Principles of marketing [2 Scandinavian ed.] 9781292104805, 1292104805

Table of contents :
Cover
Brief Contents
Contents
Preface
Preface to the first edition
About the authors
Acknowledgements
Chapter one Marketing: creating and capturing customer value
Chapter two Company and marketing strategy
Chapter three Analysing the marketing environment
Chapter four Managing marketing information to gain customer insights
Chapter five Consumer markets and consumer buyer behaviour
Chapter six Business markets and business buyer behaviour
Chapter seven Customer-driven marketing strategy: creating value for target customers
Chapter eight Branding: developing strong brands
Chapter nine Products and services
Chapter ten Pricing strategies
Chapter eleven Marketing channels
Chapter twelve Marketing communications
Chapter thirteen Creating competitive advantage
Chapter fourteen Green marketing and sustainable practices in a global marketplace
Glossary
Subject index
Company index

Citation preview

Principles of Marketing SCANDINAVIAN Edition

Principles of Marketing SCANDINAVIAN Edition 2nd edition

Philip Kotler Gary Armstrong Anders Parment

Pearson Education Limited Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk First published 2012 (print) Second edition published 2016 (print and electronic) Authorised adaptation from the United States edition, entitled Principles of Marketing: Global Edition, 13th ­edition, ISBN: 9780137006694 by Kotler, Philip; Armstrong, Gary, published by Pearson Education, Inc, ­publishing as ­Prentice Hall, © 2010. Scandinavian adaptation edition published by Pearson Education Ltd, © 2012. © Pearson Education Limited 2012 (print) © Pearson Education Limited 2016 (print and electronic) The rights of Philip Kotler, Gary Armstrong and Anders Parment to be identified as author of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. The print publication is protected by copyright. Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law. Any unauthorised distribution or use of this text may be a direct infringement of the authors’ and the publisher’s rights and those responsible may be liable in law accordingly. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. Pearson Education is not responsible for the content of third-party internet sites. ISBN: 978–1-292–10480–5 (print) 978-1-292-11556-6 (PDF) 978-1-292-11557-3 (eText) British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for the print edition is available from the Library of Congress 10 9 8 7 6 5 4 3 2 1 19 18 17 16 15 Print edition typeset in 9.5/12 Sabon LT Pro by Lumina Datamatics Print edition printed and bound by L.E.G.O. S.p.A., Italy NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION

Brief Contents

Preface

xiii

Preface to the first edition

xiv

About the authors

xv

Acknowledgements xvi Chapter 1 Marketing: creating and capturing customer value

3

Chapter 2

Company and marketing strategy

43

Chapter 3

Analysing the marketing environment

71

Chapter 4 Managing marketing information to gain customer insights

99

Chapter 5

Consumer markets and consumer buyer behaviour

125

Chapter 6

Business markets and business buyer behaviour

157

Chapter 7

Customer-driven marketing strategy: creating value for target customers

181

Chapter 8

Branding: developing strong brands

217

Chapter 9

Products and services

249

Chapter 10

Pricing strategies

275

Chapter 11 Marketing channels

311

Chapter 12 Market communication

347

Chapter 13

383

Creating competitive advantage

Chapter 14 Marketing in a global marketplace striving for sustainability

403

Glossary

447

Subject index

453

Company index

467

v

This page intentionally left blank

Contents

Preface xiii Preface to the first edition

xiv

About the authors

xv

Acknowledgements xvi

Chapter one  Marketing: creating and capturing customer value

3

Chapter preview

4

Learning objectives 4 Company case – Hennes & Mauritz: challenging the marketing orthodoxy 5 What is marketing? Marketing defined ●● The marketing process ●●

9 10 10

Understanding the marketplace and customer needs 11 ●● Customer needs, wants and demands 11 ●● Market offerings – products, services and experiences 12 ●● Customer value and satisfaction 12 ●● Exchanges and relationships 13 ●● Markets 13 Designing a customer-driven marketing strategy 14 ●● Selecting customers to serve 14 ●● Choosing a value proposition 15 ●● Marketing management orientations 15 Building customer relationships 19 ●● Customer relationship management 19 ●● The changing nature of customer relationships 21 ●● Partner relationship management 22 Capturing value from customers ●● Creating customer loyalty and retention ●● Growing share of customer ●● Building customer equity

22 23 23 24

The changing marketing landscape 25 ●● The information revolution 26 Company case – Glassdoor.com: taking the evaluation approach from consumer markets to the labour market 26 ●● Globalisation 29 ●● The call for sustainability: more ethics and social responsibility 30 Company case – Sustainable business in non-sustainable environments: TeliaSonera’s challenging efforts to contribute to a sustainable society 31 The growth of not-for-profit marketing 34 The main focus of this book: big, complex organisations 34 ●● Marketing in small and medium-sized businesses 35 Company case – Adminicon: a small business selling services to big corporations 35 Summary 37 Key terms

38

Discussing the concepts

39

Applying the concepts

39

Marketing by the numbers

39

References 40

Chapter two  Company and marketing strategy

43

Chapter preview

44

Learning objectives 44 Company-wide strategic planning: defining marketing’s role ●● Defining a market-oriented mission ●● Setting company objectives and goals ●● Designing the business portfolio

45 45 47 47

vii

Contents

Best practice – Electrolux: a portfolio company

49

Partnering to build customer relationships 52 ●● Partnering with other company departments 53 ●● Partnering with others in the marketing system 54 Marketing strategy and the marketing mix Customer-driven marketing strategy ●● Developing an integrated marketing mix

55 56 58

Managing the marketing effort Marketing analysis ●● Marketing planning ●● Marketing implementation ●● Marketing department organisation ●● Marketing control

60 61 61 62 63 63

●●

●●

Measuring and managing return on marketing investment 64 Summary 65 Key terms

66

Discussing the concepts

66

Applying the concepts

67

Marketing by the numbers

67

References 68

Chapter three  Analysing the marketing environment

71

Chapter preview

72

Learning objectives 72 The marketing environment

73

The company’s microenvironment

74

The company’s macroenvironment ●● Demographic environment

76 77

Company case – The transparent car dealership: tearing down walls that disturb customer relationships 81 ●● ●●

Economic environment Ecological environment

82 84

Company case – Flying in the future? Business travellers, punctuality and environmental impact 85 ●● ●● ●●

Technological environment Political and social environment Cultural environment

Responding to the marketing environment: proactive and reactive attitudes

88 89 90 94

Summary 94

viii

Applying the concepts

96

References 96

Chapter four  Managing marketing information to gain customer insights Chapter preview

99 100

Learning objectives 100 Marketing information and customer insights

101

Assessing marketing information needs

102

Developing marketing information ●● Internal data

103 103

Best practice – Pizza Hut – a database can make the difference between attracting and keeping customers 103 ●●

Marketing intelligence

104

Marketing research Defining the problem and research objectives ●● Developing the research plan ●● Gathering secondary data ●● Primary data collection ●● Implementing the research plan ●● Interpreting and reporting the findings

105 105 106 106 107 114 115

Analysing and using marketing information Customer relationship management ●● Distributing and using marketing information

115 115 116

Marketing research in small businesses and non-profit organisations

116

International marketing research

118

Public policy and ethics in marketing research Intrusions on consumer privacy

119 119

●●

●●

●●

Company case – Tracking consumers on the web: smart targeting or a little creepy? 119

Summary 121 Key terms

122

Discussing the concepts

122

Applying the concepts

123

References 123

Chapter five  Consumer markets and consumer buyer behaviour

125

Chapter preview

126

Learning objectives 126

Key terms

95

Company case – Harley-Davidson 127

Discussing the concepts

95

Model of consumer behaviour

128

Contents

Characteristics affecting consumer behaviour ●● Cultural factors ●● Social factors ●● Personal factors ●● Psychological factors

129 129 131 133 136

Types of buying decision behaviour ●● Complex buying behaviour ●● Dissonance-reducing buying behaviour ●● Habitual buying behaviour ●● Variety-seeking buying behaviour

140 141 141 141 142

The buyer decision process Need recognition ●● Information search ●● Evaluation of alternatives ●● Purchase decision ●● Post-purchase behaviour

142 143 143 144 144 145

The buyer decision process for new products ●● Stages in the adoption process ●● Individual differences in innovativeness ●● Influence of product characteristics on rate of adoption

146 146 146

●●

Institutional and government markets ●● Institutional markets ●● Government markets

173 174 174

Legislation issues

174

Summary 176 Key terms

176

Discussing the concepts

177

Applying the concepts

177

Focus on technology

177

Focus on ethics

178

References 178

Chapter seven  Customer-driven marketing strategy: creating value for target customers

181

Chapter preview

182

Learning objectives 182 Segmentation in contemporary markets

148

Summary 150 Key terms

151

Discussing the concepts

151

Applying the concepts

152

Focus on technology

152

Marketing by the numbers

153

References 153

Company case – Spendrups: segmentation and customer orientation that drive the market 183

Market segmentation Segmenting consumer markets

●●

157

Chapter preview

158

187 187

Best practice – Baby boomer marketing – not a hot topic for managers? 190 Best practice – Targeting the affluent – your wish is their command 192 ●● ●●

Chapter six  Business markets and business buyer behaviour

183

●●

Segmenting business markets Segmenting international markets Requirements for effective segmentation

195 196 198

Learning objectives 158

Market targeting ●● Evaluating market segments ●● Selecting target market segments

Company case – Stiga: marketing in industrial markets 159

Best practice – Fast fashion: combining logistics with differentiated marketing 201

Business markets Market structure and demand ●● Nature of the buying unit ●● Types of decisions and the decision process ●●

163 164 164 165

Best practice – IKEA: involving suppliers from start to finish 166

Business buyer behaviour 166 ●● Major types of buying situations 167 ●● Participants in the business buying process 168 ●● Major influences on business buyers 169 ●● The business buying process 170 ●● E-procurement 173

Differentiation and positioning Positioning maps ●● Choosing a differentiation and positioning strategy ●●

198 198 200

203 204 204

Company case – Staples: smart positioning? 205

Summary 211 Key terms

212

Discussing the concepts

212

Applying the concepts

213

Focus on ethics

213

References 213 ix

Contents

Chapter eight  Branding: developing strong brands

217

Chapter preview

218

Learning objectives 218 Company case – Creating a premium brand: the Audi success story 219

A branding perspective ●● The branded society ●● Where does a branding perspective apply? Company case – Place branding

226 226 227 227

264 264 265 269

Summary 271 Key terms

272

Discussing the concepts

272

Applying the concepts

272

References 273

Chapter ten  Pricing strategies

275

Best practice – The employees’ social network: a great marketing opportunity 230

Chapter preview

276

Branding strategy: building strong brands ●● Brand equity

Company case – It’s complicated: price-setting in the medical technology industry 277

●●

Employer branding

228

231 231

Company case – Björn Borg: from tennis player and endorser to global brand 231 ●● ●●

Brand strategy decisions Brand positioning

233 234

Company case – TRIWA – the conventional rebel watch: success through category repositioning 234 Company case – Brand sponsorship: Nordea Scandinavian Masters 237 Company case – Chiquita: using the brand as a bridge for broadening the brand width 241 ●●

Managing brands

Cornerstones of a strong brand

244 244

Summary 245 Key terms

245

Discussing the concepts

245

Applying the concepts

246

Marketing by the numbers

246

References 246

Chapter nine  Products and services

249

Chapter preview

250

Learning objectives 250 What is a product? Products, services and experiences

251 251 Company case – Financial services: Max Matthiessen 252 ●● Levels of product and services 255 ●● Product and service classifications 256 ●●

x

Services marketing Nature and characteristics of a service ●● Marketing strategies for service firms ●● Service-dominant logic ●●

Learning objectives 276

What is a price, actually?

280

Factors to consider when setting prices Customer perceptions of value ●● Company and product costs ●● Other internal and external considerations affecting price decisions

280 281 284

●●

New-product pricing strategies Market-skimming pricing ●● Market-penetration pricing

292 292 292

Product mix pricing strategies Product line pricing ●● Optional-product pricing ●● Captive-product pricing ●● By-product pricing ●● Product bundle pricing

293 293 294 294 295 295

Price-adjustment strategies Discount and allowance pricing ●● Segmented pricing ●● Psychological pricing

295 295 296 297

●●

●●

●●

288

Company case – Budget airlines: pricing dishonesty? 297 ●● ●● ●● ●●

Promotional pricing Geographical pricing Dynamic pricing International pricing

Price changes Initiating price changes ●● Responding to price changes ●●

300 300 300 301 301 302 303

The product life cycle

259

Summary 304

Product and service decisions ●● Individual product and service decisions ●● Product line decisions ●● Product mix decisions

260 260 263 264

Key terms

306

Discussing the concepts

306

Applying the concepts

307

Contents

Focus on ethics

307

Marketing by the numbers

Marketing by the numbers

307

References 345

References 308

344

Chapter eleven  Marketing channels

311

Chapter twelve  Marketing communications

347

Chapter preview

312

Chapter preview

348

Learning objectives 312

Learning objectives 348

Supply chains and the value delivery network

Company case – Volvo Cars: marketing communications as competitive edge, before, during and after a crisis 349

313

The nature and importance of marketing channels 313 How channel members add value – a traditional approach 314 ●● Number of channel levels 315 ●●

Channel behaviour and organisation ●● Vertical marketing systems

316 316

Company case – Zara: controlling the marketing channel chain 317 ●●

Horizontal marketing systems

319

Changing channel organisation: a modern approach 319

The promotion mix

352

Integrated marketing communications

352

Company case – Traditional media in the new communication landscape: what about the newspaper? 353 ●● ●●

The new marketing communications landscape 355 The shifting marketing communications model 355

A view of the communication process

357

320 322 322

Steps in developing effective marketing communications 358 ●● Identifying the target audience 358 ●● Determining the communication objectives 358 ●● Designing a message 359 ●● Choosing media 360 ●● Selecting the message source 361

Company case – Marketing channel strategies for multi-franchised premium products 323

Company case – Tiger Woods: when things go wrong with celebrity spokespeople 361

Channel management decisions ●● Legal considerations

●●

Channel design decisions One or more channels? Multichannel distribution systems ●● Evaluating the major alternatives ●● Designing international marketing channels

319

●●

326 327

Marketing logistics and supply chain management 327 ●● Major logistics functions 328 ●● Integrated logistics management 330 Retailing 331 Company case – Mystery shopping 331 ●●

Types of retailers

332

Company case – Gekås in Ullared: the ever-expanding retailer 334 Company case – Wal-Mart: almost unimaginably big on a global basis – but why not in Scandinavia? 337

339 Company case – Phantom shoppers 340

●●

Retailer marketing decisions

Wholesaling 341 Summary 342 Key terms

343

Discussing the concepts

343

Applying the concepts

344

Focus on ethics

344

Collecting feedback

Setting the total promotion budget and mix ●● Setting the total promotion budget ●● Shaping the overall promotion mix

362 363 363 364

Best practice – Repetition – once at the heart of advertising 365

Advertising 367 ●● Setting advertising objectives 367 ●● Developing advertising strategy 369 ●● Evaluating advertising effectiveness and return on advertising investment 371 Public relations The role and impact of public relations

372 373

Personal selling The role of the sales force

374 375

●●

Sales promotion Consumer promotions tools ●● Direct marketing

376 376 377

Online marketing

378

●●

●●

Summary 378 Key terms

379 xi

Contents

Discussing the concepts

379

Deciding whether to go global

409

Applying the concepts

380

Deciding which markets to enter

409

References 380

Deciding how to enter the market

409

Chapter thirteen  Creating competitive advantage

383

Standardisation or local adaptation? Deciding on the global marketing programme

413

Chapter preview

384

Learning objectives 384 Competitor analysis What industry are we operating in? ●● Identifying competitors ●● Industry and market definitions of competition ●● The changing nature of industry boundaries ●● Restrictions in business-to-business markets ●● Assessing competitors ●●

385 385 386 386 387 387 388

Best practice – Synergies may create competitive ­advantages 389 ●●

Selecting competitors to attack and avoid

Competitive strategies ●● Approaches to marketing strategy ●● Basic competitive strategies ●● Competitive positions ●● Market leader strategies ●● Market challenger strategies ●● Market follower strategies ●● Market nicher strategies

391 393 393 393 394 395 395 395 396

Balancing customer and competitor orientations 396 External and internal sources of competitive advantage 397

●●

Summary 397

adaptation bring? 413 Product 416 ●● Promotion 417 ●● Price 418 Company case – Watch your language! 419 ●● Marketing channels 420 ●●

Is the company truly global? National and global attitudes 420 Green marketing 421 Greenwashing 422 ●● Environmental certifications and eco-labels 425 ●●

Sustainable marketing

426

Social criticisms of marketing Marketing’s impact on individual consumers ●● Marketing’s impact on society as a whole ●● Marketing’s impact on other businesses

427 427 430 432

●●

Consumer actions to promote sustainable marketing 433 ●● Consumerism 433 ●● Environmentalism 435 Business actions towards sustainable marketing

437

Company case – Ben & Jerry’s – where there are two scoops of social values: one an integral part of the ­company’s genetic make-up, and another in its market communication efforts 438

Key terms

398

Discussing the concepts

398

Applying the concepts

398

●●

Focus on ethics

399

Summary 442

Marketing by the numbers

399

Key terms

443

References 399

Discussing the concepts

443

Chapter fourteen  Green marketing and sustainable practices in a global marketplace

Applying the concepts

443

403

Chapter preview

404

Marketing ethics

441

References 444 Glossary 447

Learning objectives 404

Subject index 453

Global marketing today

405

Company index

Looking at the global marketing environment The international trade system ●● The macroenvironment

407 407 408

●●

xii

Company case – Balancing local adaptation and global efficiencies: what does local

467

Preface

The first edition of this textbook received an overwhelming response and has been adopted in numerous Swedish marketing courses. Even in its last year, 2015, a few additional universities decided to start using the book. Throughout the lifecycle of the book, I had the opportunity to have a dialogue with teachers using the book across Sweden. Numerous guest lectures have been given, a very joyful experience from my perspective since I love lecturing and part of this experience is to learn to know the public in various areas, something I appreciate. For the second edition, a thorough revision of the text has been made. The chapter structure is kept although a few chapters, in particular Chapter 8 on branding and Chapter 14 on sustainable marketing, have undergone the most obvious revisions. Numerous cases have been added and removed, and those remaining have, in many cases, been revised. The biggest change in perspective is the substantially stronger focus on sustainability issues. There are many inputs to this change in perspective. First, travelling around the world – a per se environmentally unfriendly undertaking – is bringing new perspectives on how our consumption-oriented society contributes to undermining attempts to save our Earth from environmental disaster. The US, the origin of the subject area of marketing, and of this book, is certainly not a guiding star in this respect. Second, research into generational marketing that I’ve been involved in contributes to my understanding of sustainability issues as very important for young people – our research shows a similar interest among Baby Boomers, born in the 1940s and 1950s and raised during the 1968 revolution, the Vietnam War and the first oil crisis. Third, collaboration with colleagues that I’ve had the pleasure to work with in recent years has given compelling input. Anna Dyhre and I published a book, Sustainable

Employer Branding, in 2009, and since then two other books have come out of our creative co-operation. Charles Schewe, Marketing Professor at the University of Massachusetts, and I have co-taught and co-written an article published in the Journal of International Marketing on Generation Y/Millennials and their attitudes. Dr Mikael Ottosson, Senior Lecturer at Linköping University, and I have co-written Sustainable Marketing, published in Swedish and English, both being published in second editions shortly after they first appeared in 2013 and 2014, respectively. Magnus Söderlund, Professor at Stockholm School of Economics, and I published Thinking Beyond Classical Marketing, a book that generated great insights and thoughts. Associate Professors Daniel Kindström and Christian Kowalkowski, both at Linköping University, and I co-wrote a book on industrial marketing, a field that increasingly inspires and at the same time gets integrated with consumer marketing. Associate Professor Per Frankelius and Assistant Professor Charlotte Norman, both at Linköping University, wrote a book, Marketing as Science and Practice, with a strong focus on industries and aspects that are underexposed within the field of marketing, in textbooks in particular. Dr Sara Brorström at Gothenburg Research Institute and I are currently working with place branding and are in the process of publishing articles and book chapters on the theme based on extensive data collection in various-sized Swedish areas in comparison with insights from the international scene. All of them have contributed to my life in a larger meaning but also more specifically to this book’s second edition through the great insights that have come out of our co-operation. Anders Parment Stockholm, January 2016

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Preface to the First Edition

In early summer 2009, Pearson publisher Morten Fuglevand contacted me and asked whether I would be interested in writing a Swedish or Scandinavian edition of Kotler and Armstrong’s Principles of Marketing. Obviously, the time is past when a single marketing textbook could cover the entire world’s markets, and students and teachers have been increasingly asking for books that are adapted to the circumstances and issues at hand in a particular market or context. In this case the context was Sweden in the narrow sense, and Scandinavia, or perhaps Europe, in a broader sense. Marketing is a genuinely international subject field and thus the focus of this book is on international marketing rather than on specific Swedish marketing circumstances (which are, at any rate, few). Marketing is not like trade law or accounting, subject areas with a great emphasis on the rules and regulations of a particular country. Most students who opt for a marketing career will end up working for international organisations, and the majority of Swedish large and medium-sized companies are selling goods and services internationally. Moreover, the inspiration and ideas of marketing are truly international. New ideas and practices spread to new countries and regions at a rapid pace. However, using an American marketing textbook, such as that of Kotler and Armstrong, in Sweden presents some problems, and this is likely to hold for any country at a certain cultural distance from America. Concept-wise the American book is excellent, but many of the examples used are from American companies that very few Scandinavian students have heard of. Numerous paragraphs in the American book, e.g. on values that determine consumer behaviour and trade organisations, are US-centred, and not even a global edition could solve this problem. Every single sentence of the original Kotler & Armstrong text has been considered in adapting the original for Scandinavian circumstances. In addition to rewriting cases and examples, and illustrating best practice among Swedish firms, some recent

xiv

research insights were also added. And, of course, content on law, international trade organisations etc. has been rewritten to reflect a Swedish perspective. Last, but not least, the original content has been reduced in extent to reflect students’ and teachers’ preferences for shorter textbooks. In the past, an introductory textbook was expected to be 700 to 900 pages – sometimes even more – thus constituting a complete guidebook that covered just about everything in the marketing arena. A trend that has been going on for a while is to have a shorter course book and complement it with a number of research articles. This book is certainly not short but the ambition has been to keep it no longer than necessary to reflect existing theories and practice. One may wonder why the focus on big, international organisations is kept. Small and medium-sized enterprises constitute a substantial portion of economic activity in any country. However, business students, in particular, often work for international organisations and, if not, in most cases deal with customers who operate on an international basis. Even the smallest supplier of assembly parts has, if not a customer operating in international markets, a customer’s customer who is. As the case on Adminicon in Chapter 1 underlines, even small organisations benefit from knowing how big organisations work. And, also important, from a pedagogic point of view, it is probably easier to scale down from a big organisation perspective and apply the thinking applied to small organisations than the other way round. I’m grateful to all people who contributed their time and material to the numerous case studies presented in the book, and, of course, I’m fully responsible for any mistakes made during the process of writing this book that are still in the text. Anders Parment Stockholm, January 2011

About the authors

Philip Kotler is S.C. Johnson & Son Distinguished Professor of International Marketing at the Kellogg School of Management, Northwestern University. He received his master’s degree at the University of Chicago and his PhD at MIT, both in Economics. Dr Kotler is author of Marketing Management. He has authored dozens of other successful books and written over 100 articles for leading journals. He is the only three-time winner of the Alpha Kappa Psi Award for the best annual article in the Journal of Marketing. Gary Armstrong is Blackwell Distinguished Professor Emeritus of Marketing in the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill. He received his PhD in ­marketing from Northwestern University. Dr Armstrong has contributed articles to leading business journals and consulted with many companies on marketing strategy, marketing research and sales management.

