category
or even to other categories. In some cases, especially when there is a perceptual
connection between the products, such extensions are successful. In other cases, the
extensions are unsuccessful and can dilute the original brand equity.
Brand equity also can be "bought" by licensing the use of a strong brand for a new
product. As in line extensions by the same company, the success of brand licensing is not
guaranteed and must be analyzed carefully for appropriateness.
Managing Multiple Brands
Different companies have opted for different brand strategies for multiple products.
These strategies are:
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Single brand identity - a separate brand for each product. For example, in
laundry detergents Procter & Gamble offers uniquely positioned brands such as
Tide, Cheer, Bold, etc.
Umbrella - all products under the same brand. For example, Sony offers many
different product categories under its brand.
Multi-brand categories - Different brands for different product categories.
Campbell Soup Company uses Campbell's for soups, Pepperidge Farm for baked
goods, and V8 for juices.
Family of names - Different brands having a common name stem. Nestle uses
Nescafe, Nesquik, and Nestea for beverages.
Brand equity is an important factor in multi-product branding strategies.
Protecting Brand Equity
The marketing mix should focus on building and protecting brand equity. For example, if
the brand is positioned as a premium product, the product quality should be consistent
with what consumers expect of the brand, low sale prices should not be used compete, the
distribution channels should be consistent with what is expected of a premium brand, and
the promotional campaign should build consistent associations.
Finally, potentially dilutive extensions that are inconsistent with the consumer's
perception of the brand should be avoided. Extensions also should be avoided if the core
brand is not yet sufficiently strong.
10. Pricing Strategy
One of the four major elements of the marketing mix is price. Pricing is an important
strategic issue because it is related to product positioning. Furthermore, pricing affects
other marketing mix elements such as product features, channel decisions, and promotion.
While there is no single recipe to determine pricing, the following is a general sequence
of steps that might be followed for developing the pricing of a new product:
1. Develop marketing strategy - perform marketing analysis, segmentation,
targeting, and positioning.
2. Make marketing mix decisions - define the product, distribution, and
promotional tactics.
3. Estimate the demand curve - understand how quantity demanded varies with
price.
4. Calculate cost - include fixed and variable costs associated with the product.
5. Understand environmental factors - evaluate likely competitor actions,
understand legal constraints, etc.
6. Set pricing objectives - for example, profit maximization, revenue maximization,
or price stabilization (status quo).
7. Determine pricing - using information collected in the above steps, select a
pricing method, develop the pricing structure, and define discounts.
These steps are interrelated and are not necessarily performed in the above order.
Nonetheless, the above list serves to present a starting framework.
Marketing Strategy and the Marketing Mix
Before the product is developed, the marketing strategy is formulated, including target
market selection and product positioning. There usually is a tradeoff between product
quality and price, so price is an important variable in positioning.
Because of inherent tradeoffs between marketing mix elements, pricing will depend on
other product, distribution, and promotion decisions.
Estimate the Demand Curve
Because there is a relationship between price and quantity demanded, it is important to
understand the impact of pricing on sales by estimating the demand curve for the product.
For existing products, experiments can be performed at prices above and below the
current price in order to determine the price elasticity of demand. Inelastic demand
indicates that price increases might be feasible.
Calculate Costs
If the firm has decided to launch the product, there likely is at least a basic understanding
of the costs involved, otherwise, there might be no profit to be made. The unit cost of the
product sets the lower limit of what the firm might charge, and determines the profit
margin at higher prices.
The total unit cost of a producing a product is composed of the variable cost of producing
each additional unit and fixed costs that are incurred regardless of the quantity produced.
The pricing policy should consider both types of costs.
Environmental Factors
Pricing must take into account the competitive and legal environment in which the
company operates. From a competitive standpoint, the firm must consider the
implications of its pricing on the pricing decisions of competitors. For example, setting
the price too low may risk a price war that may not be in the best interest of either side.
Setting the price too high may attract a large number of competitors who want to share in
the profits.
From a legal standpoint, a firm is not free to price its products at any level it chooses. For
example, there may be price controls that prohibit pricing a product too high. Pricing it
too low may be considered predatory pricing or "dumping" in the case of international
trade. Offering a different price for different consumers may violate laws against price
discrimination. Finally, collusion with competitors to fix prices at an agreed level is
illegal in many countries.
Pricing Objectives
The firm's pricing objectives must be identified in order to determine the optimal pricing.