Anders Parment is Senior Lecturer and Researcher in Marketing at Stockholm Business School at Stockholm University. He completed his PhD on Automobile Marketing at Linköping University. He also holds an MSc in Economics and Political Science from Lund University and a Bachelor of Laws from Örebro University. Dr Parment has won several prizes for his books and teaching and is a well-known speaker and consultant on different marketing themes, e.g. employer branding, generational/cohorts marketing, automobile marketing and consumer behaviour, often with an outlook on what will happen in the future. He has published several books and articles on these themes in English, German and Swedish, and has acted as a consultant for various international companies, including Audi, Bilia, BMW, Carnegie, Clas Ohlson, DNB Bank, Ernst & Young, Frauenhofer IAO, Gottlieb Duttweiler Institute, Grontmij, IGDS, IKEA, Peek & Cloppenburg, Porsche, Siemens, Swedbank and the Volkswagen Group, and domestic organisations, including the Museum of Modern Art, the Swedish Competition Authority, the Swedish Prime Minister’s Office and major banks and insurance companies.

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acknowledgements

We are grateful to the following for permission to reproduce copyright material: Figures Figure 1.5 adapted from ‘Mismanagement of customer loyalty’, Harvard Business Review, July 2002, p. 93 (Reinartz, W. and V. Kumar, V.), © 2002 by the Harvard Business School Publishing Corporation. All rights reserved. Reprinted with permission.; Figure 2.8 adapted from ‘Return on marketing: using consumer equity to focus marketing strategy’, Journal of Marketing, January 2004, p.112 (Rust, R.T, Lemon, K.N. and Zeithaml, V.A.); Figure 5.3 adapted from Motivation and Personality, 3rd edn, Prentice Hall, Inc. (Maslow, A.H., 1987), © 1987 Reprinted and electronically reproduced by permission of Pearson Education Inc., New York, New York; Figure 5.4 adapted from Consumer Behaviour and Marketing Action, Kent Publishing (Assael, H., 6th edn, 1988) p. 67; Figure 5.6 from Diffusion of Innovations, 4th edn, The Free Press (Rogers, E.M.) © 1962, 1971, 1983, by the Free Press, © 1995 by Everett M. Rogers, a Division of Simon & Schuster Adult Publishing Group; Figure 7.1 from Consumer Behaviour, 2nd edn, John Wiley & Sons, Inc. (Martin Evans, M., Jamal, A. and Foxall, G., 2009); Figure 10.2 from The Strategy and Tactics of Pricing, 3rd edn, Prentice Hall (Nagle, T.T. and Holden, R.K.), © 1995, 2002. Reprinted and electronically reproduced by permission of Pearson Education, Inc., New York, New York; Figure 13.2 from ‘Can you say what your strategy is?’, Harvard Business Review, April 2008, p. 89 (Collins, D.J. and Rukstad, M.G.), © 2008 by the President and Fellows of Harvard College; all rights reserved; Figure 14.6 from Innovation, Creative Destruction and Sustainability, Research Technology Management, September–October, pp. 21–7 (Hart, S.L., 2005). Text Case study on pp. 252–5 from Interview with Andreas Kåhlin, partner at Max Matthiessen; www.maxm.se, accessed April 2015; Box on p. 284 adapted from Auto Brand. Building Successful Car Brands for the Future, Kogan Page (Parment, A., 2014); Case study on pp. 277–9 from interview with Josef Smeds, Business Unit Manager, Sweden & Iceland, Medtronic

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Diabetes, April 2015; Case study on pp. 413–16 from interview with Tom Skogman, Equity Analyst, Equity & Credit Research, Handelsbanken Capital Markets, Helsinki. Screenshots Screenshot on pp. 27–8 from glassdoor.com Photos We would like to thank the following for their kind permission to reproduce their photographs: (Key: b – bottom; c – centre; l – left; r – right; t – top) 123RF.com: 132; Courtesy of Acne Studios: Acne Studio 2, 29; Alamy Images: Andre Jenny 216, 229b, Arctic Images/ Alamy 70, 80t, Cultura 390, Johner Images 156, 165, Johner Images/Alamy 110, Lonely Planet Images/Alamy 124, 139, Lphoto 197, Mikael Utterström 310, 320, Peter Erik Forsberg 292, picturesbyrob 54, Stefan Sollfors 209; Susanna Asklöf: 50; Ben & Jerry’s : 439l, 439r; BMW: 55b; Corbis: 199, Bob Strong/Reuters 432; Courtesy of ICA AB: 52b, 92; Courtesy of Volvo Car Corporation: 59, 149, 345; Courtesy of F12: F12/Wolfgang Kleinschmidt 20; Getty Images: AFP 84, 274, 302, 402, 412, Ezra Shaw 362, John Freeman/Lonely Planet Images 79, Lena Granefelt/Getty Images 98, 117, Ullstein bild 210; H&M: 7, 8, 376; H.J. Heinz Company Limited: 262; Ingram: 130b; Courtesy of Kahl’s Kaffe AB: 408; Karolinska University Hospital: 175; Max Matthiessen: 253, 255; Courtesy of Medtronic AB: 278; Mercedes-Benz: 55t; Courtesy of Nordea: 238; Anders Parment: 42, 51l, 51r, 73, 76, 80, 86, 134, 193, 196, 201, 229t, 230, 236, 260, 277, 283t, 283b, 297, 323, 336, 341, 440, 42, 51l, 51r, 73, 76, 80, 86, 134, 193, 196, 201, 229t, 230, 236, 260, 277, 283t, 283b, 297, 323, 336, 341, 440, Lou Linwei 293, Lphoto 180; Pearson Education Ltd: 10, 135, wavebreakmedia. Shutterstock 251; Photographers Direct: Erik Cronberg/www.erikcronberg.se 240; Press Association Images: 75, 83, 89, 75, 83, 89, Anders Wiklund/Scanpix 162, Bengt Nilsson/Scanpix 382, 387, Christian Ãrnberg/Scanpix 333, Claudio Bresciani/Scanpix 339, Leif Jansson/Scanpix 147, Mark Earthy/Scanpix 318, 328, Mona-Lisa Djerf/Scanpix 431, Peter Lyden/Green

acknowledgements

Cargo/Scanpix 330, Ronny Karlsson/Scanpix 248, 267, Staffan Lowstedt/Scanpix 418; SAS: 87; Scandic Hotels: Åke 269; Shutterstock.com: Gelia 266, Hadrian 256; Tom Skogman: 415; Staples AB: Henric Lind 206; Svensk Biogas: 18;

TeliaSonera: 31, 33b; Tobii AB: 108; Volkswagen Group Sverige AB: 220, 221, 222; Witt Sverige AB: 324, 325. All other images © Pearson Education

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Marketing: creating and capturing customer value

Chapter

one

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Company case – Hennes & Mauritz: challenging the marketing orthodoxy

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What is marketing?

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Understanding the marketplace and customer needs

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Designing a customer-driven marketing strategy

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Building customer relationships

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Capturing value from customers

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The changing marketing landscape

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Company case – Glassdoor.com: taking the evaluation approach from consumer markets to the labour market

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Company case – Sustainable business in non-sustainable environments: TeliaSonera’s challenging efforts to contribute to a sustainable society

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The main focus of this book: big, complex organisations

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Company case – Adminicon: a small business selling services to big corporations

▲­

Mini contents

Source: Courtesy of Acne Studios

Chapter preview In this chapter, we introduce you to the basic concepts of marketing. Simply put, marketing is managing profitable customer relationships. The aim of marketing is to create value for customers and to capture value from customers in return. We discuss the five steps in the marketing process. Finally, we discuss the major trends and forces affecting marketing in this age. Understanding these basic concepts and forming your own ideas about what they really mean to you will give you a solid foundation for all that follows in the book. First, we’ll take a look at Hennes & Mauritz, one of the world’s leading fashion brands.

Learning objectives After reading this chapter, you should be able to: 1 Define marketing and outline the steps in the marketing process. 2 Explain the importance of understanding customers and the marketplace, and identify the five core marketplace concepts. 3 Identify the key elements of a customer-driven marketing strategy and discuss the marketing management orientations that guide marketing strategy. 4 Discuss customer relationship management and identify strategies for creating value for ­customers and capturing value from customers in return. 5 Describe the major trends and forces that are changing the marketing landscape in this age of relationships.

 

Company case hennes & Mauritz: challenging the marketing orthodoxy Let’s start with a good story about marketing in action. The Swedish firm Hennes & Mauritz (H&M), the world’s second largest fashion retailer after Inditex Group with Zara, has developed many of the great marketing insights you will learn about in this book. It all started in Vasteras, where, a few years after the Second World War, Erling Persson, inspired by a trip to the US, established the first store. Selling women’s clothing, it was called Hennes, Swedish for ‘hers’. The business idea at the time was to sell fashionable pieces of high-quality clothing at attractive prices – and H&M, like many other successful companies, has largely stayed with this idea since its inception. In 1968, Persson acquired a hunting equipment store in Stockholm called Mauritz Widforss. Included in the inventory was a supply of men’s clothing, prompting Persson to expand into menswear. Accordingly, he renamed the store Hennes & Mauritz, later often abbreviated to H&M. The Persson family has remained at the heart of H&M during its phenomenal expansion. Erling ’s son Stefan became CEO in 1990 and then chairman of the board in 1998. Rolf Eriksen became CEO in 2000 and Stefan’s son, Karl-Johan, took over the CEO role in 2009 with father Stefan still chairman of the board. H&M started its international expansion early on, and ever since has grown consistently. Its internationalisation strategy was to start with countries culturally similar to Sweden – in accordance with the Uppsala internationalisation model you will learn about in Chapter  12 – and then gradually expanded to new countries and continents. Beginning in the mid1960s, H&M’s expansion accelerated in intensity over time – though it never became too rapid. It was not until the 1990s that the first stores opened in Finland, France, Belgium, Austria, Spain and the Netherlands. By the end of the decade H&M’s stores could be found all over Europe. The first US stores opened in New York, on 5th Avenue and 51st Street, in March 2000. The chosen US locations reflect perfectly H&M’s very successful marketing channel strategy, which focuses on city centres with lots of fashion-interested passers-by. Fashion retailing, like many other industries, has traditionally been associated with expensive, upmarket clothing being sold in city centres while cheap clothing is sold at shopping malls and outlets far from the city centre. If H&M had decided to establish their stores in areas with low rental costs, as traditional wisdom might suggest would be the right strategy for a budget retailer, it would have an entirely different customer profile and probably a weaker brand perception. H&M frequently appears in fashion magazines like Cosmopolitan, Vogue, Elle and Marie Claire – and this is ultimately because the very attractive locations provide a direct route to city-centre customers. And fashion trends are largely created in city centres. Fifteen years after the first US store opened, H&M had almost 4,000 stores worldwide and more than 300 stores in the USA. The growth has continued and H&M has created a franchising model to secure expansion in countries where direct store ownership is difficult or impossible – however, the ambition to own the stores remains. In the last decade, H&M has thus succeeded in expanding to Australia, Dubai, Kuwait, Israel, Hong Kong, China, Russia, Indonesia, Singapore, Jordan, and many other countries. Soon after H&M was created, it started selling cosmetics, and now offers a mixture of H&M-labelled products and products from well-known brands, e.g. Nivea, L’Oréal and Elnett. Perhaps inspired by its competitor Zara, H&M started selling home furnishings in 2009, but this represents a very small part of its sales.

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Chapter 1 Marketing: creating and capturing customer value

H&M operates six brands – H&M, Monki, COS, & Other Stories, Weekday and Cheap Monday. Through offering a variety of stores, more customer segments could be reached and the price level could be adjusted to maximize profit opportunities. The image of Sweden as a country is an asset in H&M’s expansion. There are lots of tensions between countries and, at times, US firms suffer an image disadvantage, the country of origin being a symbol for commercialism, quarter-by-quarter capitalism, lack of sustainability, and making use of every opportunity to source materials and products at the lowest price, regardless of location, environmental impact and co-worker rights. These, at any rate, are the criticisms of the anti-consumerism movement. Popular culture can also have an impact on the success of establishing a company in a new market area, and during their peak in the mid- to late 1970s, Swedish pop group ABBA was nowhere as popular as in Australia, something that could well help H&M to win over the hearts and minds – and wallets – of consumers in this vast but sparsely populated country. H&M opened its first store in Australia in 2014. Although a certain degree of diversification in terms of brands and products has taken place, in future the major proportion of H&M’s turnover is still likely to come from the physical fashion stores. The H&M stores with their great locations, generous opening hours, appealing fashion products, attractive pricing and high turnover of goods sold are the essence of the firm’s success story. And this last point is of particular importance: H&M stores get new goods several times a week (frequency depends on the store size and turnover). Fast fashion is quite a new phenomenon. H&M, like an increasing number of its competitors (with Zara as one of the most significant examples), applies the fast fashion principle, meaning that lead times are as low as two to three weeks. To accomplish such short lead times, it is necessary to adopt a number of lean retailing practices and to develop strong supply chain partnerships between retailers and manufacturers. This flexibility is sometimes called quick response. For quick response to work, two principles are crucial. First, it demands that products move forward, along the supply chain from manufacturer to retailer, as quickly as possible. When an order is placed, the ordered items must be manufactured and distributed to the stores within a short timeframe. Second, the fast movement of information back along the supply chain is crucial, to make sure that information on consumer preferences is properly transmitted, in order to identify and appropriately respond to trends within the market. Computer-aided design and batch or modular manufacturing, where small batches of a diverse range of garments are manufactured rather than the traditional long production runs of one garment type, have contributed to replacing the economies of scale with the economics of scope. Thus, the combination of speed and flexibility has created a new situation in the fashion market: that of economies of scale in retailing, often labelled fast fashion, rather than in manufacturing. H&M has the client relations, it has an H&M store card and it has rapid access to all the customers who visit the store regularly to see whether there are any new fashion items available. And this happens one or more times a week, not along the traditional industry lines of a spring and an autumn collection. This is a retailer’s dream, and the quick response principle makes sure this advantage is sustainable. H&M will continue to provide new products on a regular basis; it is an integrated part of the business model. Since H&M owns almost all of its stores, price reductions and campaigns are under its control and can be run without giving an impression of desperate discounting. Fashion styles change quickly in the contemporary consumption culture – therefore, having the ability to respond quickly to changes in consumer preferences, and going beyond that by providing new products that consumers haven’t even thought of, is likely also to be an advantage in the future. Despite its huge success – with remarkably high growth, particularly since the early 1990s – H&M is facing challenges. More recently, sustainability issues have been addressed by various stakeholders and the fast fashion concept applied by, among others, H&M and Inditex Group, has been questioned. Glaring media headlines about how workers making mobile phones are committing suicide, about how horse

6

Marketing: creating and capturing customer value

meat is being sold as beef, or about how those making clothes for H&M in factories in Cambodia are earning the equivalent of SEK 3 per hour reach today’s critical consumers promptly. When well-known and profitable companies like Apple and H&M show themselves to be acting in a manner that does not promote sustainability and human rights, this becomes a rewarding subject to write about. This adds to a general criticism towards companies which, to a certain degree, exploit cheap labour opportunities in the third world. A long-term problem for H&M and many other companies is that their business model is based on continuously squeezing costs, in due course creating unsustainable conditions for suppliers. This criticism could be applied to Wal-Mart, ICA, IKEA, Indiska and many other companies that we regularly buy from. On the other hand, companies like H&M create jobs and development in low-wage countries so the picture of constant cost-cutting efforts creating a breeding ground for unsustainable conditions at subcontractors’ premises is a bit one-sided. The emergence and growth of grassroots-driven information, whereby critical consumers create and manage the information flow, not least via social media and alternative not-for-profit media channels, is pushing companies into strengthening their sustainability efforts. In the case of H&M, for instance, cotton increasingly comes from more sustainable sources and it is clear that H&M seems to be genuinely interested in sustainability, although it could be questioned whether the efforts so far are substantial or incremental. H&M has taken this criticism seriously, something that does not eliminate the fact that the consumption of fast fashion might be harmful for society in the long run. Since 2002, H&M issues a yearly sustainability report and in recent years, the sustainability efforts have been intensified.

Source: H&M Sweden

7

Chapter 1 Marketing: creating and capturing customer value

Questions 1 What are the main elements of the H&M success story? Don’t hesitate to add elements that are not treated in the text. 2 Is there anything you would have done differently, had you had the opportunity to design H&M’s strategies? 3 Do you think H&M will have the opportunity to grow in the future? Explain your reasoning. 4 What are the main threats and opportunities to H&M’s future success? 5 What do you think about the potential of value-for-money fashion clothing in the future? 6 Where do you think the discussion on sustainability will end up? Sources: www.hm.com; Trevor Hopper, Robert Scapens and Deryl Northcott, Issues in Management Accounting, Ch. 2 (Pearson, 2007); Mikael Ottosson and Anders Parment, Sustainable Marketing (Lund: Studentlitteratur, 2015).

Source: H&M Sweden

Today’s successful companies have one thing in common: like Hennes & Mauritz (H&M), they are strongly customer focused and heavily committed to marketing. These companies share a passion for understanding and satisfying the needs of their customers. They motivate everyone in their organisations to help build lasting customer relationships based on creating value. They understand the importance of marketing intelligence and taking social responsibility, including being an ideal employer.1 After all, great customer service is a defining characteristic of most companies that enjoy sustainable profitability and growth.2

8

What is marketing?

What is marketing? Marketing, more than any other business function, deals with customers. Although we will soon explore more detailed definitions of marketing, perhaps the simplest definition is this one: Marketing is managing profitable customer relationships. The twofold goal of m ­ arketing is to attract new customers by promising superior value and to keep and grow current ­customers by delivering satisfaction. These two goals cannot be separated, and it’s not easy to divide c­ ustomers into ‘current’ and ‘new’ categories. For instance, customers may stay with a ­product brand but change retailer, or vice versa; companies undergo mergers and acquisitions, ­meaning customers may not know the owner behind a brand; and customers may change brand and then later change back again. A frequent business traveller may be on maternity or paternity leave for 12 months but still remain a key customer, even though no or few flights are ­undertaken in a year. Stopping their frequent flyer plan would be a bad move and might undermine the customer relationship. All in all, making the distinction between existing and new c­ ustomers is becoming increasingly difficult. However, one thing is certain: consumers remember bad experiences and they also remember extraordinary service. H&M has become one of the world’s leading clothing retailers by focusing on customer value – good design for a decent price. IKEA did the same thing with home furniture and accessories. Uber has challenged the dominating taxi business and in early 2015, the n ­ umber of Uber contracted cars in New York City surpassed the number of Yellow Cabs. These ­companies apply genuinely customer-oriented approaches, operate profitable business models and do not hesitate to break with industry norms. H&M challenged the accepted industry wisdom, which had traditionally suggested that premium brand clothing should be sold in city centres and cheap clothing should be sold in shopping malls and outlets. H&M instead offered nicely designed clothing in appealing locations at attractive, or even low, prices. IKEA made home furnishing a DIY (do-it-yourself) activity – prices came down and consumers realised that ­outfitting your home doesn’t have to cost a fortune. IKEA has made a major contribution to the current low price of home furniture. Although its innovativeness has been questioned recently, Apple made a great achievement by defining itself beyond the traditional consumer electronics industry. The well-designed and emotionally appealing iPhone and iPad products will be remembered as masterpieces of great customer orientation. Accomplishments in marketing relate not only to products, but to services too. Scandinavian architecture is well known around the globe and successful examples are numerous, including work by Alvar Aalto (a Finn), Jorn Utzon (a Dane, the main architect of the Sydney Opera House), Arne Jacobsen (a Dane) and Ralph Erskine (British-Swedish, architect of the Greenwich Millennium Village). Skype and Spotify are other great marketing examples with their origin in Sweden and Scandinavia. Good marketing is critical to the success of every organisation. No matter where they’re based, large for-profit firms such as H&M, IKEA, Volkswagen, Toyota, Radisson, Google, Toyota, Lidl, and L’Oréal use marketing. Not-for-profit organisations such as colleges, hospitals, museums, symphony orchestras, political parties and even churches and unions are increasingly engaging in marketing and many museums are very active in the social media channels. You already know a lot about marketing – it’s all around you. Marketing comes to you in the good old traditional forms: you see it in the abundance of products at your nearby shopping mall and in the advertisements that fill your TV screen, spice up your magazines, or pile through your letterbox. But in recent years, marketers have assembled a host of new marketing approaches that include imaginative websites, internet forums, social networks, and increasingly interactive mobile phones. These new approaches aim to do more than just blast out messages to the masses. They aim to reach you directly and personally. Look at how Google combines a strategy of finding new ways of using the internet to facilitate the everyday life of consumers with being very commercial and profitable. In some countries, Google is ranked as the number one ideal employer among students, thus reflecting an image as well as a message 9

Chapter 1  Marketing: creating and capturing customer value

The Opera House in Sydney is a great example of Scandinavian architecture that contributes to the perception of Scandinavian countries being good at design, architecture and other non-product-oriented services. Source: Pearson Education Ltd

to society: providing excellent services to consumers creates and captures customer value. Today’s marketers want to become a part of your life and to enrich your experiences of their brands – Google, Spotify, H&M and IKEA are great examples of how this may work. There is much more to marketing than meets the consumer’s casual eye. Behind it all is a massive network of people and activities competing for your attention and purchases. This book will give you a complete introduction to the basic concepts and practices of today’s marketing with emphasis on Swedish companies and how they compete in domestic and international markets. In this chapter, we begin by defining marketing and the marketing process.

Marketing defined

Marketing – The process by which companies create value for customers and build strong customer relationships in order to capture value from customers in return.

10

Selling and advertising – which are generally seen as core elements in marketing – are only the tip of the marketing iceberg. Today, marketing must be understood not in the old sense of making a sale – ‘telling and selling’ – but in the new sense of satisfying customer needs. If the marketer understands consumer needs, develops products that provide superior customer value and prices, and distributes and promotes them effectively, these products are likely to sell easily. In fact, according to management guru Peter Drucker, ‘The aim of marketing is to make selling unnecessary.’3 In other words, great marketing creates an automatic demand for the products. Selling and advertising are only part of a larger ‘marketing mix’ – a set of marketing tools that work together to satisfy customer needs and build customer relationships. Broadly defined, marketing is a social and managerial process by which individuals and organisations obtain what they need and want through creating and exchanging value with others. In a narrower business context, marketing involves building profitable, value-laden exchange relationships with customers. Hence, we define marketing as the process by which companies create value for customers and build strong customer relationships in order to capture value from customers in return.4

The marketing process Figure 1.1 presents a simple five-step model of the marketing process. In the first four steps, companies work to understand consumers, create customer value and build strong customer

Understanding the marketplace and customer needs

Create value for customers and build customer relationships Understand the marketplace and customer needs and wants

Design a customer-driven marketing strategy

Construct an integrated marketing programme that delivers superior value

Capture value from customers in return Build profitable relationships and create customer delight

Capture value from customers to create profits and customer equity

Figure 1.1  A simple model of the marketing process

relationships. In the final step, companies reap the rewards of creating superior customer value. By creating value for consumers, they in turn capture value from consumers in the form of sales, profits and long-term customer equity. In this chapter, we will review each step but focus more on the customer relationship steps – understanding customers, building customer relationships and capturing value from customers. In Chapter 2, we’ll look more deeply into the second and third steps – designing marketing strategies and constructing marketing programmes.

Understanding the marketplace and customer needs As the first step in the marketing process, companies must understand customer needs and wants and the marketplace within which they operate. We now examine five core customer and marketplace concepts: (1) needs, wants, and demands; (2) market offerings (products, services and experiences); (3) value and satisfaction; (4) exchanges and relationships; and (5) markets.

Customer needs, wants and demands The most basic concept underlying marketing is that of human needs. Human needs are states of felt deprivation. They include basic physical needs for food, clothing, warmth and safety; social needs for belonging and affection; and individual needs for knowledge and self-expression. These needs were not created by marketers; they are a basic part of the human make-up. Wants are the form human needs take as they are shaped by culture and individual personality. An Italian or German needs food but wants pasta or bratwurst. A person in Norrland needs food but wants roast reindeer. Wants are shaped by one’s society and are described in terms of objects that will satisfy needs. When backed by buying power, wants become demands. Given their wants and resources, people demand products with benefits that add up to the most value and satisfaction.5 Outstanding marketing companies go to great lengths to learn about and understand their customers’ needs, wants and demands. They conduct consumer research and analyse mountains of customer data. Their people at all levels – including top management – stay close to customers. The former CEO (until 2008) of Swedish telecommunications company Tele2, Lars-Johan Jarnheimer, suggested that their great customer orientation is based on the policy that all bosses, including Jarnheimer himself, must work in the customer care department two to four days a year. If not, they forego their bonus. That’s an excellent way of staying close to the customers, according to Jarnheimer.6 A similar policy is pursued by Southwest Airlines. All senior executives handle bags, check in passengers and serve as flight attendants once every quarter.

Needs – States of felt ­deprivation.

Wants – The form human needs take as shaped by culture and individual personality. Demands – Human wants that are backed by buying power.

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Chapter 1  Marketing: creating and capturing customer value

Market offerings – products, services and experiences Market offering – Some combination of products, services, information or experiences offered to a market to satisfy a need or want.

Marketing myopia – The mistake of paying more attention to the specific products a company offers than to the benefits and experiences produced by those products.

Consumers’ needs and wants are fulfilled through market offerings – some combination of products, services or experiences offered to a market to satisfy a need or want. Market ­offerings include services – activities or benefits offered for sale that are essentially intangible and do not result in the ownership of anything. In modern economies, services represent an increasing part of the GDP (gross domestic product) at the cost of physical products. Also in companies in traditional manufacturing, e.g. Siemens and ABB, the percentage of the ­value-adding that may be derived from services is increasing. Examples of services include banking, airlines, hair-dressing, hotels and home cleaning services. In fact, every company and organisation must add value for their customers. A travel agency must save time, simplify the search for a particular combination of travel requirements or offer unique products to justify their very existence. Not all travel agencies offer any of these. The same holds for companies in other industries. More broadly, market offerings also include other entities, such as people, places, information, ideas, churches and non-governmental organisations (NGOs). Many cities, for example, pay a lot of attention to branding. One such, Nyköping, a municipality of around 50,000 citizens, has its own marketing department. They run marketing campaigns to recruit inhabitants, particularly from the Stockholm area, which is one hour (100 km) away from Nyköping. They have also been engaged in, and criticised for, co-branding campaigns with Ryanair. A major co-branding project cost Nyköping SEK 55 million over ten years, but it has generated a lot of publicity and industrial activity in the Nyköping area. ‘200 jobs today, 1,000 jobs tomorrow is just the beginning,’ said Goran Forsberg, mayor of Nyköping.7 The campaign and marketing attitude have had a positive effect. Nyköping now attracts more people than it loses. In 1999 the total migration balance was +175 people, in 2004 234 people, in 2009 274 people, and in 2014 it reached 470 people.8 The positive migration balance is pronounced among people aged 25 to 36, which is one of the main target groups of the city’s branding campaign.9 Many sellers make the mistake of paying more attention to the specific products they offer than to the benefits and experiences produced by these products. These sellers suffer from marketing myopia, a concept originally articulated by Theodor Levitt, who half a decade ago suggested that railway companies are not in the railway business, but in the transportation business. Levitt suggests that companies and sellers suffering from marketing myopia are so taken with their products that they focus only on existing wants and lose sight of underlying customer needs.10 They forget that a product is only a tool to solve a consumer problem. A manufacturer of 6 mm drill bits may think that the customer needs a drill bit. But what the customer really needs is a 6 mm hole. These sellers will have trouble if a new product comes along that serves the customers’ needs better or less expensively, thus creating a competitive advantage that will turn consumers’ attention away to the new solution. The customer will have the same need but will want the new product of the competitor. Smart marketers look beyond the attributes of the products and services they sell. By ­orchestrating several services and products, they create brand experiences for consumers.

Customer value and satisfaction Consumers usually face a broad array of products and services that might satisfy a given need. How do they choose among these many market offerings? Customers form expectations about the value and satisfaction that various market offerings will deliver and buy accordingly. ­Satisfied customers buy again and tell others about their good experiences. Dissatisfied ­customers often switch to competitors and disparage the original product to others. Marketers must be careful to set the right level of expectations. If they set expectations too low, they may satisfy those who buy, but fail to attract enough buyers. If they raise expectations too high, buyers will be disappointed. Consumers are, and should be, very demanding – that will be good for the company in the long run. Customer value and 12

Understanding the marketplace and customer needs

customer satisfaction are key building blocks for developing and managing customer relationships. We will revisit these core concepts later in the chapter.

Exchanges and relationships Marketing occurs when people decide to satisfy needs and wants through exchange relationships. Exchange is the act of obtaining a desired object from someone by offering something in return. In the broadest sense, the marketer tries to bring about a response to some market offering. The response may be more than simply buying or trading products and services. A social action group wants idea acceptance, a political party wants membership, and an ­amateur theatre company wants an audience. Marketing consists of actions taken to build and maintain desirable exchange r­ elationships with target audiences involving a product, service, idea or other object. Beyond simply ­attracting new customers and creating transactions, the goal is to retain customers and grow their business with the company.

Exchange – The act of obtaining a desired object from someone by offering something in return.

Markets The concepts of exchange and relationships lead to the concept of a market. A market is the set of actual and potential buyers of a product. These buyers share a particular need or want that can be satisfied through exchange relationships. Marketing means managing markets to bring about profitable customer relationships. However, creating these relationships takes work. Sellers must search for buyers, identify their needs, design good market offerings, set prices for them, promote them, and store and deliver them. Activities such as consumer research, product development, communication, marketing channels, pricing and service are core marketing activities. Although we normally think of marketing as being carried on by sellers, buyers also carry on marketing. Consumers do marketing when they search for products, interact with companies, obtain information and make their purchases. Today’s technologies have empowered consumers and made marketing a truly interactive affair – many consumers take the opportunity to give feedback to firms and other consumers by providing information on web forums. It is very common to do so with hotels, and many hotels have hundreds of reviews on the likes of tripadvisor.co.uk, booking.com and hotels.com. Consumers consult this information before booking a hotel for business or leisure travel. An example of consumer power and its contribution to marketing comes in the form of forums and Facebook groups that collect and store information about a particular company. Interactivity is becoming increasingly important as companies need to know more about customers than was the case in the past. Marketers are no longer asking simply ‘How can we reach our customers?’ but also ‘How should our customers reach us?’ and even ‘How can our customers reach each other?’ Only by being customer-oriented and delivering great customer value can the company be sure that what is being said about it contributes to its marketing in a good way. Figure 1.2 shows the main elements of a marketing system. Marketing involves serving a market of final consumers in the face of competitors. The company and competitors research the market and interact with consumers to understand their needs. They then create and send their market offerings and messages to consumers, either directly or through marketing intermediaries. All of the parties in the system are affected by major environmental forces (demographic, economic, physical, ecological, technological, political/legal and social/cultural). Each party in the system adds value for the next level. All of the arrows represent relationships that must be developed and managed. Thus, a company’s success at building profitable relationships depends not only on its own actions but also on how well the entire system serves the needs of final consumers. A food retailer can’t offer lower prices unless its suppliers provide merchandise at low costs, and a premium brand kitchen manufacturer can’t deliver high quality to kitchen buyers unless its dealers provide outstanding sales and service. 13

Chapter 1  Marketing: creating and capturing customer value

Figure 1.2  Elements of a modern marketing system

Company (marketer) Suppliers

Marketing intermediaries

Final users

Competitors

Major environmental forces

Designing a customer-driven marketing strategy Marketing management – The art and science of choosing target markets and building profitable relationships with them.

Once it understands consumers and the marketplace sufficiently, marketing management can design a customer-driven marketing strategy. We define marketing management as the art and science of choosing target markets and building profitable relationships with them. Art emphasises the importance of understanding the marketplace, knowing customers and not forgetting that great marketing is based on feelings and extraordinary competence in understanding the next level – what comes next and what’s beyond the dynamics of the marketplace of today are questions that should be raised. Science emphasises the need for a systematic gathering of knowledge about what is happening in the marketplace, at an applicable level as well as from the latest research. In this respect, it is not only marketing researchers’ findings that may be of interest, but also research from adjacent disciplines, i.e. psychology and economics. The aim of marketing management is to find, attract, keep and grow target customers by creating, delivering and communicating superior customer value. To design a winning marketing strategy, the marketing manager must answer two important questions: What customers will we serve (what’s our target market)? and How can we serve these customers best (what’s our value proposition)? Then, the marketer develops an integrated marketing programme that will actually deliver the intended value to target customers. The marketing programme builds customer relationships by transforming the marketing strategy into action. It consists of the firm’s marketing mix, called the four Ps of marketing: product, price, place and promotion. To deliver on its value proposition, the firm must first create a need-satisfying market offering (product). It must decide how much it will charge for the offering (price) and how it will make the offering available to target consumers (place). Finally, it must communicate with target customers about the offering and persuade them of its merits (promotion). The firm must blend all of these marketing mix tools into a comprehensive integrated marketing programme that communicates and delivers the intended value to chosen customers. We will explore the marketing mix in much more detail in later chapters. We will discuss key marketing strategy concepts briefly here, and then look at them in more detail in the next chapter.

Selecting customers to serve The company must first decide who it will serve. In principal terms, it does this by dividing the market into segments of customers (market segmentation) and selecting which segments it will go after (target marketing). Some people think of marketing management as finding as many 14

Designing a customer-driven marketing strategy

customers as possible and increasing demand. But there are many problems with such a clear take-everything-you-can-get-approach. First, marketing managers know that they cannot serve all customers in every way. By trying to serve all customers, they may not serve any customers well. Instead, the company wants to select only customers that it can serve well and profitably. Second, not all markets are growing, and in static or shrinking markets, growth may still be possible but in many cases it is not likely to be profitable. Expanding market shares from 15 to 20 per cent may imply that margins become wafer-thin. Third, some customers are particularly good for the company’s brand image. The company is likely to benefit in the long run through focusing on this segment although other segments may give a higher short-term profit. This is particularly important for companies in a growth phase which may benefit strongly from focusing on customers who become brand ambassadors, thus generating further sales by being exposed in the right places and social contexts. Fashionistas, e.g. Emma Watson, Anna Ewers or Kaia Gerber, may influence many thousands of young consumers particularly to buy a piece of clothing, after being spotted by fashion magazines such as Vogue, Marie Claire, Cosmopolitan and Elle. Some marketers may actually seek fewer customers and reduced demand. They came to this conclusion when they realised that a strategy based on mass production was unlikely to be successful. In other cases, where there is excess demand, companies may practise d ­ emarketing to reduce the number of customers or to shift their demand temporarily or permanently. For instance, many power companies now sponsor programmes that help customers reduce their power usage through peak-load control devices, better energy-use monitoring, and heating ­system tune-up incentives. Progress Energy, a privately owned energy company in the south-eastern USA, even offers an Energy Manager on Loan programme that provides school systems and other public customers with a cost-free on-site energy expert to help them find energy-savings opportunities. As there are both cost savings and environmental considerations involved in using the product, there are two strong reasons to use it. Ultimately, marketing managers must decide which customers they want to target and on the level, timing and nature of their demand. Simply put, marketing management is customer management and demand management.

Choosing a value proposition The company must also decide how it will serve targeted customers – how it will differentiate and position itself in the marketplace. A company’s value proposition is the set of benefits or values it promises to deliver to consumers to satisfy their needs. German automaker BMW promises ‘the ultimate driving machine’, whereas the British-made Land Rover lets you ‘Go Beyond’ – to ‘get a taste of adventure, whatever your tastes’. Levi’s promises ‘Quality never goes out of style’ and Adidas ‘Impossible is Nothing’. And with mobile phones, Finland’s Nokia is ‘Connecting People – anyone, anywhere’. Such value propositions differentiate one brand from another, and reflect a company’s ­competitive advantage. Value propositions answer the customer’s question, ‘Why should I buy your brand rather than a competitor’s?’ Companies must design strong value propositions that give them the greatest advantage in their target markets. Unfortunately, too many companies find it difficult to define their value propositions – in a study, two-thirds of car dealers were not able to give a satisfactory definition of competitive advantage or value proposition.11

Marketing management orientations Marketing management wants to design strategies that will build profitable relationships with target consumers. But what philosophy should guide these marketing strategies? What weight should be given to the interests of customers, the organisation and society? Very often, these interests conflict. There are five alternative concepts under which organisations design and carry out their marketing strategies: the production, product, selling, marketing and societal marketing 15

Chapter 1  Marketing: creating and capturing customer value

concepts. To an extent, these concepts reflect the historical development of how companies have been approaching marketing. However, many companies still stay with the marketing philosophies that were predominant a number of decades ago.

The production concept Production concept – The idea that consumers will favour products that are available and highly affordable and that the organisation should t­ herefore focus on improving production and distribution efficiency.

The production concept holds that consumers will favour products that are available and highly affordable. Therefore, management should focus on improving production and distribution efficiency. This concept is one of the oldest orientations that guide sellers. The production concept is still a useful philosophy in some situations but it can lead to marketing myopia. Companies adopting this orientation run a major risk of focusing too narrowly on their own operations and losing sight of the real objective – satisfying customer needs and building customer relationships.

Product concept – The idea that consumers will favour products that offer the most quality, ­performance and features and that the o ­ rganisation should ­therefore devote its energy to making continuous product improvements.

The product concept holds that consumers will favour products that offer the most in ­quality, performance and innovative features. Under this concept, marketing strategy focuses on ­making continuous product improvements. Product quality and improvement are important parts of most marketing strategies. However, focusing solely on the company’s products can also lead to marketing myopia. For example, some manufacturers believe that if they can ‘build a better mousetrap, the world will beat a path to their door’. But they are often rudely shocked. Buyers may be looking for a better solution to a mouse problem, but not necessarily for a better mousetrap. The better solution might be a chemical spray, an exterminating service, or something else that works even better than a mousetrap. Furthermore, a better mousetrap will not sell unless the manufacturer designs, packages and prices it attractively; places it in convenient marketing channels; brings it to the attention of people who need it; and convinces buyers that it is a better product.

The product concept

The selling concept Selling concept – The idea that consumers will not buy enough of the firm’s p ­ roducts unless it ­undertakes a large-scale selling and promotion effort.

Marketing concept – The marketing management philosophy holds that achieving ­organisational goals depends on knowing the needs and wants of target markets and delivering the desired satisfaction better than competitors do.

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Many companies follow the selling concept, which holds that consumers will not buy enough of the firm’s products unless it undertakes a large-scale selling and promotion effort. The selling concept is typically practised with unsought goods – those that buyers do not normally think of buying, such as insurance. These industries must be good at tracking down prospects and selling them on product benefits. Such aggressive selling, however, carries high risks. It focuses on creating sales t­ ransactions rather than on building long-term, profitable customer relationships. The aim often is to sell what the company makes rather than making what the market wants. Many ­consumers have poor experiences of overzealous telesales people, and selling-intensive industries s­ ometimes have a poor reputation. The selling concept assumes that customers who are coaxed into ­buying the product will like it. Or, if they don’t like it, they will possibly forget their ­disappointment and buy it again later. These are usually poor assumptions.

The marketing concept The marketing concept holds that achieving organisational goals depends on knowing the needs and wants of target markets and delivering the desired satisfaction better than competitors do. Under the marketing concept, customer focus and value are the paths to sales and profits. Instead of a product-centred ‘make and sell’ philosophy, the marketing concept is a customer-centred ‘sense and respond’ philosophy. The job is not to find the right customers for your product but to find the right products for your customers. Figure 1.3 contrasts the selling concept and the marketing concept. The selling concept takes an inside-out perspective. It starts with the factory, focuses on the company’s existing products,

Designing a customer-driven marketing strategy

Figure 1.3  The selling and marketing concepts contrasted

and calls for selling and promotion to obtain profitable sales. It focuses primarily on customer conquest – getting short-term sales with little concern about who buys or why. In contrast, the marketing concept takes an outside-in perspective. As Herb Kelleher, Southwest Airlines’ colourful CEO, puts it, ‘We don’t have a marketing department; we have a customer department.’ The marketing concept starts with a well-defined market, focuses on customer needs and integrates all the marketing activities that affect customers. In turn, it yields profits by creating lasting relationships with the right customers based on customer value and satisfaction. Marketing course modules attempt to influence students’ thinking with a marketing concept perspective. Implementing the marketing concept often means more than simply responding to customers’ stated desires and obvious needs. Customer-driven companies research current customers deeply to learn about their desires, gather new product and service ideas, and test proposed product improvements. Such customer-driven marketing usually works well when a clear need exists and when customers know what they want. In many cases, however, customers don’t know what they want or even what is possible. Many consumer electronics products deliver customer value that few would have thought of before the product was launched. Nevertheless, a company that stays close to customers and societal development has the opportunity to understand customer needs even better than customers themselves do and to create products and services that meet existing and latent needs. Companies succeeding with customer-driving marketing are ahead of their customers in developing new products, which requires superior skills in understanding what is going on in the marketplace. And not only in terms of existing products and competitors, but also beyond – in other industries, other markets, thus finding new combinations of customer benefits and features provided by firms outside the traditional industry boundaries.