Common objectives include the following:
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Current profit maximization - seeks to maximize current profit, taking into
account revenue and costs. Current profit maximization may not be the best
objective if it results in lower long-term profits.
Current revenue maximization - seeks to maximize current revenue with no
regard to profit margins. The underlying objective often is to maximize long-term
profits by increasing market share and lowering costs.
Maximize quantity - seeks to maximize the number of units sold or the number
of customers served in order to decrease long-term costs as predicted by the
experience curve.
Maximize profit margin - attempts to maximize the unit profit margin,
recognizing that quantities will be low.
Quality leadership - use price to signal high quality in an attempt to position the
product as the quality leader.
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Partial cost recovery - an organization that has other revenue sources may seek
only partial cost recovery.
Survival - in situations such as market decline and overcapacity, the goal may be
to select a price that will cover costs and permit the firm to remain in the market.
In this case, survival may take a priority over profits, so this objective is
considered temporary.
Status quo - the firm may seek price stabilization in order to avoid price wars and
maintain a moderate but stable level of profit.
For new products, the pricing objective often is either to maximize profit margin or to
maximize quantity (market share). To meet these objectives, skim pricing and penetration
pricing strategies often are employed. Joel Dean discussed these pricing policies in his
classic HBR article entitled, Pricing Policies for New Products.
Skim pricing attempts to "skim the cream" off the top of the market by setting a high
price and selling to those customers who are less price sensitive. Skimming is a strategy
used to pursue the objective of profit margin maximization.
Skimming is most appropriate when:
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Demand is expected to be relatively inelastic; that is, the customers are not highly
price sensitive.
Large cost savings are not expected at high volumes, or it is difficult to predict the
cost savings that would be achieved at high volume.
The company does not have the resources to finance the large capital expenditures
necessary for high volume production with initially low profit margins.
Penetration pricing pursues the objective of quantity maximization by means of a low
price. It is most appropriate when:
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Demand is expected to be highly elastic; that is, customers are price sensitive and
the quantity demanded will increase significantly as price declines.
Large decreases in cost are expected as cumulative volume increases.
The product is of the nature of something that can gain mass appeal fairly quickly.
There is a threat of impending competition.
As the product lifecycle progresses, there likely will be changes in the demand curve and
costs. As such, the pricing policy should be reevaluated over time.
The pricing objective depends on many factors including production cost, existence of
economies of scale, barriers to entry, product differentiation, rate of product diffusion, the
firm's resources, and the product's anticipated price elasticity of demand.
Pricing Methods
To set the specific price level that achieves their pricing objectives, managers may make
use of several pricing methods. These methods include:
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Cost-plus pricing - set the price at the production cost plus a certain profit
margin.
Target return pricing - set the price to achieve a target return-on-investment.
Value-based pricing - base the price on the effective value to the customer
relative to alternative products.
Psychological pricing - base the price on factors such as signals of product
quality, popular price points, and what the consumer perceives to be fair.
In addition to setting the price level, managers have the opportunity to design innovative
pricing models that better meet the needs of both the firm and its customers. For example,
software traditionally was purchased as a product in which customers made a one-time
payment and then owned a perpetual license to the software. Many software suppliers
have changed their pricing to a subscription model in which the customer subscribes for a
set period of time, such as one year. Afterwards, the subscription must be renewed or the
software no longer will function. This model offers stability to both the supplier and the
customer since it reduces the large swings in software investment cycles.
Price Discounts
The normally quoted price to end users is known as the list price. This price usually is
discounted for distribution channel members and some end users. There are several types
of discounts, as outlined below.
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Quantity discount - offered to customers who purchase in large quantities.
Cumulative quantity discount - a discount that increases as the cumulative
quantity increases. Cumulative discounts may be offered to resellers who
purchase large quantities over time but who do not wish to place large individual
orders.
Seasonal discount - based on the time that the purchase is made and designed to
reduce seasonal variation in sales. For example, the travel industry offers much
lower off-season rates. Such discounts do not have to be based on time of the
year; they also can be based on day of the week or time of the day, such as pricing
offered by long distance and wireless service providers.
Cash discount - extended to customers who pay their bill before a specified date.
Trade discount - a functional discount offered to channel members for
performing their roles. For example, a trade discount may be offered to a small
retailer who may not purchase in quantity but nonetheless performs the important
retail function.
Promotional discount - a short-term discounted price offered to stimulate sales.