The societal marketing concept The societal marketing concept questions whether the pure marketing concept overlooks possible conflicts between consumer short-term wants and consumer long-term welfare. Is a firm that satisfies the immediate needs and wants of target markets always doing what’s best for consumers in the long run? The societal marketing concept holds that marketing strategy should deliver value to customers in a way that maintains or improves both the consumer’s and society’s well-being. Consider today’s flourishing bottled water industry. You may view bottled water companies as offering a convenient, tasty and healthy product. Its packaging suggests ‘green’ images of pristine lakes and snow-capped mountains. Yet making, filling and shipping billions of plastic bottles generates huge amounts of carbon dioxide emissions that contribute significantly to global warming. Further, the plastic bottles pose a substantial recycling and solid waste

Societal marketing concept – The idea that a company’s marketing decisions should consider consumers’ wants, the company’s ­requirements, consumers’ long-term interests, and society’s long-term interests.

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Chapter 1  Marketing: creating and capturing customer value

The production of biogas and the use of biogas for buses, trucks and cars harm the ­environment much less than do fossil fuels. Source: Svensk Biogas

disposal problem, particularly in cases where the bottle is non-refundable. Thus, in satisfying short-term consumer wants, the successful bottled water industry may be causing environmental problems that run counter to society’s long-term interests.12 As Figure 1.4 shows, companies should balance three considerations in setting their marketing strategies: company profits, consumer wants and society’s interests. Svensk Biogas supplies biogas, today seen as the fuel that constitutes the highest degree of sustainability for the environment, supply assurance and the economy. Sales of biogas for vehicles (cars, trucks and buses) have increased dramatically over the last decade or so and are still increasing. However, as with most fuel types, the higher the demand, the more ­expensive it becomes for suppliers such as Svensk Biogas to acquire the raw materials needed for producing the fuel, and although production is local and efficient (Svensk Biogas mainly supplies the Ostergotland County with biogas), production and use still harm the environment, so the development of more fuel-efficient vehicles is still a high priority. Vehicles running on biogas are normally converted petrol vehicles. Svensk Biogas is located in the Linköping area and is owned by the Linköping Municipality through Tekniska Verken. In 2014, Svensk Biogas moved its production facilities to Tekniska Verken to draw 18

Building customer relationships

Figure 1.4  Three considerations underlying the societal marketing concept

benefits from co-ordinating the production of biogas and water, the latter being Tekniska Verken’s responsibility. Svensk Biogas is an important cornerstone in profiling Linköping as a sustainable city. Through close co-operation with Linköping University, Svensk Biogas and Linköping are creating a competitive advantage in the development of knowledge about climate-smart solutions.

Building customer relationships The first three steps in the marketing process – understanding the marketplace and ­customer needs, designing a customer-driven marketing strategy, and constructing marketing ­programmes – all lead up to the fourth and most important step: building profitable customer relationships.

Customer relationship management Customer relationship management (CRM) is perhaps the most important concept of modern marketing. Some marketers define customer relationship management narrowly as a customer data management activity. By this definition, it involves managing detailed information about individual customers and carefully managing customer ‘touch-points’ in order to maximise customer loyalty. Well-known examples are the ICA card and the MedMera card, which provide some demographic information on the customer’s profile and detailed information about purchase transactions. We will discuss this narrower CRM activity in Chapter 4 when dealing with marketing information. Most marketers, however, give the concept of customer relationship management a broader meaning. In this broader sense, customer relationship management is the overall process of building and maintaining profitable customer relationships by delivering superior customer value and satisfaction. It deals with all aspects of acquiring, keeping and growing customers.

Relationship building blocks: customer value and satisfaction The key to building lasting customer relationships is to create superior customer value and satisfaction. Satisfied customers are more likely to be loyal customers and to give the company a larger share of their business. Attracting and retaining customers can be a difficult task. Customers often face a ­bewildering array of products and services from which to choose, and in recent decades, customer ­loyalty has decreased simultaneously with the ever-expanding range on offer.13

Customer relationship management  Managing detailed information about individual customers and carefully managing customer ‘touch points’ to maximise customer loyalty.

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Chapter 1  Marketing: creating and capturing customer value

Customer-perceived value – The customer’s evaluation of the difference between all the benefits and all the costs of a marketing offer relative to those of competing offers.

Customer satisfaction – The extent to which a p ­ roduct’s perceived ­performance matches a buyer’s ­expectations.

Consumers can enjoy a premium lunch experience at prices ranging from SEK 385–95 by visiting a premium ­restaurant at lunchtime, as in the case of Fredsgatan 12, a restaurant owned by Melker Andersson and Danyel Couet. (www.f12.se) Source: Courtesy of F12/ ­Wolfgang Kleinschmidt

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In general terms, a customer is likely to buy from the firm that offers the highest customer-­ perceived value – the customer’s evaluation of the difference between all the benefits and all the costs of a market offering ­relative to those of competing offers. Not all customers make consistently rational decisions when buying – we will discuss that further in Chapter 5 – but as a general rule, it’s reasonable to assume that consumers try to maximise the value that products they buy create. Customers often do not judge values and costs ‘accurately’ or ‘objectively’. They act on perceived value. For example, compared with a cheap SEK 60 lunch at McDonald’s, does a premium lunch in an exclusive restaurant for, say, SEK 130 provide superior taste and a premium experience in terms of location and indoor environment? If so, is it worth the considerably higher price? It’s all a matter of personal value perceptions but for many consumers the answer is yes. Customer satisfaction depends on the product’s perceived performance relative to a buyer’s expectations. If the product’s performance falls short of expectations, the customer will be dissatisfied. If performance matches expectations, the customer will be satisfied. If performance exceeds expectations, the customer will be highly satisfied or delighted. Outstanding marketing companies go out of their way to keep important customers satisfied. Studies show that higher levels of customer satisfaction lead to greater customer loyalty, although loyalty in general terms has decreased in recent decades in light of an increasing supply of products and services, and changed consumer attitudes. Customer expectations these days are high and smart companies aim to delight customers by promising only what they can deliver, and then delivering more than they promise. Delighted customers are not only likely to make repeat purchases, but they will also become willing marketing partners and brand ambassadors who will spread the word about their good experiences to others. So even though some delighted customers may try another company the next time for variety, their high level of satisfaction will be communicated to people they know, on website forums, in customer surveys and in their day-by-day interactions. For companies interested in delighting customers, exceptional value and service are more than a set of policies or actions – they are a company-wide attitude, an important part of the overall company culture. For example, year after year, Ritz-Carlton, an operator of luxury hotels in 26 countries, ranks at or near the top of the hospitality industry in terms of customer satisfaction. Its passion for satisfying customers is summed up in the company’s credo, which promises that its luxury hotels will deliver a truly memorable experience – one that

Building customer relationships

‘enlivens the senses, instils well-being, and fulfils even the unexpressed wishes and needs of our guests’. Check into any Ritz-Carlton hotel around the world, and you’ll be amazed by the company’s fervent dedication to anticipating and meeting even your slightest need. Without ever asking, they seem to know that you want a king-size bed, a non-allergenic pillow and breakfast with cappuccino in your room. Each day, hotel staffers – from those at the front desk to those in maintenance and housekeeping – discreetly observe and record even the smallest guest preferences. Then, every morning, each hotel reviews the files of all new arrivals who have stayed previously at a Ritz-Carlton and prepares a list of suggested extra touches that might delight each guest. And once they identify a special customer need, the Ritz-Carlton employees go to legendary extremes to meet it. For example, to serve the needs of a guest with food allergies, a Ritz-Carlton chef in Bali located special eggs and milk in a small grocery store in another country and had them delivered to the hotel. As a result of such great customer service, 95 per cent of departing guests report that their stay has been a truly memorable experience. Despite strong competition, more than 90 per cent of RitzCarlton’s delighted customers return.14

However, although the customer-centred firm seeks to deliver high customer satisfaction relative to competitors, it does not attempt to maximise customer satisfaction. A company can always increase customer satisfaction by lowering its price or increasing its services, but this may result in lower profits. Thus, the purpose of marketing is to generate customer value profitably. This requires a very delicate balance: the marketer must continue to generate more customer value and satisfaction but not ‘give away the house’. The nature of the target market determines to what extent a company is building real relationships with customers. At one extreme, a company with many low-margin customers may seek to develop basic relationships with them, sometimes by using a CRM system, which doesn’t mean the company has real relationships with its customers. For example, ICA does not phone or call on all of its consumers to get to know them personally. Instead, it creates relationships through brand-building TV commercials, advertising, sales promotions, and its monthly magazine. At the other extreme, in markets with few customers and high margins, sellers want to create full partnerships with key customers, a concept that is particularly strong in business-to-business markets. Today, many companies offer frequency marketing programmes that reward customers who buy frequently or in large amounts. Kicks and Sephora offer discount vouchers, airlines offer frequent-flyer programmes (e.g. SAS’s EuroBonus or Lufthansa’s Miles and More), and hotels give room upgrades to their frequent guests (e.g. Marriott Rewards, Scandic Friends or Hilton HHonors).

The changing nature of customer relationships Significant changes are occurring in the ways in which companies are relating to their customers. Yesterday’s big companies focused on mass marketing to all customers at arm’s length. Today’s companies are building deeper, more direct and more lasting relationships with more carefully selected customers. Here are some important trends in the way companies and customers are relating to one another.

Relating with more carefully selected customers Few firms today – mainly those providing public transport, newspapers and generic groceries – still practise true mass marketing, i.e. selling in a standardised way to any customer who comes along. Instead, most are now targeting fewer, more profitable customers. Once they identify 21

Chapter 1  Marketing: creating and capturing customer value

profitable customers, firms can create attractive offers and special handling to capture these customers and earn their loyalty. But what should the company do with unprofitable customers? If it can’t turn them into profitable ones, it may even want to ‘fire’ customers who are too unreasonable or who cost more to serve than they are worth.15

Relating more deeply and interactively Beyond choosing customers more selectively, companies are now relating with chosen customers in deeper, more meaningful ways, using interactive approaches that help build targeted, two-way customer relationships. However, new communications tools also create challenges. They give consumers greater power and control. Today’s consumers have more information than ever before, and they have a wealth of platforms for airing and sharing their views with other consumers. And more than ever before, consumers can choose the brand conversations and exchanges in which they participate. Greater consumer control means that, in building customer relationships, companies can no longer rely on marketing by intrusion. They must practise marketing by attraction – creating market offerings and messages that involve consumers rather than interrupt them. In this way, consumer-generated marketing has become a significant marketing force.

Partner relationship management When it comes to creating customer value and building strong customer relationships, today’s marketers know that they can’t go it alone. They must work closely with a variety of ­marketing partners. In addition to being good at CRM, marketers must also be good at partner ­relationship management. Major changes are taking place in how marketers partner with ­others inside and outside the company to jointly bring more value to customers. The old thinking was that marketing is done only by marketing, sales and customer-support people. However, in today’s more connected world, every functional area can interact with customers, especially electronically. A modern approach implies that all employees are seen as brand ambassadors, and if they are satisfied and happy, it will give the company an enormous advantage in competition with other firms. David Packard, the late co-founder of Hewlett-­Packard, wisely said, ‘Marketing is far too important to be left only to the marketing department.’16 Changes are also occurring in how marketers connect with their suppliers, distributors, retailers, channel partners and others who connect the company to its buyers, even competitors. Most companies today are networked companies, relying heavily on partnerships with other firms. The supply chain describes a longer channel, stretching from raw materials to components to final products that are carried to final buyers. For example, the supply chain for a piece of clothing consists of suppliers of fabric, the clothing manufacturer, and the distributors, retailers and others who sell the clothing. Through supply chain management, many companies today are strengthening their connections with partners all along the supply chain. They know that their fortunes rest not just on how well they perform; success at building customer relationships also rests on how well their entire supply chain performs against competitors’ supply chains, cf. the H&M company case on fast fashion at the beginning of the chapter. These companies don’t just treat suppliers as vendors and distributors as customers. They treat both as partners in delivering customer value.

Capturing value from customers The first four steps in the marketing process outlined in Figure 1.1 involve building customer relationships by creating and delivering superior customer value. The final step involves capturing value in return in the form of current and future sales, market share and profits. 22

Capturing value from customers

By creating superior customer value, the firm creates highly satisfied customers who stay loyal and buy more. This, in turn, means greater long-term returns for the firm. Here, we discuss the outcomes of creating customer value: customer loyalty and retention, share of market and share of customer, and customer equity.

Creating customer loyalty and retention Good customer relationship management creates customer delight. In turn, delighted customers remain loyal and talk favourably to others about the company and its products. Studies show big differences in the loyalty of customers who are less satisfied, somewhat satisfied and completely satisfied. Even a slight drop from complete satisfaction can create an enormous drop in loyalty. Thus, the aim of customer relationship management is to create not just customer satisfaction, but also customer delight.17 Losing a customer means losing more than just a single sale. It means losing the entire stream of purchases that the customer would make over a lifetime of patronage, in addition to the image losses that consumers may express if the company doesn’t live up to expectations. Unhappy customers are likely to influence others not to buy from the under-delivering company. Customer lifetime value is the value of the entire stream of purchases that the customer would make over a lifetime of patronage. Lexus, for example, estimates that a single satisfied and loyal customer is worth more than $600,000 in lifetime sales.18 Thus, working to retain and grow customers makes good economic sense. In fact, companies lose money on specific transactions but still benefit greatly from a long-term relationship. Customer delight creates an emotional relationship with a brand, not just a rational preference. And that relationship keeps customers coming back. But what about Ryanair and other budget brands that obviously do things that are not genuinely customer-oriented? They could offer food for free; introduce a frequent flyer programme; and help customers when delays cause them to miss the transfer flight.19 However, all these measures would increase Ryanair’s cost base, thus making it impossible to maintain the low prices. Keeping the cheap tickets as a competitive advantage has been a successful strategy and in line with what the customer wants. So no-frills strategies might be as customer-oriented as the traditional approach: to offer everything that competitors offer and customers want, to avoid ending up in a situation with one or more competitive disadvantages. Regardless of the approach applied by a company, there needs to be a substantial cost control. Those days when high-margin, premium-brand companies could spend money in many areas to ‘strengthen the brand’, ‘build customer relations’ or ‘know what is going on in the marketplace’ are gone. Every company needs to spend money wisely and, even here, rules and principles may save administrative costs for the company at the same time as they provide an advantage for the customer. Some companies in the travel industry have understood this. In 2003, Statens Jarnvagar (Swedish major, state-owned railway carrier) introduced a rule whereby they paid customers compensation for late train arrivals. The system is now automated and calculates the compensation type and amount based on the traveller’s ticket rules and the reason for the delay – factors beyond SJ’s control give less compensation.

Customer lifetime value – The value of the entire stream of purchases a customer makes over a ­lifetime of patronage.

Growing share of customer Beyond simply retaining good customers to capture customer lifetime value, good customer relationship management can help marketers to increase their share of customer – the share they get of the customer’s purchasing in their product categories. Banks want to sell retirement funds and insurances to increase their ‘share of wallet’. Supermarkets and restaurants want to get more ‘share of stomach’. In today’s saturated markets particularly, it is difficult to expand the customer base, but expanding the current customers’ spending may serve the same goal: to grow and become more profitable. To increase share of customer, firms can offer greater variety to current customers. Or they can create programmes to cross-sell and up-sell in order to market more products and

Share of customer – The portion of the c­ ustomer’s purchasing that a company gets in its product ­categories.

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Chapter 1  Marketing: creating and capturing customer value

services to existing customers. For example, Amazon, originally an online bookseller, soon diversified into selling DVDs, MP3 downloads, software, video games, electronics, apparel, furniture, toys, and jewellery. Amazon now produces consumer electronics – notably, Amazon Kindle e-book readers, Fire tablets, Fire TV and Fire Phone – and is a major provider of cloud ­computing services. Based on each customer’s purchase history, the company recommends related products that might be of interest. This recommendation system may influence up to 30 per cent of all sales.20 In these ways, Amazon captures a greater share of each customer’s spending budget. Amazon even helps customers sell their used books by letting them advertise for free – customers looking for a new book are also informed about used books provided by other Amazon users.

Building customer equity Customer equity – The total combined customer lifetime values of all of the company’s customers.

Companies want not only to create profitable customers, but to ‘own’ them for life, earn a greater share of their purchases and capture their customer lifetime value. The ultimate aim of customer relationship management is to produce high customer equity.21 Customer equity is the total combined customer lifetime values of all of the company’s current and potential customers. Clearly, the more loyal the firm’s profitable customers, the higher the firm’s customer equity. Customer equity may be a better measure of a firm’s performance than current sales or market share. Whereas sales and market share reflect the past, customer equity suggests the future. Consider the case of Swedish truck producer Volvo. In 2008, Volvo Trucks returned its best profit in history. However, sales in quarter 3 of 2008 fell by an incredible 99.7 per cent. Volvo said it received 115 order bookings for heavy trucks in Europe in the quarter, down from 41,970 trucks a year earlier.22 Profitability suggested a healthy and successful company; the number of order bookings, however, was nothing short of a catastrophe. In this case, the financial crisis was the major reason for the catastrophic sales numbers. However, it illustrates an inherent problem in using historic sales and loyalty information: the future may be very different from the past, although seldom is it as extreme as in this case.

Building the right relationships with the right customers Companies should manage customer equity carefully. They should view customers as assets that need to be managed and maximised. But not all customers, not even all loyal customers, are good investments. Surprisingly, some loyal customers can be unprofitable, and some disloyal customers can be profitable.23 Which customers should the company acquire and retain? The company can classify customers according to their potential profitability and manage its relationships with them accordingly. Figure 1.5 classifies customers into one of four relationship groups, according to their profitability and projected loyalty.24 Each group requires a different relationship management strategy. ‘Strangers’ show low potential profitability and little projected loyalty. There is little fit between the company’s offerings and their needs. The relationship management strategy for these customers is simple: don’t invest anything in them. ‘Butterflies’ are potentially profitable but not loyal. There is a good fit between the company’s offerings and their needs. However, like real butterflies, we can enjoy them for only a short while and then they’re gone. An example is stock market investors who trade shares often and in large amounts but who enjoy hunting out the best deals without building a regular relationship with any single brokerage company. The same holds for consumers who see haggling with the price as a sport – whether they are buying an insurance or a newspaper subscription (e.g. consumers who regularly switch between Dagens Nyheter and Svenska Dagbladet depending on the lowest price available at the time), or petrol for the car. Efforts to convert butterflies into loyal customers are rarely successful. Instead, the company should enjoy the butterflies while it can. It should use promotional blitzes to attract them, create satisfying and profitable transactions with them, and then cease investing in them until the next time around. If the customers are happy, they will tell others. If possible, costly recruitment campaigns with 24

Potential profitability

The changing marketing landscape

High profitability

Butterflies Good fit between company’s offerings and customer’s needs; high profit potential

True Friends Good fit between company’s offerings and customer’s needs; highest profit potential

Low profitability

Strangers Little fit between company’s offerings and customer’s needs; lowest profit potential

Barnacles Limited fit between company’s offerings and customer’s needs; low profit potential

Short-term customers

Figure 1.5  Customer relationship groups Source: Adapted from Werner Reinartz and V. Kumar, Mismanagement of customer loyalty’, Harvard Business Review (July 2002, p. 93). Copyright © 2002 by the Harvard Business School Publishing Corporation. All rights reserved. Reprinted with permission.

Long-term customers

Projected loyalty

a negative marginal contribution should be avoided. For instance, the insurance company If Skadeforsakringar used to offer 50 per cent off the first year’s premium for home insurance. This means that the customer generates less income than the calculated costs of administration and reimbursement. If a high percentage of the newly recruited customers are butterflies, the campaign may be unprofitable. As insurance is a low-involvement product with limited social impact, discounting the product heavily to recruit butterfly customers may not be a good idea, as opposed to emotional, high-involvement products that generate effective marketing if they appear in the right social context. ‘True friends’ are both profitable and loyal. There is a strong fit between their needs and the company’s offerings. The firm wants to make continuous relationship investments to delight these customers and nurture, retain and grow them. It wants to turn true friends into ‘true believers’, who come back regularly and tell others about their good experiences with the company. ‘Barnacles’ are highly loyal but not very profitable. There is a limited fit between their needs and the company’s offerings. An example is smaller bank customers who bank regularly but do not generate enough returns to cover the costs of maintaining their accounts. And they may borrow very small amounts at high administrative costs for the bank. Like barnacles on the hull of a ship, they create drag. Barnacles are perhaps the most problematic customers. The company might be able to improve their profitability by selling them more, raising their fees or reducing the service to them. However, if they cannot be made profitable, they should be ‘fired’. For brands in need of a ‘cool’ image particularly, focusing on barnacles may counteract attempts to project an ideal customer image. The point here is an important one: different types of customers require different relationship management strategies. The goal is to build the right relationships with the right customers.

The changing marketing landscape Marketing doesn’t take place in a vacuum. Now that we’ve discussed the five steps in the marketing process, let’s examine how the ever-changing marketplace affects both consumers and the marketers who serve them. There are many changes in the marketing landscape that place new demands on companies and make it increasingly important to understand the environment and the setting from different perspectives. In this section, we examine the major trends and forces that are changing the marketing landscape and challenging marketing strategy. We look at four important developments that have an influence on most companies: the information revolution; globalisation; the call for more ethics, sustainability, and social responsibility; and the growth of not-for-profit marketing. It should be pointed out that there are many other developments and this list could be a lot longer. 25

Chapter 1 Marketing: creating and capturing customer value

The information revolution The information revolution has been going on for several decades, but it has accelerated in the last ten years. It is mainly technology-driven: advances in computers, communication, information and other digital technologies have had a major impact on the ways companies communicate with and bring value to their customers. Marketers can now learn about and track customers much more easily and thus create products and services tailored to individual customer needs. This is helping marketers to communicate with customers either in large groups or on a one-to-one basis. The new information environment means that marketers can no longer expect consumers to seek them out, nor can they always control the conversations taking place about their brands. Marketing content and pictures, as well as criticism and complaints, are all now easily available on the internet. The information revolution has created a different set of attitudes and traits among consumers. Thanks to the internet, consumers have become more powerful: there is now a multitude of opportunities to find out what people are saying about products (e.g. a car or an item of clothing), services (e.g. a restaurant, an airline or a hotel), a business school, an employer or even a doctor or teacher. What these changes mean for the labour market is well illustrated in the following case study on Glassdoor.com.

Company case Glassdoor.com: taking the evaluation approach from consumer markets to the labour market ‘What would happen if someone left the unedited employee survey for the whole company on the printer and it got posted to the web?’ This was the question Glassdoor.com’s co-founder Robert Hohman asked his long-time friend Rich Barton, who founded travel site Expedia in 1994. Hohman and Barton contemplated why it was so difficult to find helpful information about jobs and workplaces. Hohman called on a good friend, Tim Besse, and they expanded the survey concept to include salary details for the job level and CEO approval ratings. The career and workplace community Glassdoor.com was born aiming to deliver a new transparency to the job market. Glassdoor.com provides an opportunity for anyone to find out about and anonymously share salary details about specific jobs for specific employers, or to share company and interview reviews describing the inner workings of a firm. All these services are free. All the information comes from the people who know these companies best: either the employees who work there or the candidates who have been interviewed there. Before users get access to all of the information shared by others on Glassdoor.com, they are asked to post an anonymous salary, company review or interview review. Glassdoor.com grew rapidly, its main focus being on America. In spring 2009, reviews of 20,000 companies were available – at the end of that year more than 70,000 companies were reviewed on Glassdoor.com. The growth slowed, for the simple reason that most firms operating in the US of a sufficient size were now on Glassdoor.com. But the amount of data continued growing at a fast pace. Glassdoor provides real-time salary/ compensation details by title and company, thus answering questions such as the employees’ overall grading of a company or how much a marketing manager at Inditex Group, Deutsche Bank or Atlas Copco earns a year. Moreover, detailed company reviews give pros and cons based on what employees on the inside really

26

The changing marketing landscape

think, with reviews and ratings that cover the good, the bad and a lot more in between. Interview reviews offer inside information on a company’s interview and hiring process. And for those people in the job market not currently applying for a job at any of the companies available on Glassdoor.com, these reviews provide a useful insight into the overall experience of an interview. Glassdoor.com reflects a new era, one of consumer and employee power, and of transparency. There are certainly methodological problems with websites where users provide all the information, e.g. websites that provide hotel reviews, client-based ranking of hospitals and student-based university rankings. Despite that, websites like Glassdoor.com are very important and reflect a transition in the job market from one in which employers are in charge to one where employees may have the upper hand.25

Glassdoor.com reflects a new era of consumer and employee power and of transparency. Source: GlassDoor

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Chapter 1 Marketing: creating and capturing customer value

Source: GlassDoor

28

The changing marketing landscape

Online marketing is now the fastest-growing form of marketing, particularly in consumer marketing. Business-to-business certainly relies heavily on the salesforce and traditional offline relationship building, although the internet provides a lot of very useful tools to support this. Nonetheless, the web grows in importance within the business-to-business sector. Most traditional ‘brick-and-mortar’ companies have now become ‘click-and-mortar’ companies. Some companies also provide user guides and software for ten-year-old products – a great ­opportunity to stay attractive among consumers looking to solve a problem.

Globalisation As they are redefining their relationships with customers and partners, marketers are also taking a fresh look at the ways in which they relate with the broader world around them. As opposed to just one or a few decades ago, almost every company is now touched in some way by global competition. Today, companies are not only trying to sell more of their locally produced goods in international markets, they also are buying more supplies and components abroad. Small, local companies increasingly compete with big international companies. Neighbourhood stores and service providers must deliver consumer value to stay viable, and the same holds for any local service, be it a local, independently run and owned hotel, restaurant or retailer under competition from an international chain. As consumers are more well informed and use the internet to compare prices, a local electronics or clothing store can hardly charge 20 per cent higher prices, as they did in the past. Managers in countries around the world need to take a global, not just a local, view of the company’s industry, competitors and opportunities. One example is the Swedish fashion industry which contributes substantially to the internationalisation of the industry. While most Swedish clothing retailers, e.g. H&M, Kappahl and Lindex, purchase clothing from low-cost countries, Sweden also exports a lot of clothing. H&M is the dominant retailer and is more targeted towards the fashion-aware budget market, while H&M-owned Cheap Monday does the same but on a smaller scale. However, a significant number of premium fashion brands, e.g. ACNE, Filippa K and Rodebjer, to name a few, sell a lot of their products abroad and contribute significantly to Sweden having an important role in the global fashion industry.

Acne is one among many examples of successful Swedish fashion companies. Source: Courtesy of Acne Studios

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Chapter 1 Marketing: creating and capturing customer value

The call for sustainability: more ethics and social responsibility Marketers are re-examining their relationships with social values and responsibilities and with the very Earth that sustains us. This development is reflected in the marketing concepts introduced earlier in the chapter. As the worldwide consumerism and environmentalism movements mature, today’s marketers are being called upon to take greater responsibility for the social and environmental impact of their actions, hence contributing to a more sustainable society. The consumerism and environmentalism movements took off in the early 1970s and contributed to a significant pressure on companies to take a broader perspective on marketing. Not only consumer tastes and preferences need to be considered but also the effect of consumption on society and other stakeholders. There have been some influential initiatives in between, e.g. Naomi Klein’s No Logo (2001),26 which provides a criticism on global corporations in particular, and how they explore opportunities to manufacture at low cost, emphasise branding heavily and then overmarket the products to consumers in rich countries. Branding appeals also to consumers at the lower socioeconomic end and these consumers will do everything they can to gain access to the society the brand is promising, according to Klein. In the last few years, corporate ethics and social responsibility have become hot topics for almost every business. And few companies can ignore the renewed and very demanding environmental movement. Every company action can affect customer relationships:27 Everything a company does affects the brand in the eyes of the customer. Forward-looking companies readily accept their responsibilities and view socially responsible actions as an opportunity to do well by doing good. Legislation will force companies to fulfil ever more demanding minimum requirements – but to stay competitive, companies in general need to do more than that.

Sustainability is not only about caring about the environment. The Brundtland Commission’s original definition of the term sustainable development, reads as follows: ‘Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.’28 Nowadays, three dimensions of sustainability are recognised and emphasised, none of them automatically being superior to the other dimensions: economic, environmental, and social responsibility. ●­

Economic sustainability comprises factors concerning how we can create economic growth (which has been criticised!) without risking co-worker health and material resources.

●­

Environmental (sometimes ecological) sustainability emphasises that economic growth cannot occur at the expense of our nature, environment, and ecology.

●­

Social sustainability, finally, is about building up a long-term sustainable society in which people’s basic needs are met.

It is often difficult to straightforwardly keep the three different parts of the sustainability concept apart as economic, environmental, and social sustainability often touch upon and even overlap each other. For instance, introducing new energy-efficient ventilation systems into industrial manufacturing can, for instance, reduce energy consumption, improve the working environment of the staff, and create economic growth in the environmental technology industry.

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The changing marketing landscape

Company case Sustainable business in non-sustainable environments: teliaSonera’s challenging efforts to contribute to a sustainable society Anna Romberg is Ethics & Compliance Officer for TeliaSonera’s operations in Eurasia and part of top management’s anti-corruption programme. Romberg is heavily involved in making TeliaSonera’s operations more sustainable: We are dealing with various issues that emerge. Running operations in Eurasia often means conflicts between Nordic management ideals, and the local circumstances that are at hand in Eurasian countries. For instance, in many of the former Soviet Union countries where we operate it is part of the regulatory requirement to install equipment in the network that enables real time surveillance with-

Source: TeliaSonera

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Chapter 1 Marketing: creating and capturing customer value

out a separate request. In practice this means that the authorities can tap into phone conversations and access customer data real time. The issue boils down to weaknesses in the local legislation which we can try to impact but which we can not replace overnight. However, we have an escalation process in place where we challenge the authorities – for example, when we get requests to shut down parts of the network or limit some services. At the end of the day, I firmly believe that our efforts to take responsibility for our actions and our sustainability efforts in these markets have an impact – they have to have an impact. We will challenge the local authorities and our local parties for transparency and our business as such, the telecoms industry, includes vast potential for solving the sustainability challenges of our time.

Issues around business responsibility and sustainability are not only an issue for the Eurasian countries: We had a case in Norway some time ago recently with base stations built by Romanian workers. They had horrible labour conditions from our Nordic perspective. We didn’t contract them but our provider subcontracted them. This is, however, not something that matters. They were building our network. As such we are expected to and should take responsibility. Ensuring that all third parties, working on the company’s behalf, are living up to the same standards as the employees is hard work. All suppliers obviously sign up to our Supplier Code of Conduct, and we conduct monitoring. But in some respect we also need to ensure that the suppliers understand what they have signed up to and that we do not incentivise wrong behaviour through, for example, price and timing pressures.

Despite all practical issues, TeliaSonera has an important role in contributing to a more sustainable future. Romberg says: As I see it this is a dual task: ●­

Firstly, we need to ensure we live up to all commitments and obligations when it comes to ethical business practices, anti-corruption, human rights, labour rights and environmental aspects. Here we have implemented a systematic approach to really ensure that we comply with what we have committed to. This is what we call to conduct responsible business, to take responsibility for how we do business and to ensure that our employees and third parties act accordingly.

●­

Secondly, we can, by the virtue of our business, solve issues relating to sustainability and contribute to a more sustainable society. This part relates to finding the business case for sustainable solutions, products and services and is part of the business strategy.

The sustainability challenge is that one could argue that companies are expected to take a greater responsibility because local society has failed. Corruption is not only an issue for the business, there is a demand and supply side to it. If no government officials would demand bribes the problem would more or less be solved. Weak governance mechanisms are a key issue – and this is compensated by imposing greater responsibility on companies. I do not say that companies should not bear their share of responsibility – because we reap the profits. However, we need to work with stakeholders on a broad scale to promote sustainability. It is not a one company effort. Media, too, has a vital role. The sustainability agenda is to a large extent driven by social interest groups and media. The TeliaSonera we see today would most likely not be in place if it were not for the media. But of course media may not always present the full picture. Here we have a responsibility to be as transparent as we can. To ensure that everyone interested has access to all relevant information. A practical example is the ‘cotton issue’ in Uzbekistan.

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The changing marketing landscape

In general companies are expected to contribute to the social economic programme of the country – the cotton harvest season being one of them. Companies are asked to provide labour for the harvesting, which we obviously refuse to. However, our local company arranged food distribution, traditional Uzbek pilaf, to harvest workers in the regions. This was done without any branding or marketing, just pure food provision. The media however interpreted it as ‘TeliaSonera is sponsoring forced labour’. And yes we are painfully aware of the lack of respect of human rights in the country and of the issue with forced labour within the cotton industry. Which we firmly distance ourselves from. Nevertheless, the feeding initiative was perceived locally as a philanthropic undertaking – providing food to hungry people can never be wrong, right? Well in this case it was. This exemplifies that we also need to work with our colleagues to bridge the gap between our realities. However, our relationship with various media has improved significantly since we implemented our transparent approach. We are committed to not only talk about our achievements but about our challenges as well. No real problems are solved by us hiding behind nice reports and glossy statements. It’s great that we are scrutinized. In the long run I believe that transparency contributes to a more sustainable society with less corruption, greater respect for human rights and a cleaner environment.

Where will all these changes end up? Romberg says: It has long been a trend among businesses to outsource activities, but the strong focus on sustainability and the corporate responsibility might force companies to insource activities, something that facilitates control. And price can no longer be the only factor – we need to start evaluating other parameters as well – and this is not done by the sustainability team. It is done as part of every business decision.

Source: Interview conducted with Anna Romberg, Group Anti-Corruption program lead, Region Eurasia Ethics & Compliance Officer, May 2015.

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Chapter 1  Marketing: creating and capturing customer value

The growth of not-for-profit marketing In the past, marketing has been most widely applied in the for-profit business sector. In recent years, however, marketing has also become a major part of the strategies of many not-­­­for-profit organisations, such as universities, schools, hospitals, museums and churches. ­Not-for-profits face stiff competition for support and membership. Consumers are finding that they have less time than they had before – yet, at the same time, the number of activities available for them to do is exploding. Most not-for-profit organisations find it more difficult than before to get committed people engaged in their activities. Sound marketing can help them to attract membership and support.29 Cities, regions, individuals, schools, primary healthcare – competition has forced almost every organisation and institution to tell people why they exist and what they can offer in an increasingly cluttered media space.

The main focus of this book: big, complex organisations The main focus of this book is on big, complex organisations with a number of organisational units. These organisations, in most cases, have products with different customer profiles and at different stages in the product life cycle, implying that a portfolio perspective might be applied. What is meant then by a ‘big’ organisation? There may be several definitions: size, number of organisational units, annual turnover, complexity, the number of employees, the number of markets in which it operates, the number of retailers etc. More retailers, more products and more markets mean a more complex administration. Big, complex organisations have been the focus of the marketing discipline since its birth in the mid-twentieth century. An alternative approach for this book would have been to focus on smaller organisations, and then develop different marketing aspects and see how they work in bigger organisations. Technically, organisations start as small, entrepreneurial undertakings and grow bigger over time. However, such an approach, which would include organisational size and complexity in discussing all key aspects of marketing theory and practice, would make the book very complex if the ambition to treat all basic marketing concepts were to be kept. Our recommendation for those working in small or medium-sized enterprises is to study all the basic concepts in a big organisation context, as they are presented in this book, and then try to scale the insights down to smaller organisations. In fact, most marketing concepts have emerged through studies of big enterprises, often American ones. The easiest way to communicate and learn segmentation, portfolio management or brand development is probably by presenting examples and insights from bigger organisations and then applying the thinking to smaller organisations, rather than the other way around. There are other arguments in favour of focusing on bigger organisations. Big organisations, with few exceptions, have a marketing department, i.e. specialists who work with marketing and see it as important – these people make sure that marketing is a dynamic and living part of the organisation’s everyday life. The dynamic that is created in a big organisation with marketers, engineers, human resources staff, middle managers, project leaders, CFOs and CIOs is different from – and more bureaucratic than – the dynamic patterns in smaller organisations. Planning processes mean bureacracy and this is an inherent dimension of any big organisation; the challenge is to make the marketing planning as smooth and efficient as possible. Planning processes are inherently different in small organisations and one may need a separate course module, and book, to understand the dynamics of small and medium-sized enterprises. Students may benefit from taking a module on entrepreneurship and new business development. It is not only marketing that is based on large enterprises, but also major courses and textbooks on organisation theory, accounting, finance and management control, so this book belongs to that tradition. 34

The main focus of this book: big, complex organisations

People currently working in industry and in public service with a business degree or similar will have studied marketing in the 1980s, 1990s, or 2000s or perhaps even in the 1970s. They will be using those concepts that have been presented (and, of course, refined) in business schools for decades. Breaking with tradition, by not using the same frame of reference when teaching the next generation of business students, is problematic as, upon graduation, their knowledge of the basic marketing concepts as understood by practitioners will be limited. The pattern in this respect is quite clear: students learn concepts and a terminology when they study, accompanied by some deeper understanding and perspective in relation to the subject in question, and they use these insights when they start working. To do that, they largely need to share a set of reference points with those people who left business schools and universities five, ten and twenty years earlier. That being said, there is an enormous need to question, challenge, develop and refine what has been taught in the past, but it should be done with reference to the traditional concepts of the subject. For instance, the Boston Matrix and the SWOT analysis are concepts that are understood by everybody who studied marketing in the last three to four decades, and they can’t be neglected in current discussions, regardless of whether people like them or not. Hopefully, readers of this book will want to further their understanding of marketing and read more books on the subject. There are books on almost every branch of marketing, e.g. segmentation, positioning, brand development, entrepreneurship, brand portfolio management, strategic management and business intelligence, while other books attempt to expand on what is communicated in the introductory book.30

Marketing in small and medium-sized businesses Small businesses may have few employees, but they still represent a significant amount of activity in financial and personnel terms. A major part of the GDP of a country is created by small and medium-sized companies, the percentage varying according to the method of calculation, and these companies are responsible for a substantial portion of the new jobs that are created.

Company case adminicon: a small business selling services to big corporations Linus Berg runs Adminicon, a company specialising in corporate relocations. Adminicon takes complete responsibility for setting up new office facilities and making sure everything is working when staff come to the new facilities for the first time. In a typical case, the company leaves the old facilities on Friday at 5 pm and moves into the new office on the following Monday at 8 am. Everything should work properly. The process of office relocation is more complex than it might appear: people may feel frustrated when they have to move; many technical and infrastructure-related issues must be dealt with; and the negative aspects of the new location – which staff will be quick to spot! – are not always easily foreseeable. Most of Adminicon’s customers – or rather Berg’s customers, since he as a person is more important than the company brand at this stage – are big organisations. ‘But it’s people who buy from me, not companies buying from Adminicon,’ says Berg. ‘Recently, one of my customers [i.e. a person, not the organisation he was working for] changed jobs, and he called me when he started working for a new employer, just to ask for the same services he bought from me in his old job.’

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Chapter 1 Marketing: creating and capturing customer value

‘What doesn’t work in my experience is calling potential customers who don’t know about me and with whom I have no relationship. We once bought a list of potential customers for SEK 30,000 and my colleague called them. It’s marketing, and we called them, not a call centre. But we didn’t get one single job.’ Big organisations are sensitive to risks, and senior managers expect a corporate relocation to be a smooth process that doesn’t disturb the day-to-day business a lot. Even though relocations may solve some problems, there is always a risk that new problems may arise should the relocation not go well. Consequently, companies will not buy corporate relocation services unless they are guaranteed a smooth process: and how can facility managers know this will be the case if an unknown person calls them up out of the blue? Berg gets most of his projects through recommendations, and he puts a lot of effort into maintaining relationships with key people: ‘I have lunch with key people on a regular basis, it’s crucial to maintain and develop relations with people who recommend me to others. In my case, it’s the real-estate consultants. It’s almost an oligopoly situation and companies contact the consultants if, for whatever reason, they want to move.’ Relations, track record and trust are keywords in Berg’s marketing strategy. ‘The real-estate consultants’ customers have confidence in what the consultants suggest, so if they like me they are likely to recommend me. This was my strategy from the beginning and it still works.’ There are no fast tracks to new jobs in this industry, but through hard work and by consistently delivering high quality, a good reputation might be created. ‘I meet my customers over an extended period of time, say 6–12 months, and develop a relationship with them. We know each other quite well, and in many cases they may recommend me to others.’ A close relationship also means there is a need to be open/transparent and attentive. Berg says: ‘Our policy is not to talk directly to the end customer without asking the property consultant involved. I wouldn’t like to sidestep them. It’s crucial that the consultants trust me – without their recommendation I wouldn’t, as a small player, have got contracts with Shell, Schibstedt and other big companies.’ The property consultants help their clients – often big global corporations – to find new facilities. ‘Sometimes we charge through the consultants, and if I do a good job the property consultant also benefits from this. In a sense I’m an extension of their brand,’ says Berg. Berg studied industrial engineering and management, a master’s degree in engineering with focus on business and management, at the KTH Royal Institute of Technology, and graduated in 1999. Like most business programmes at major universities, the teaching focuses on medium-sized and big companies. ‘Most of my former study buddies work for big companies and all my clients are big organisations – so, at the end of the day, it was really a good thing to take a study programme with a focus on big organisations. I think that focus will help people in dealing with – and working for – big organisations. Entrepreneurial skills are harder to teach – I acquired my ability to run a small business as I grew up, in the church I belong to and through my role as a project leader in a variety of professional and private contexts,’ says Berg. Berg developed his problem-solving ability as a student: ‘Although my company is small, I work with big enterprises on a daily basis and I certainly need to know how they work. When I studied, we also had case-based classes that considered, among others, organisational units of around 30 to 40 employees. We looked at the case studies from different angles: business, engineering, calculus, marketing, leadership, how to motivate employees etc., so several perspectives were integrated.’ ‘A typical case dealt with companies with good technological leadership but a poor financial situation. I remember a case involving a product that was seen as great by customers, but which was not generating any money. We had to come up with a solution that eliminated or at least reduced the impact of the problem. These were the things that helped me to develop my analytical skills.’ In the final year of the course, the emphasis was on the integration of technology, economy and leadership, and several case studies reflected this. Asked if he has plans to grow, Berg says, ‘Yes, we do have, but the main objective is always to keep the same level of quality of the services provided. Any expansion must not jeopardise that. This is the foundation of our brand.’ Source: Interview with Linus Berg ( July 2010 and April 2015).

36

Summary

Summary At the start of this chapter, Figure 1.1 presented a simple model of the marketing process. Now that we’ve discussed all of the steps in the process, Figure 1.6 presents an expanded model that will help you pull it all together. The first four steps of the marketing process focus on creating value for customers. The ­company first gains a full understanding of the marketplace by researching customer needs and managing marketing information. It then designs a customer-driven marketing strategy based on the answers to two simple questions. The first question is: ‘What consumers will we serve?’ (market segmentation and targeting). Good marketing companies know that they cannot serve all ­customers in every way. Instead, they need to focus their resources on the customers they can serve best and most profitably. The second marketing strategy question is: ‘How can we best serve targeted customers?’ (differentiation and positioning). Here, the marketer outlines a value ­proposition that spells out what values the company will deliver in order to win target customers. With its marketing strategy decided, the company now constructs an integrated marketing programme – consisting of a blend of the four marketing mix elements, or the four Ps – that transforms the marketing strategy into real value for customers. The company develops product offers and creates strong brand identities for them. It prices these offers to create real customer

Create value for customers and build customer relationships Understand the marketplace and customer needs and wants

Design a customer-driven marketing strategy

Construct an integrated marketing programme that delivers superior value

Research customers and the marketplace

Select customers to serve: market segmentation and targeting

Product and service design: build strong brands

Decide on a value proposition: differentiation and positioning

Pricing: create real value

Manage marketing information and customer data

Distribution: manage demand and supply chains

Capture value from customers in return Build profitable relationships and create customer delight

Capture value from customers to create profits and customer equity

Customer relationship management: build strong relationships with chosen customers

Create satisfied, loyal customers

Partner relationship management: build strong relationships with marketing partners

Capture customer lifetime value Increase share of market and share of customer

Promotion: communicate the value proposition

Harness marketing technology

Manage global markets

Ensure ethical and social responsibility

Figure 1.6  An expanded model of the marketing process

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Chapter 1  Marketing: creating and capturing customer value

value and distributes the offers to make them available to target consumers. Finally, the company designs promotion programmes that communicate the value proposition to target consumers and persuade them to act on the market offering. Perhaps the most important step in the marketing process involves building value-laden, profitable relationships with target customers. Throughout the process, marketers practise customer relationship management to create customer satisfaction and delight. Here, the company must work closely with marketing partners both inside the company and throughout the marketing system. In the fifth and final step, the company reaps the rewards of its strong customer relationships by capturing value from customers. The interaction between the company and its customers is at the heart of a modern marketing approach, and lays the foundation of a long-term relationship. Delivering superior customer value creates highly satisfied customers who will buy more and will buy again – and tell others about their experiences. This helps the company to capture customer lifetime value and greater share of customer. The result is increased long-term customer equity for the firm. Finally, in the face of today’s changing marketing landscape, companies must take into account the new information environment, take advantage of global opportunities, and ensure that they act sustainably, i.e. in an ethical and socially responsible way. Figure 1.6 provides a good road map to future chapters in the book. Chapters 1 and 2 introduce the marketing process, with a focus on building customer relationships and capturing value from customers. Chapters 3–6 address the first step of the marketing process – understanding the marketing environment, managing marketing information, and understanding consumer and business buyer behaviour. In Chapter 7, we look more deeply at the two major marketing strategy decisions: selecting which customers to serve (segmentation and targeting) and deciding on a value proposition (differentiation and positioning). Chapter 8 deals with brands, an important background to each of the four marketing mix variables – product, price, place and promotion – which are treated one by one in Chapters 9–12. Chapter 13 discusses competitive strategy and competitive advantages, and Chapter 14, the last chapter, deals with the global marketing environment and the need for ethics and social responsibility.

Key terms

38

Marketing 10

Marketing concept

16

Needs 11

Societal marketing concept

17

Wants 11

Customer relationship management (CRM)

19

Demands 11

Customer-perceived value

20

Market offering

12

Customer satisfaction

20

Marketing myopia

12

Consumer-generated marketing

22

Exchange 13

Partner relationship management

22

Marketing management

14

Customer lifetime value

23

Production concept

16

Share of customer

23

Product concept

16

Customer equity

24

Selling concept

16

Marketing by the numbers

Discussing the concepts 1. What is marketing and what is its primary goal? 2. Compare and contrast customer needs, wants and demands. Describe the need versus the want for the following products: IKEA furniture, Nike shoes and iPad.

4. What are the five different marketing management orientations? Which orientation do you believe your university or school of management follows when marketing itself? 5. Explain the difference between share of ­customer and customer equity. Why are these concepts important to marketers? 6. How has the internet changed consumers and marketers?

3. Explain how a company designs a ­customer-driven marketing strategy.

Applying the concepts 1. Ask five businesspeople from different industries (e.g. food service, retailing, consumer-product manufacturing, industrial-product manufacturing and education) what they think marketing is. Evaluate their definitions and discuss whether or not they are consistent with the goal of creating customer value and managing profitable customer relationships. 2. In a small group, develop a marketing plan for a pet boarding service. Who is your target market? How will you enable customers to get the best value? Define what you mean by value and develop the value proposition of your offering for this target market. 3. Define the different relationship levels companies can build with customers. Pick a company and describe the types of relationships you have with it.

Marketing by the numbers Not all customers pay their bills on time, while others are considered to be extremely high maintenance. Simply getting rid of customers that fall into these categories is not always the answer. How will valued customers view the policy? It is never easy for a business to assess the value of customers, particularly the long-term value of the customer. It is possible to use a fairly simple net present value calculation. To determine a basic customer lifetime value, each stream of profit is discounted back to its present value (PV) and then totalled. The basic equation for calculating net present value (NPV) is as follows: N Ct NPV = a t t = 0 11 + r2

where, t = time of the cash flow, N = total customer lifetime, r = discount rate and Ct = net cash flow [the profit) at time t (the initial cost of acquiring a customer would be a negative profit at time 0). NPV can be calculated easily with most financial calculators or by using one of the c­ alculators available on the internet, such as the one at http://www.investopedia.com/calculator/ NetPresentValue.aspx. 1. Assume that a trade customer spends an average of SEK 1,500 a week and that the retailer earns a 5 per cent margin. Calculate the customer lifetime value if this shopper remains loyal over a tenyear life span, assuming a 5 per cent annual interest rate and no initial cost to acquire the customer. 2. Discuss how a business can increase a customer’s lifetime value.

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Chapter 1  Marketing: creating and capturing customer value

References 1 According to student surveys by leading employer branding company Universum (www.universum.com), H&M is one of the most desired employers among students. 2 Thomas Boysen Anker, Leigh Sparks, Luiz Moutinho and Christian Grönroos, ‘Consumer dominant value ­creation: a theoretical response to the recent call for a consumer dominant logic for marketing’, European Journal of Marketing, 49(3/4), 532–560 (2015), 10.1108/EJM-09-2013-0518. 3 As quoted in Carolyn P. Neal, ‘From the Editor’, Marketing Management ( January–February 2006, p. 3). 4 The American Marketing Association offers the following definition: ‘Marketing is the activity, set of ­institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.’ Accessed at https://www.ama.org/AboutAMA/Pages/ Definition-of-Marketing.aspx (October 2015). Also see Lisa M. Keefe, ‘Marketing Defined’, Marketing News (15 January 2008, pp. 28–9). 5 cf. Michael Solomon, Gary Bamossy, Soren Askegaard and Margaret Hogg, Consumer Behaviour: A European Perspective, 4th edn (Pearson, 2009). 6 Bjorn Wilke, ‘Jarnheimer foljer med i priskrig’, Dagens Industri (17 March 2003). 7 Soren Smidt-Jensen, City branding: lessons from medium sized cities in the Baltic Sea region’, in Medium Sized Cities in Dialogue Around the Baltic Sea (Danish Centre for Forest, Landscape and Planning, KVL, 2006, pp. 1–6). 8 www.nykoping.se/sv/nyheter/fortsatt_inflyttning (accessed 2 March 2010); http://nykoping.se/ Kommun--politik/Nyhetsarkiv/2015/Inflyttningen-till-Nykoping-fortsatter/ (accessed 24 March 2015). 9 Statistiska Centralbyran. See also Soren Smidt-Jensen, City branding: lessons from medium sized cities in the Baltic Sea region’, in Medium Sized Cities in Dialogue Around the Baltic Sea (Danish Centre for Forest, Landscape and Planning, KVL, 2006, pp. 1–6). 10 See Theodore Levitt’s classic article, ‘Marketing myopia’, Harvard Business Review ( July–August 1960, pp. 45–56). For more recent discussions, see Yves Doz, Jose Santos and Peter J. Williamson, ‘Marketing ­myopia re-visited: why every company needs to learn from the world’, Ivey Business Journal ( ­­January– February 2004, p. 1); ‘What business are you in?’, Harvard Business Review (October 2006, pp. 127–37); and John D. Nicholson and Philip J. Kitchen, ‘The development of regional marketing – have marketers been myopic?’, International Journal of Business Studies ( June 2007, pp. 107–25). 11 Anders Parment, Auto Brand: Building Successful Car Brands for the Future, New York: Kogan Page. 12 See Ben Elgin, ‘How “Green” Is That Water?’, BusinessWeek (13 August 2007, p. 68). 13 See, e.g., Anders Parment, Generation Y in Consumer and Labour Markets (Routledge, 2011). 14 Portions adapted from Julie Barker, ‘Power to the people’, Incentive (February 2008, p. 34) and Carmine Gallo, ‘Employee motivation the Ritz-Carlton way’, BusinessWeek (29 February 2008). Also see ‘The world’s best hotels – where luxury lives’, Institutional Investor (November 2007, p. 1); and http://corporate.ritzcarlton. com/en/About/Awards (accessed October 2015).. 15 See Werner Reinartz and V. Kumar, ‘The mismanagement of customer loyalty’, Harvard Business Review, 80(7), 86–94 ( July 2002). 16 Philip Kotler and Kevin Lane Keller, Marketing Management, 13th edn (Prentice Hall, 2009, p. 11). 17 For more on the relationship between customers’ satisfaction, loyalty and company performance, see Fred Reichheld, The Ultimate Question: Driving Good Profits and True Growth (Boston: Harvard Business School Press, 2006); Bruce Cooilef et al., ‘A longitudinal analysis of customer satisfaction and share of wallet: investigating the moderating effects of customer characteristics’; Journal of Marketing ( January 2007, pp. 67–83); Murali Chandrahsekaran, Kristin Rotte, Stephen S. Tax and Rajdeep Grewal, ‘Satisfaction, strength, and customer loyalty’, Journal of Marketing Research (February 2007, pp. 153–63); and Leonard L. Berry and Lewis P. Carbone, ‘Build loyalty through experience management’, Quality Progress (September 2007, pp. 26+). 18 For interesting discussions on assessing and using customer lifetime value, see Rajkumar Venkatesan, V. Kumar and Timothy Bohling, ‘Selecting valuable customers using a customer lifetime value framework’, Marketing Science Institute, report no. 05-121 (2005); Sunil Gupta et al., ‘Modeling customer lifetime value’, Journal of Service Research (November 2006, pp. 139–46); ‘Determining “CLV” can lead to making magical ­marketing decisions’, BtoB (7 May 2007, p. 18); and Detlef Schoder, ‘The flaw in customer lifetime value’, Harvard Business Review (December 2007, p. 26).

40

References

19 A customer flying from Nyköping/Skavsta to Porto has a transfer in London but the transfer is not ­guaranteed – the customer technically buys two tickets, one from Nyköping to London/Stansted and one from London/Stansted to Porto. 20 Erick Schonfeld, ‘Click here for the upsell’, Business 2.0 (11 July 2007); and ‘Getting shoppers to crave more’, Fortune Small Business (24 August 2007, p. 85). Based on experiences from the website. 21 See Roland T. Rust, Valerie A. Zeithaml and Katherine A. Lemon, Driving Customer Equity (New York: Free Press, 2000); Robert C. Blattberg, Gary Getz and Jacquelyn S. Thomas, Customer Equity (Boston, MA: Harvard Business School Press, 2001); Rust, Lemon and Zeithaml, ‘Return on marketing: using customer equity to focus marketing strategy’, Journal of Marketing ( January 2004, pp. 109–27); Rust, Zeithaml and Lemon, ‘Customer-centered brand management’, Harvard Business Review (September 2004, p. 110); Robert P. Leone et al., ‘Linking brand equity to customer equity’, Journal of Service Marketing (November 2006, pp. 125–38); Julian Villanueva and Dominique Hanssens, Customer Equity: Measurement, Management and Research Opportunities (Hanover, MA: Now Publishers Inc., 2007); and Roland T. Rust, ‘Seeking higher R0I? Base ­strategy on customer equity’, Advertising Age (10 September 2007, pp. 26–7). 22 Press Release (29 October 2008). 23 See Werner Reinartz and V. Kumar, ‘The mismanagement of customer loyalty’, Harvard Business Review ( July 2002, pp. 86–94). 24 See reference in note 22. For more on customer equity management, see Michael D. Johnson and Fred Seines, ‘Customer portfolio management: toward a dynamic theory of exchange relationships’, Journal of Marketing (April 2004, pp. 1–17); Sunil Gupta and Donald R. Lehman, Managing Customers as Investments (Philadelphia: Wharton School Publishing, 2005); Roland T. Rust, Katherine N. Lemon and Das Narayandas, Customer Equity Management (Upper Saddle River, NJ: Prentice Hall, 2005); and Kathy Stevens, ‘Using ­customer equity models to improve loyalty and profits’, Journal of Consumer Marketing, 23 (2006, p. 379). 25 Glassdoor.com; Anders Parment and Anna Dyhre, Sustainable Employer Branding; Per J. Hakansson, speech at Universum Awards (2009), Building Online Employer Brands Using Social Media Tools, 23 March in Stockholm and 19 May in Berlin. 26 Naomi Klein, No Logo. No Space, No Choice, No Jobs (London: Flamingo, 2001). 27 Adapted from information in Don Frischmann, ‘Nothing is insignificant when it comes to brand fulfillment’, Advertising Age (21 January 2008, p. 16). 28 G-H. Brundtland et al., Official Records of the General Assembly, Forty-second Session, Supplement No. 25 (A/42/25), ANNEX, Report of the World Commission on Environment and Development: ‘Our Common Future’, United Nations General Assembly (1987). 29 For examples, and for a good review of non-profit marketing, see Philip Kotler and Alan R. Andreasen, Strategic Marketing for Nonprofit Organizations, 6th edn (Upper Saddle River, NJ: Prentice Hall, 2003); Philip Kotler and Karen Fox, Strategic Marketing for Educational Institutions (Upper Saddle River, NJ: Prentice Hall, 1995); Philip Kotler, John Bowen and James Makens, Marketing for Hospitality and Tourism, 3rd edn (Upper Saddle River, NJ: Prentice Hall, 2003); and Philip Kotler and Nancy Lee, Marketing in the Public Sector: a Roadmap for Improved Performance (Philadelphia: Wharton School Publishing, 2007). 30 See, e.g., Anders Parment and Magnus Sbderlund, Det har maste du ocksa veta om marknadsforing (Malmö: Liber, 2010).

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Company and marketing strategy

Chapter

two

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Company-wide strategic planning: defining marketing’s role

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Best practice – Electrolux: a portfolio company

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Partnering to build customer relationships

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Marketing strategy and the marketing mix

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Managing the marketing effort

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Measuring and managing return on marketing investment

▲­

Mini contents

Source: Anders Parment

Chapter preview In the first chapter, we explored the marketing process by which companies create value for consumers in order to capture value from them in return. We will now dig deeper into steps two and three of the marketing process – designing customer-driven marketing strategies and constructing marketing programmes. First, we look at the organisation’s overall strategic planning, which guides marketing strategy and planning. Next, we discuss how, guided by the strategic plan, marketers partner closely with others inside and outside the firm to create value for customers. We then examine marketing strategy and planning – how marketers choose target markets, position their market offerings, develop a marketing mix, and manage their marketing programmes. This process is at the heart of marketing theory and practice. Finally, we look at the important step of measuring and managing return on marketing investment.

Learning objectives After reading this chapter, you should be able to: 1 Explain company-wide strategic planning and its four steps. 2 Discuss how to design business portfolios and develop growth strategies. 3 Explain marketing’s role in strategic planning and how marketing works with its partners to create and deliver customer value. 4 Describe the elements of a customer-driven marketing strategy and mix and the forces that influence it. 5 List the marketing management functions, including the elements of a marketing plan, and discuss the importance of measuring and managing return on marketing investment.

Company-wide strategic planning: defining marketing’s role

Company-wide strategic planning: defining marketing’s role Each company must find the game plan for long-term survival and growth that makes the most sense given its specific situation, opportunities, objectives and resources. This is the focus of strategic planning – the process of developing and maintaining a strategic fit between the organisation’s goals and capabilities and its ever-changing marketing opportunities. Strategic planning sets the stage for the rest of the planning in the firm. Companies usually prepare ­several short-term plans, e.g. for liquidity planning and sales activities, as well as long-range plans, sometimes with scenario planning to prepare for different situations. Long-range plans particularly reflect strategic priorities, thus relating the company’s overall strategy to the opportunities of adapting to emerging changes, threats and opportunities in a constantly changing environment. At the corporate level, the company starts the strategic planning process by defining its overall purpose and mission (see Figure 2.1). Here, the reason the company exists is outlined – why is there a need for this particular company in the marketplace and in what way does it serve customers better than other companies? This mission is then turned into detailed supporting objectives that guide the whole company. Next, headquarters decides what portfolio of businesses and products is best for the company and how much support to give each one – with a portfolio perspective, there is competition among businesses and products and each part has to justify its existence and the resources required to invest and develop in competition with other parts of the company. Each business and product line develops detailed marketing and other departmental plans that support the company-wide plan. For each market in which the company operates or plans to operate, there should be a plan. All in all, marketing planning occurs at the business-unit, product and market levels. It supports company strategic planning with more detailed plans for specific marketing opportunities.

Strategic planning – The process of developing and maintaining a strategic fit between the organisation’s goals and capabilities and its changing marketing opportunities.

Defining a market-oriented mission An organisation exists to accomplish something, and this purpose should be clearly stated. Forging a sound mission begins with the following questions. What is our business? Who is the customer? What do consumers value? What should our business be? These simple-sounding questions are among the most difficult the company will ever have to answer. Successful companies continuously raise these questions and answer them carefully and completely – and successful companies always provide a great answer. IKEA and Zara, for instance, both offer

Like the marketing strategy, broad company strategy must be customer-focused

Business unit, product, and market level

Corporate level Defining the company mission

Setting company objectives and goals

Designing the business portfolio

Planning marketing and other functional strategies

Company-wide strategic planning guides marketing strategy and planning Figure 2.1  Steps in strategic planning

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Chapter 2  Company and marketing strategy

Mission statement – A ­statement of the ­organisation’s purpose – what it wants to accomplish in the larger environment.

Companies should define themselves not in terms of what they do or make (‘We sell high-quality computers’) but in terms of how they create value for customers (‘We bring ­inspiration and innovation to work and leisure time’).

a unique combination of appealing design, attractive locations, thought-through distribution and attractive prices. This combination has convinced consumers all over the world and these companies are still in a growth phase. Many organisations develop mission statements that reflect the organisation’s p ­ urpose – what it wants to accomplish in the larger environment. A clear mission statement acts as an ‘invisible hand’ that guides people in the organisation. Studies have shown that firms with well-crafted mission statements have better organisational and financial performance.1 Some companies define their missions myopically in product or technology terms (‘We make and sell furniture’ or ‘We are a chemical-processing firm’). But mission statements should be market-oriented and defined in terms of satisfying basic customer needs. Products and technologies eventually become outdated, but basic market needs can last forever. Among basic market needs you will find transport, socialising and bragging. A car may fulfil all these needs, but has some inherent disadvantages: in general terms, driving a car (at least if one is alone in the car!) harms the environment more than public transport, it contributes significantly to traffic jams and may reduce the aesthetic appeal of, for example, city centres. However, people need transport for all sorts of reasons, e.g. getting to work, and other modes of transport also have their inherent disadvantages. Although traffic may constitute some socialisation, in terms of the ‘show-off effect’, the car doesn’t perform as well as a few decades ago.2 So for some people and applications, products from other industries may compete with the car. Table 2.1 provides several other examples of product-oriented versus market-oriented business definitions.3 Mission statements should be meaningful and specific yet motivating. They should emphasise the company’s strengths in the marketplace. Too often, mission statements are written for public relations purposes and lack specific, workable guidelines. An ideal mission statement should be appealing to all stakeholders.

Table 2.1  Market-oriented business definitions

Company

Product-oriented definition

Market-oriented definition

Amazon.co.uk

‘We sell books, videos, CDs, toys, consumer electronics, hardware, household goods and other products online.’

‘We make the internet buying experience fast, easy and enjoyable – we’re the place where you can find and discover anything you want to buy online.’

Google

‘We provide the world’s best online search engine.’

‘We help you organise the world’s information and make it universally accessible and useful.’

SAS

‘We sell transport.’

‘We help you discover the world and do business in a time-effective and pleasurable way.’

Panasonic

‘We sell air-conditioning machines.’

‘We provide a better indoor climate, which makes your home a more attractive place for pleasure, ­leisure and work.’

L’Oréal

‘We make cosmetics.’

‘We sell lifestyle and self-expression; success and status; memories, hopes and dreams.’

Ritz-Carlton Hotels

‘We rent rooms.’

‘We create the Ritz-Carlton experience – one that enlivens the senses, instils well-being and fulfils even the unexpressed wishes and needs of our guests.’

IKEA

‘We run budget furniture stores.’

‘We deliver low prices every day and give ordinary people the chance to buy nice furniture and an ­enjoyable shopping experience.’

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Company-wide strategic planning: defining marketing’s role

Finally, a company’s mission should not be stated as making more sales or profits – profits are only a reward for creating value for customers. A company’s employees need to feel that their work is significant and that it contributes to people’s lives.

Setting company objectives and goals The company needs to turn its mission into detailed supporting objectives for each level of management. Each manager should have objectives and be responsible for reaching them. For example, IKEA makes and markets a diverse product mix of furniture and home accessories that basically includes everything a family may need for their home (singles are welcome but the IKEA stores are very family-oriented!). But IKEA does more than just distribute and sell furniture. Its mission is to create a better everyday life for the many4 – a much broader perspective that includes attractive prices, a great retail environment with cheap food and a playground for kids. In business-to-business markets, Volvo Trucks present themselves as total solution providers, signifying that they don’t only offer trucks, but also help their customers improve logistics, reduce emissions and make transport more efficient, thus helping customers improve their marketing offer. To get stronger in the marketplace, a company may need to increase the product’s promotion by increase spending on salespeople, advertising and public relations efforts. In this way, the firm’s mission is translated into a set of objectives for the current period.5

Designing the business portfolio Guided by the company’s mission statement and objectives, management now must plan its business portfolio – the collection of businesses and products that make up the company. Portfolio thinking is at the heart of a business person’s approach – it integrates the market analysis with an understanding of risks and financial mechanisms. The best business portfolio is the one that creates the best fit between the company’s strengths and weaknesses to opportunities in the environment – but parts of the portfolio may look very different, in terms of risk profile and market opportunities. Business portfolio planning involves two steps. First, the company must analyse its current business portfolio and decide which businesses should receive more, less or no investment. Second, it must shape the future portfolio by developing strategies for growth and downsizing.

Business portfolio – The collection of businesses and products that make up the company.

Analysing the current business portfolio The major activity in strategic planning is business portfolio analysis, whereby management evaluates the products and businesses that make up the company. The company is likely to put strong resources into its more profitable businesses and phase down or drop its weaker ones, unless future forecasts suggest other priorities. Management’s first step is to identify the key businesses that make up the company, called strategic business units (SBUs). A SBU can be a company division, a product line within a division, or sometimes a single product or brand. The company next assesses the attractiveness of its various SBUs and decides how much support each deserves. When designing a business portfolio, it’s a good idea to add and support products and businesses that fit closely with the firm’s core philosophy and competencies. The purpose of strategic planning is to find ways in which the company can best use its strengths to take advantage of attractive opportunities in the environment. So most standard portfolio analysis methods evaluate SBUs on two important dimensions – the attractiveness of the SBU’s market or industry and the strength of the SBU’s position in that market or industry. The best-known portfolio-planning method was developed by the Boston Consulting Group, a leading management consulting firm.6 Although this model has been criticised

Portfolio analysis – The process by which management evaluates the products and businesses that make up the company.

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Chapter 2  Company and marketing strategy

Figure 2.2  The BCG growth— share matrix

from various angles,7 it is very well known and useful: most marketers know this model extremely well.

Growth—share matrix – A portfolio-planning method that evaluates a company’s strategic business units in terms of its market growth rate and relative market share. SBUs are classified as stars, cash cows, question marks or dogs.

The Boston Consulting Group approach  Using the now-classic Boston Consulting Group (BCG) approach, a company classifies all its SBUs according to the growth–share matrix as shown in Figure 2.2. On the vertical axis, market growth rate provides a measure of market attractiveness. On the horizontal axis, relative market share serves as a measure of company strength in the market. The growth—share matrix defines four types of SBU: 1. Stars. Stars are high-growth, high-share businesses or products. They often need heavy investments to finance their rapid growth. Eventually their growth will slow down, and they will turn into cash cows. 2. Cash cows. Cash cows are low-growth, high-share businesses or products. These established and successful SBUs need less investment to hold their market share. Thus, they produce a lot of cash that the company uses to support other SBUs that need investment and develop new businesses. 3. Question marks. Question marks are low-share business units in high-growth markets. They require a lot of cash to hold their share, let alone increase it. Management has to think hard about which question marks it should try to build into stars and which should be phased out. 4. Dogs. Dogs are low-growth, low-share businesses and products. They may generate enough cash to maintain themselves but do not promise to be large sources of cash. The ten circles in the growth–share matrix represent a typical company’s ten current SBUs. The company has two stars, two cash cows, three question marks and three dogs. The areas of the ­circles are proportional to the SBU’s sales. This company is in fair shape, although not in good shape. It wants to invest in the more promising question marks to make them stars and to maintain the stars so that they will become cash cows as their markets mature. Fortunately, it has two good-sized cash cows. Income from these cash cows will help finance the company’s question marks. The company should take some decisive action concerning its dogs and its question marks. Once it has classified its SBUs, the company must determine what role each will play in the future. One of four strategies can be pursued for each SBU. The company can invest more in the business unit in order to build its share. Or it can invest just enough to hold the SBU’s share at the current level. It can harvest the SBU, milking its short-term cash flow regardless of the long-term effect. Finally, the company can divest the SBU by selling it or phasing it out and using the resources elsewhere. As time passes, SBUs change their positions in the growth–share matrix. Many SBUs start out as question marks and move into the star category if they succeed. They later become cash cows as market growth falls, then finally die off or turn into dogs towards the end of their life cycle. The company needs to add new products and units continuously so that some of them will become stars and, eventually, cash cows that will help finance other SBUs.

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Company-wide strategic planning: defining marketing’s role

Problems with matrix approaches  The BCG and other formal methods revolutionised stra­ tegic planning when they were introduced in the 1960s and 1970s. However, such centralised approaches have limitations: they can be difficult, time-consuming and costly to implement. Management may find it difficult to define SBUs and measure market share and growth. In addition, these approaches focus on classifying current businesses, but provide little advice on future planning. Because of such problems, many companies have dropped formal matrix methods in favour of more customised approaches that better suit their specific situations. Moreover, unlike ­former strategic-planning efforts that rested mostly in the hands of senior managers at company headquarters, today’s strategic planning has been decentralised. Increasingly, companies are placing responsibility for strategic planning in the hands of cross-functional teams of divisional managers who are close to their markets. When the organisation and its individual staff members are involved in the strategy process of the company, a certain degree of strategic thinking among the staff is likely to exist.

Best practice Electrolux: a portfolio company Many people think of Electrolux as making either white goods or vacuum cleaners. But it does a lot more than that. First, Electrolux produces a broad range of home appliances, far more, in fact, than most people are aware of. Second, the Electrolux Group owns numerous well-known brands, e.g. Tornado, Voss and Zanussi. Electrolux’s portfolio comprises around 30 brands, and this is after a substantial brand consolidation: in 2002, the portfolio consisted of 149 brands. Electrolux offers espresso machines, food preparation appliances and electric cookers. The products are sold through the Electrolux store chain, alongside the likes of cutlery, kitchen interiors and fittings. Value is added for consumers by facilitating the purchase of home improvements. In some cases, Electrolux takes advantage of both strong national brands and its own Electrolux brand through co-branding. For instance, the German company AEG, founded in 1887, a hallmark for quality in white goods and home appliances, has been designated AEG-Electrolux since 2004 to signify the link with Electrolux. Both companies have a successful history. AEG employed Peter Behrens in the early twentieth century. Behrens is seen as the founder of a consistent corporate identity thinking and he was very successful in developing functional design. Electrolux has been very successful in developing and commercialising new products throughout the twentieth century, e.g. the vacuum cleaner in 1912, the refrigerator in 1923, and the first household washing machine in 1951. By combining the strengths of AEG and Electrolux, a great competitive offer has been created. The slogan of AEG-Electrolux is ‘Perfect in form and function’ – thus combining consumers’ desire for aesthetics and functionality in the same product range. The success of the Electrolux group lies largely in the foundation of a portfolio principle – Electrolux as a home appliances brand applies a product portfolio principle, whereas the Electrolux Group applies a brand portfolio principle. The firm thus takes advantage of the ability to adapt to local markets, e.g. by working with local brands, and at the same time benefits from global synergies in product development, manufacturing and attempts to understand customers.

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Chapter 2  Company and marketing strategy

Electrolux’s mission statement Our vision – to be the world leader in making life easier and more enjoyable with the help of powered appliances. To be the innovator in our industry, continuously introducing improvements that surprise and delight. To apply quality to everything we do. To be the brand leader – the source of appliances for kitchen and cleaning that people think of first. To be so familiar and trusted that people happily pay a premium price for Electrolux appliances and services. To continue to be the industry leader in environmental protection. Source: AB Electrolux

Source: Susanna Askiöff

Developing strategies for growth and downsizing

Market penetration – A strategy for company growth by increasing sales of current products to current market segments without changing the product.

50

Beyond evaluating current businesses, designing the business portfolio involves finding businesses and products the company should consider in the future. Many companies need growth if they are to compete more effectively, satisfy their stakeholders and attract the best talent. ‘Growth is pure oxygen,’ states one executive. ‘It creates a vital, enthusiastic corporation where people see genuine opportunity.’ Executives in downsizing companies find it more difficult to maintain and develop staff and partner motivation. And a firm must be careful not to make growth itself an objective. The company’s objective must be to manage ‘profitable growth’.8 First, in market penetration, it is difficult not to think about McDonald’s. In Sweden, like in many other markets, McDonald’s has gone through a process of market penetration and finally the process has slowed down as a certain level of saturation is reached and the market share has increased. McDonald’s launched its first restaurant in Sweden in 1973. Years later, McDonald’s only had ten restaurants in Sweden, but it started engaging heavily in market penetration. By 1993 there were 68 restaurants in Sweden and McDonald’s continued to grow rapidly. Growth has slowed during the last decade and there are now about 220 restaurants in Sweden, a number that has not changed significantly since the turn of the millennium.9 This is a perfect example of market penetration – making more sales without changing the original product significantly. McDonald’s has made some minor modifications but has largely stayed with the original product range. Growth has been realised through marketing mix improvements, i.e. adjustments to its product design, advertising, pricing and marketing channels.

Company-wide strategic planning: defining marketing’s role

Figure 2.3  The product/ market expansion grid

The introduction of McFeast in 1977 and Big Tasty in 2004 are, from a larger perspective, minor changes and do not change the pronounced market penetration approach. Marketing has the main responsibility for achieving profitable growth for the company. Marketing needs to identify, evaluate and select market opportunities and lay down strategies for capturing them. One useful device for identifying growth opportunities is the product/­ market expansion grid, shown in Figure 2.3.10 Second, management might consider possibilities for market development – identifying and developing new markets for its current products. H&M, Subway and Zara have emphasised market development by rapid growth into new countries and regions, i.e. Europe, the USA, Russia, China and Japan, in the last 20–30 years. However, new markets doesn’t have to mean new countries – for instance, managers could review new demographic markets. New demographic groups – such as senior consumers, the 55+ cohort11 – could be encouraged to try new food styles, travel destination or products. Managers could also review new geographical markets, while considering the opportunities and risks involved in such decisions (see Chapter 14).

Market development – A strategy for company growth by identifying and developing new market segments for current company products.

Rapid growth in China, together with an explosion in consumer choice and an increasing interest in lifestyle consumption have made China one of the world’s most important markets.

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Chapter 2  Company and marketing strategy

ICA’s access to their 3.5 million ICA cardholders provided a great opportunity to launch a bank. Source: Courtesy of ICA AB

Product development – A strategy for company growth by offering ­modified or new products to current markets. Diversification – A strategy for company growth through starting up or buying businesses outside of its current products and markets. Downsizing – Reducing the business portfolio by ­eliminating products of business units that are not profitable or that no longer fit the company’s overall strategy.

Third, product development could be considered – offering modified or new products to current markets. Charter tour operators like Apollo, Detur, Solresor, Tui/Fritidsresor and Ving have introduced numerous new products, i.e. travel concepts for couples, families, seniors, SPA weekends and romantic city weekends. Fourth, management might consider diversification – starting up or buying businesses outside of the company’s current products and markets. Many strong brands explore the opportunities to make use of their brands through expanding into new markets. Examples are numerous, among them Fiat clothing, Peugeot bicycles, ICA Bank and Harley-Davidson perfume. Companies must not only develop strategies for growing their business portfolios, but also strategies for downsizing them. There are many reasons that a firm might want to abandon products or markets. The market environment might change, making some of the company’s products or markets less profitable. The firm may have grown too quickly or entered areas in which it lacks experience. Reallocating managerial and financial resources to areas where they are better needed and more critical for company future success may be a reasonable priority. Moreover, a company may have entered too many international markets without the proper research, or introduced new products that do not offer superior customer value. Finally, some products or business units simply age and die, a process that may take decades or just a few years. Typical examples are CRT television sets; Polaroid photographs with instant processing; and steam trains and ferries. When a firm finds it owns brands or businesses that are unprofitable or that no longer fit its overall strategy, it must carefully prune, harvest or divest them. Weak businesses usually require a disproportionate amount of management attention. That’s a key rationale for outsourcing activities that require attention but don’t result in customer value and company profitability. The same principle applies here. Managers should focus on promising growth opportunities, not fritter away energy trying to salvage fading ones.

Partnering to build customer relationships Marketing alone can’t create superior customer value. Under the company-wide strategic plan, marketers must work closely with other departments to form an effective company value chain and must then work with other companies in the marketing system to create an overall value delivery network that jointly serves customers. For example, Toyota knows the importance of building close relationships with its suppliers and includes the phrase ‘achieve supplier satisfaction’ in its mission statement. The company’s strategic plan establishes what kinds of businesses the company will operate and its objectives for each. Then, within each business unit, more detailed planning takes place. The major functional departments in each unit – marketing, human resources, 52

Partnering to build customer relationships

finance, controlling, accounting, purchasing, operations, information systems and others – must work together to accomplish strategic objectives and make sure the company reaches its overall goals in terms of growth, profitability and sustainability. Controlling, finance and human resources, in particular, may be crucial partners: marketers may come up with great ideas, but they need a counterpart to discuss the financial implications – controlling and finance may have a better overview of the company’s overall priorities, financial situation and risk profile.12 The human resources function is crucial in finding the best employees for the company.13 Marketing plays a key role in the company’s strategic planning in several ways. First, marketing provides a guiding philosophy – the marketing concept – that suggests that company strategy should revolve around building profitable relationships with important consumer groups. This is something different from a short-term financial focus. Second, marketing provides inputs to strategic planners by helping to identify attractive market opportunities and by assessing the firm’s potential to take advantage of them. Finally, within individual business units, marketing designs strategies for reaching the unit’s objectives. Once the unit’s objectives are set, marketing’s task is to help carry them out profitably. In addition to customer relationship management, marketers must also practise partner relationship management. They must work closely with partners in other company departments to form an effective value chain that serves the customer. Companies must partner effectively with other companies in the marketing system to form a competitively superior value delivery network. We now take a closer look at the concepts of a company value chain and a value delivery network. Few companies have the resources and competencies necessary to satisfy all consumer needs throughout the value chain.

Partnering with other company departments Each company department can be thought of as a link in the company’s value chain.14 Each department carries out value-creating activities to design, produce, market, deliver and support the firm’s products. That being said, activities and departments that don’t create value to the customer should be questioned. The firm’s success depends not only on how well each department performs its work, but also on how well the various departments co-ordinate their activities. For instance, Stadium’s, ICA’s or IKEA’s ability to offer the right products at low prices depends on the purchasing department’s skill in developing the required suppliers and buying from them at low cost. The IT department must provide fast and accurate information about which products are selling in each store. And its operations people must provide effective, lowcost merchandise handling. A company’s value chain is only as strong as its weakest link. Success depends on how well each department performs its work of adding customer value and on how well the activities of various departments are co-ordinated. If purchasing can’t obtain the right combination of product and price from suppliers, then marketing can’t deliver on its promise of creating customer value. Ideally then, a company’s different functions should work in harmony to produce value for consumers. But, in practice, departmental relations are full of conflicts and misunderstandings. The marketing department largely takes the consumer’s point of view. But when marketing tries to develop customer satisfaction, it can cause other departments to do a poorer job in their terms. Marketing department actions can increase purchasing costs, disrupt production schedules, increase inventories and create budget headaches. Overly influential marketers in combination with little budget control can result in financial problems, just as too little marketing orientation can result in dissatisfied customers. A typical conflict exists in many qualified IT, consultancy and ERP (enterprise resource planning) system companies. Marketers try to – and are forced by competitors to do so – stretch the limits and offer customers something programmers, system architects and the R&D department would consider impossible. Up to a certain point, this tension can provoke a creative situation that brings developers closer to the marketplace and to what customers are

Value chain – The series of departments that carry out value-creating activities to design, produce, market, deliver and support a firm’s products.

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When SJs X2000 fast trains, which have been in service since 1990, leave Gothenburg, Stockholm, Malmö or Copenhagen, there is a lot of partnering and co-operation with departments inside the company. Source: Alamy Images/ picturesbyrob

demanding. However, if marketers become too strong and influential, and don’t listen to the people who develop the products, it is likely to be difficult to maintain motivation and a sense of empowerment among those employees whose efforts are necessary to fulfil the marketers’ promises. Thus, the other departments may resist the marketing department’s efforts. All in all, all company departments should have a say and, at the end of the day, it’s a question of balancing different interests. The marketing perspective should never be neglected. Yet marketers must find ways to get all departments to ‘think consumer’ and to develop a smoothly functioning value chain. The idea is to maximise the customer experience across the organisation and its various customer touch points.

Partnering with others in the marketing system Other companies are not only competitors – they may also be partners that we need to deal with on a regular basis in a non-competitive context. For example, BMW and Mercedes, rivals for several decades, are running a joint project to provide their premium cars with competitive hybrid technology. By doing it together, they have a good chance of achieving a higher level of success, which is important, not least because Toyota and Lexus have developed and manufactured reliable hybrid cars for many years. Increasingly in today’s marketplace, competition no longer takes place between individual competitors. Rather, it takes place between the entire value delivery networks created by these competitors. Thus, Volvo’s performance against Lexus depends on the quality of Volvo’s overall value delivery network versus Lexus’s. Even if Volvo makes the best cars, it might lose out in the marketplace if Lexus’s dealer network provides more customer-satisfying sales and service. The automotive industry is very product-driven,15 which makes it likely that the company producing the most attractive car will be more competitive from a consumer point of view. However, in many other industries, the product in a strict sense constitutes only one of a number of factors that produce customer satisfaction. A restaurant, for instance, that offers a great location and, accordingly, an attractive meeting point from a social point of view may be perceived as a lot more attractive by consumers than one with excellent food and a poor location. 54

Marketing strategy and the marketing mix

Source: Mercedes-Benz

Long-time rivals Mercedes-Benz and BMW have cooperated on developing hybrid technology in order to compete with the technology leader in the field, Japanese ­Toyota-Lexus. In 2014, Mercedes-Benz and BMW started a cooperation for the design and production of wireless charging for electrical and hybrid cars. Source: BMW Group

Marketing strategy and the marketing mix Now that we’ve set the context in terms of company-wide strategy, it’s time to talk about customer-driven marketing strategy and programmes. The strategic plan defines the company’s overall mission and objectives. Marketing’s role and activities are shown in Figure 2.4, which summarises the major activities involved in managing a customer-driven marketing strategy and the marketing mix. The primary goal is to create value for customers and build profitable customer relationships. Next comes marketing strategy – the marketing logic by

Marketing strategy – The marketing logic by which the company hopes to create customer value and achieve profitable ­relationships.

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Chapter 2  Company and marketing strategy

Competitors

ion tat en

ing Customer value and relationships

Price iat ion

g

ere Diff

Promotion

im M pl ark em e en ting ta tio n

g tin ke ol ar tr M con

Marketing strategy involves two key questions: which customers will we serve (segmentation and targeting), and how will we create value for them (differentiation and positioning)? Then, the company designs a marketing programme – the four Ps – that delivers the intended value to targeted consumers

nt

sit Po

io nin

Ta rg et

Seg m

Product

Place At its core, marketing is all about creating customer value and profitable customer relationships

g tin ke ing ar n M lan p

M a an rke al tin ys g is

Marketing intermediaries

Suppliers

Publics

Figure 2.4  Managing marketing strategies and the marketing mix

which the company hopes to create this customer value and achieve these profitable relationships. The company decides which customers it will serve (segmentation and targeting) and how (differentiation and positioning). It identifies the total market, then divides it into smaller segments, selects the most promising segments, and focuses on serving and satisfying the customers in these segments. Guided by marketing strategy, the company designs an integrated ­marketing mix made up of factors under its control – product, price, place and promotion (the four Ps). We will now look briefly at each activity, and in later chapters discuss each one in more depth.

Customer-driven marketing strategy Before it can satisfy consumers, a company must first understand their needs and wants. Companies know that they cannot profitably serve all consumers in a given market – at least not all consumers in the same way. There are too many different kinds of consumers with too many different kinds of needs. Most companies are in a position to serve some segments better than others. Thus, each company must divide up the total market, choose the best segments, and design strategies for profitably serving chosen segments. This process involves market segmentation, market targeting, differentiation and positioning.

Market segmentation The market consists of many types of customers, products and needs. The marketer has to determine which segments offer the best opportunities. Consumers can be grouped and served in various ways based on geographic, demographic, psychographic and behavioural factors. The process of dividing a market into distinct groups of buyers who have different needs, 56

Marketing strategy and the marketing mix

characteristics or behaviours, and who might require separate products or marketing programmes, is called market segmentation. The extent to which market segmentation is useful varies. For example, IKEA would gain little by distinguishing between low-income and high-­ income customers, as the IKEA business model doesn’t provide tools to price discriminate and distinguish between customer segments. Premium airlines, on the other hand, have sophisticated tools to identify, communicate with and set prices for different customer groups. Leading international airlines typically have three or four classes on long-haul flights. A ticket from Frankfurt to New York with Lufthansa may cost SEK 5,000 in economy class, SEK 12,000 in premium economy class, SEK 25,000 in business class and SEK 65,000 in first class. A market segment consists of consumers who respond in a similar way to a given set of marketing efforts. In the market for fashion clothing, for example, consumers who want the biggest, most comfortable car regardless of price make up one market segment. Consumers who care mainly about price and operating economy make up another segment. It would be difficult to create one clothing brand that was the first choice of consumers in both segments.

Market segmentation – Dividing a market into distinct groups of buyers who have different needs, characteristics or ­behaviours, and who might require separate products or marketing programmes. Market segment – A group of consumers who respond in a similar way to a given set of marketing efforts.

Market targeting After a company has defined market segments, it can enter one or many of these segments. Market targeting involves evaluating each market segment’s attractiveness and selecting one or more segments to enter. A company should target segments in which it can profitably generate the greatest customer value and sustain it over time. A company with limited resources might decide to serve only one or a few special segments or ‘market niches’. An IT company in the Västbo region in Western Smaland, also known as the Gnosjö area, may have less competence in a strict sense than the major competitors in Gothenburg, Malmö and Helsingborg, but higher cost structures than low-cost players. However, through their unique attachment to the local area, superior knowledge about their customers and a location advantage resulting in shorter travel times and faster delivery, they may still be very competitive within their region, i.e. their niche market. Most companies enter a new market by serving a single segment, and if this proves successful, they add more segments. But in this case with the Västbo region, a decision to go outside the current market areas must be made with prudence – the company is not likely to be competitive in Gothenburg or Malmö. Market analysis is the key to understanding this, while gut feelings may suggest that the great success in the local area could mean success in other markets also. Many European companies have failed in the US. It’s a vast market with demanding customers and competitive firms doing everything they can to maintain their market shares. Thus, clever companies carry out an analysis of whether they should expand or not, and in which markets, often arriving at the conclusion that they can’t serve every customer in every market. The opposite also occurs. Some large companies eventually seek full market coverage. They want to be the General Motors (GM) of their industry. GM sells about 10 million cars a year – constantly battling for the number one position in competition with Toyota and Volkswagen – and says that it makes a car for every ‘person, purse and personality’. The leading company normally has different products designed to meet the special requirements of each segment.

Market targeting – The process of evaluating each market segment’s ­attractiveness and selecting one or more segments to enter.

Market differentiation and positioning After a company has decided which market segments to enter, it must decide how it will differentiate its market offering for each targeted segment and what positions it wants to occupy in those segments. Positioning is arranging for a product to occupy a clear, distinctive and desirable place relative to competing products in the minds of target consumers. As one positioning expert puts it, positioning is ‘why a shopper will pay a little more for your brand’.16 Marketers want to develop unique market positions for their products, reflecting a competitive advantage. If a product is perceived to be exactly like others on the market, consumers would have no reason to buy it, unless a lower price is offered.

Positioning – Arranging for a product to occupy a clear, distinctive and desirable place relative to competing products in the minds of target consumers.

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Differentiation – Actually differentiating the market offering to create superior customer value.

Marketing mix – The set of controllable tactical marketing tools – product, price, place and promotion – that the firm blends to produce the response it wants in the target market.

In fact, many products are very similar from the customer point of view, but the small things reflecting a strong position may make the difference. The company can offer greater customer value either by charging lower prices than competitors or by offering more benefits to justify higher prices. But if the company promises greater value, it must then deliver that greater value. Thus, effective positioning begins with differentiation – actually differentiating the company’s market offering so that it gives consumers more value. The company’s entire marketing programme should support the chosen positioning strategy. Differentiation is more difficult to achieve than a price advantage – the former needs attention from the entire organisation and throughout the customer experience, while the latter is easier: if prices are lower than competitors’ prices and the offer is ‘good enough’, many customers will like it.

Developing an integrated marketing mix After deciding on its overall marketing strategy, the company is ready to begin planning the details of the marketing mix, one of the major concepts in modern marketing. The marketing mix is the set of controllable, tactical marketing tools that the firm blends to produce the response it wants in the target market. The marketing mix consists of everything the firm can do to influence the demand for its product. The many possibilities can be collected into four groups of variables known as ‘the four ps’: product, price, place and promotion. Figure 2.5 shows the marketing tools under each P. Product means the goods-and-services combination the company offers to the target market. Thus, a Volvo XC90 consists of nuts and bolts, spark plugs, pistons, headlights and thousands of other parts. The car comes fully serviced and with some support functions, e.g. up to 11-year road assistance in the case of Volvo.17 Price is the suggested retail price plus factory options, e.g. sunroof, air suspension, a premium sound system, and LED headlights, minus discounts that are negotiated. Car dealers rarely charge the full sticker price. The buyer may get winter tyres, four-year inspections for free or attractive credit terms as part of the price offer to adjust the suggested price for the current competitive situation. Place includes company activities that make the product available to target consumers. Volvo partners include a large body of independently owned dealerships that sell the company’s model range. Availability is key here and is a function of dealer network density and location. In e-business, availability is measured in terms of time to delivery: if the customer will get the goods in a few days, it doesn’t matter whether the selling firm is located in northern Sweden, in the UK or anywhere else in the world. Promotion means activities that communicate the merits of the product and persuade target customers to buy it. Volvo Cars spends billions of Krona each year on marketing and advertising to convince consumers about the company and its many products.18 Dealership salespeople get many customer leads through the efforts arranged by Volvo Cars. Manufacturers, middlemen and dealers offer special promotions – sales, cash rebates, low-financing rates etc. – as added purchase incentives.

An effective marketing programme blends all of the marketing mix elements into an integrated marketing programme designed to achieve the company’s marketing objectives by delivering value to consumers. The marketing mix constitutes the company’s tactical toolkit for establishing strong positioning in target markets. Some critics think that the four Ps may omit or under-emphasise certain important activities. For example, they ask, ‘Where are services?’ Just because they don’t start with a ‘P’ doesn’t justify omitting them. The answer is that services, such as banking, airline and retailing 58

Marketing strategy and the marketing mix

Product Variety Quality Design Features Brand name Packaging Services

The marketing mix – or the four Ps – consists of tactical marketing tools, blended into an integrated marketing programme that actually delivers the intended value proposition to target customers

Target customers Intended positioning Promotion Advertising Personal selling Sales promotion Public relations

Figure 2.5  The four Ps of the marketing mix

Price List price Discounts Allowances Payment period Credit terms

Place Channels Coverage Assortments Locations Inventory Transportation Logistics

This product, a Volvo XC90, has nuts and bolts, spark plugs, headlights and a system for pedestrian detection, and offers services such as warranties and road assistance. But a good product is not enough. To be successful in the marketplace, the other tactical marketing tools in the ­marketing mix – price, place, and promotion – must support the product and, together with the product, constitute a coherent marketing offer. Source: Volvo Group

services, are products too. We might call them service products. ‘Where is packaging?’ the critics might ask. Marketers would answer that they include packaging as just one of many product decisions. All said, as Figure 2.5 suggests, many marketing activities that might appear to be left out of the marketing mix are subsumed under one of the four Ps. The issue is not whether there should be four, six or 10 Ps so much as what framework is most helpful in designing integrated marketing programmes. There is another concern, however, that is valid. It holds that the four Ps concept takes the seller’s view of the market, not the buyer’s view. From the buyer’s viewpoint, in 59

Chapter 2  Company and marketing strategy

this age of customer value and relationships, the four Ps might be better described as the four Cs:19 4Ps

4Cs

Product

Customer solution

Price

Customer cost

Place

Convenience

Promotion

Communication

Thus, whereas marketers see themselves as selling products, customers see themselves as buying value or solutions to their problems – remember that customers are buying holes, not drills. Customers are interested in the total costs of obtaining, using and disposing of a p ­ roduct, and want the product and service to be as conveniently available as possible. M ­ arketers would do well to think through the four Cs first and then build the four Ps on that platform.

Managing the marketing effort So far we’ve focused on the marketing in marketing management. Now, let’s turn to the ­management. Managing the marketing process requires the four marketing management functions shown in Figure 2.6 – analysis, planning, implementation and control. The company first develops company-wide strategic plans and then translates them into marketing and other plans for each division, product and brand. Through implementation, the company turns the plans into actions. Control consists of measuring and evaluating the results of marketing

Analysis

Planning

Implementation

Control

Develop strategic plans

Carry out the plans

Measure results

The first part of the chapter dealt with this – developing companywide and marketing strategies and plans

Evaluate results

Develop marketing plans

Take corrective action

We’ll close the chapter by looking at how marketers manage those strategies and plans – how they implement marketing strategies and programmes and evaluate the results Figure 2.6  Managing marketing: analysis, planning, implementation and control

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Managing the marketing effort

Internal

The goal of SWOT analysis is to match the company strengths to attractive opportunities in the environment, while eliminating or overcoming the weaknesses and minimising the threat

External

S W O T Strengths

Weaknesses

Internal capabilities that may help a company reach its objectives

Internal limitations that may interfere with a company’s ability to achieve its objectives

Opportunities

Threats

External factors that the company may be able to exploit to its advantage

Current and emerging external factors that may challenge the company’s performance

Positive

Negative

Hang on to this one! SWOT analysis is a widely used tool for conducting a situation analysis. You’ll find yourself using it a lot in the future, especially when analysing business cases

Figure 2.7  SWOT analysis: strengths (S), weaknesses (W), opportunities (0) and threats (T)

activities and taking corrective action where needed – here, assistance from controllers may be needed. Finally, marketing analysis provides information and evaluations needed for all of the other marketing activities.

Marketing analysis Managing the marketing function begins with a complete analysis of the company’s situation. The marketer should conduct a SWOT analysis, by which it evaluates the company’s overall strengths (S), weaknesses (W), opportunities (O) and threats (T) (see Figure 2.7). Strengths include internal capabilities, resources and positive situational factors that may help the ­company to serve its customers and achieve its objectives. Weaknesses include internal limitations and negative situational factors that may interfere with the company’s performance. Opportunities are favourable factors or trends in the external environment that the company may be able to exploit to its advantage. And threats are unfavourable external factors or trends that may present challenges to performance. The company should analyse its markets and marketing environment to find attractive opportunities and identify environmental threats. It should analyse company strengths and weaknesses as well as current and possible marketing actions to determine which opportunities it can best pursue. The goal is to match the company’s strengths to attractive opportunities in the environment, while eliminating or overcoming the weaknesses and minimising the threats.

SWOT analysis – An overall evaluation of the company’s overall strengths (S), weaknesses (W), opportunities (0) and threats (T).

Marketing planning Through strategic planning, the company decides what it wants to do with each business unit. A detailed marketing plan is needed for each business, product or brand. What does a marketing plan for a product or a brand look like? Table 2.2 outlines the major sections of a typical product or brand marketing plan. The plan begins with an executive summary that quickly reviews major assessments, goals and recommendations. The main section of the plan presents a detailed SWOT analysis of the current marketing situation as well as potential threats and opportunities. The plan next states major objectives for the brand and outlines the specifics of a marketing strategy for achieving them. A marketing strategy consists of specific strategies for target markets, positioning, the ­marketing mix and marketing expenditure levels. It outlines how the company’s business model intends to create value for target customers in order to capture value in return. In this section, the planner explains how each strategy responds to the threats, opportunities and 61

Chapter 2  Company and marketing strategy

Table 2.2  Contents of a marketing plan

Section

Purpose

Executive summary

Presents a brief summary of the main goals and recommendations of the plan for management review, helping top management to find the plan's major points quickly

Current marketing situation

Describes the target market and company's position in it, including information about the market, product performance, competition and distribution. This section includes: ●●

●●

●●

●●

a market description, which defines the market and major segments, then reviews customer needs and factors in the marketing environment that may affect customer purchasing a product review, which shows sales, prices and gross margins of the major products in the product line a review of competition, which identifies major competitors and assesses their market positions and strategies for product quality, pricing, distribution and promotion a review of distribution, which evaluates recent sales trends and other developments in major distribution channels

Threats and opportunities analysis

Assesses major threats and opportunities that the product might face, helping management to anticipate important positive or negative developments that might have an impact on the firm and its strategies

Objectives and issues

States the marketing objectives that the company would like to attain during the plan's term and discusses key issues that will affect their attainment. For example, if the goal is to achieve a 15 per cent market share, this section looks at how this goal might be achieved

Marketing strategy

Outlines the broad marketing logic by which the business unit hopes to create customer value and relationships and the specifics of target markets, positioning and marketing expenditure levels. This section also outlines specific strategies for each marketing mix element and explains how each responds to the threats, opportunities and critical issues spelled out earlier in the plan

Action programmes

Spells out how marketing strategies will be turned into specific action programmes that answer the following questions: What will be done? When will it be done? Who will do it? How much will it cost?

Budgets

Details a supporting marketing budget that is essentially a projected profit-and-loss statement. It shows expected revenues (forecasted number of units sold and the average net price) and expected costs of production, distribution and marketing. The difference is the projected profit. Once approved by higher management, the budget becomes the basis for materials buying, production scheduling, personnel planning and marketing operations

Controls

Outlines the control that will be used to monitor progress and allow higher management to review implementation results and spot products that are not meeting their goals. It includes measures of return on marketing investment

critical issues spelled out earlier in the plan. Additional sections of the marketing plan lay out an action programme for implementing the marketing strategy along with the details of a ­supporting marketing budget.

Marketing implementation Planning good strategies is only a start on the road to successful marketing. A brilliant ­marketing strategy counts for little if the company fails to implement it properly. Marketing implementation is the process that turns marketing plans into marketing actions in order to accomplish strategic marketing objectives. Whereas marketing planning addresses the what and why of marketing activities, implementation addresses the who, where, when and how. 62

Managing the marketing effort

Many managers think that ‘doing things right’ (implementation) is as important as, or even more important than, ‘doing the right things’ (strategy). The fact is that both are critical to success, and companies can gain competitive advantages through effective implementation. One firm can have essentially the same strategy as another, yet win in the marketplace through faster or better execution. Still, implementation is difficult – it is often easier to think up good marketing strategies than it is to carry them out, and some companies may be lucky to have a great location, great employees and a good financial situation while others find it very difficult to realise their strategies.

Marketing department organisation The company must design a marketing organisation that can carry out marketing strategies and plans. If the company is very small, one person might do all of the research, selling, advertising, customer service and other marketing work. As the company expands, a marketing department emerges to plan and carry out marketing activities. In large companies, this department contains many specialists. They have product and market managers, sales managers and salespeople, market researchers, advertising experts, CRM managers and many other specialists. Modern marketing departments can be arranged in several ways. The most common form of marketing organisation is the functional organisation. Under this organisation, different marketing activities are headed by a functional specialist – a sales manager, marketing manager or product manager. A company that sells across the country or internationally often uses a geographic organisation. Its sales and marketing people are assigned to specific countries and regions, thus allowing salespeople to settle into a territory, get to know their customers, and work with a minimum of travel time and cost. In a sparsely populated country like Sweden, it is difficult for many companies to handle the vast distances, particularly in northern Sweden, with huge costs of travel and very limited economic activity. Companies with many very different products or brands may create a product management organisation. Using this approach, a product manager develops and implements a complete strategy and marketing programme for a specific product or brand. Product management first appeared at Procter & Gamble in 1929, since some products were not doing well and unless there is some organisational division between brands and products, there may be too little attention paid to important brands and products. Large companies that produce many different products flowing into many different geographic and customer markets usually employ some combination of the functional, geographic and product organisation forms to ensure that each part receives its share of management attention. However, it can also add costly layers of management and reduce organisational flexibility. Today’s marketing environment calls for less focus on products, brands and territories and more focus on customer relationships so the organisational structure must reflect this changed emphasis.

Marketing control Because many surprises occur during the implementation of marketing plans, marketers must practise constant marketing control – evaluating the results and taking corrective action to ensure that objectives are attained. The marketing control process involves four steps. Management first sets specific marketing goals. It then measures its performance in the marketplace and evaluates the causes of any differences between expected and actual performance. Finally, management takes corrective action to close the gaps between its goals and its performance. This may require changing the action programmes or even changing the goals. Operating control involves checking ongoing performance against the annual plan and taking corrective action when necessary. Its purpose is to ensure that the company achieves the sales, profits and other goals set out in its annual plan, e.g. brand controllers ensuring that the brand exposition (physical appearance, signs, labels etc.) and brand experience (mystery 63

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shoppers may be used to control customer treatment; see Chapter 11) meet the standards. Operating control also involves determining the profitability of different products, territories, markets and channels. Strategic control involves looking at whether the company’s basic strategies are well matched to its opportunities. Marketing strategies and programmes can quickly become outdated, and each company should periodically reassess its overall approach to the marketplace. Companies may also use the marketing audit to assess different parts of the marketing process. The audit is normally conducted by an objective and experienced outside party. The findings may come as a surprise – and sometimes as a shock – to management. Remember: the customer, and in aggregated terms the market, is right. Managers claiming that their understanding of the brand is right, while the market is wrong, need to reconsider what they are thinking about their brand.

Measuring and managing return on marketing investment

Return on marketing investment (marketing ROI) – The net return from a marketing investment divided by the costs of the marketing investment.

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Marketing managers must ensure that their marketing budget is being spent wisely. In the past, many marketers spent freely on big, expensive marketing programmes, often without thinking carefully about the financial returns on their spending. They believed that marketing produces intangible outcomes, which do not lend themselves readily to measures of productivity or return. But because of more pressure from owners, tougher competition in most markets, and the fact that marketing spending has been questioned in many companies, improved methods for measuring the return on marketing investment have emerged. Return on marketing investment (or marketing ROI) is the net return from a marketing investment divided by the cost of the marketing investment. It measures the profits generated by investments in marketing activities. In measuring financial ROI, both the return and the investment are uniformly measured in krona, dollars, euros or any other currency. This seems straightforward but there are some problems involved in measuring return on marketing expenditure. First, there is as yet no consistent definition of marketing ROI. Second, the effects of marketing are, by definition, difficult to assess since there are an almost indefinite array of factors, including competitor moves, changing cost structures and emerging products. ­However, in some instances, it is very easy to measure increased sales, e.g. Findus selling 750 per cent more fish sticks during a campaign with ICA. Third, there are a multitude of goals in spending money on marketing: increased sales may be one goal, but improved image, a higher price premium or a better product mix may also be desired outcomes. Without any doubt, there is a certain element of contradiction across these goals: a higher price premium normally leads to lower short-term sales, everything else being equal. Fourth, the dynamic nature of marketing makes emphasis on one goal difficult. Findus may sell a lot more during a campaign, but find that consumers are less willing to pay full retail price after the campaign is finished. Fifth, ROI measures have some inherent limitations. If the company has a low current ROI – assume 8 per cent, even unprofitable activities that generate 10 per cent will boost ROI. Because of depreciation, the investment in the ROI formula will become lower, thus boosting ROI figures solely due to the passage of time.20 A company can assess return on marketing in terms of standard marketing performance measures, such as brand awareness, sales or market share. Many companies are assembling such measures into marketing dashboards – meaningful sets of marketing performance ­measures in a single display used to monitor strategic marketing performance. A marketing dashboard gives marketers the detailed measures they need to assess and adjust their marketing strategies.21 Increasingly, however, beyond standard performance measures, marketers are using ­customer-centred measures of marketing impact, such as customer acquisition, customer ­retention, customer lifetime value and customer equity. These measures capture not just

Summary

Marketing investments

Marketing returns Inproved customer value and satisfaction

Beyond measuring return on marketing investment in terms of standard performance measures such as sales or market share, many companies are using customer-relationship measures such as customer satisfaction, retention and equity. These are more difficult to measure, but capture both current and future performance

Increased customer attraction

Increased customer retention

Cost of marketing investment

Increased customer lifetime values and customer equity

Return on marketing investment

Figure 2.8  Return on marketing investment Source: Adapted from Roland T. Rust, Katherine N. Lemon and Valerie A. Zeithaml, ‘Return on Marketing: Using Consumer Equity to Focus Marketing Strategy’, Journal of Marketing (January 2004, p. 112).

current marketing performance but also future performance resulting from stronger customer relationships. Figure 2.8 views marketing expenditures as investments that produce returns in the form of more profitable customer relationships.22

Summary In this chapter, we examined company-wide strategic planning and marketing’s role in the organisation. Then, we looked more deeply into marketing strategy and the marketing mix, and reviewed the major marketing management functions. In future chapters, we’ll expand on these fundamentals. Strategic planning sets the stage for the rest of the company’s planning, and involves developing a strategy for long-term survival and growth. It consists of four steps: defining the company’s mission, setting objectives and goals, designing a business portfolio, and developing functional plans. The company mission should be market-oriented, realistic, specific, motivating and consistent with the market environment. The mission is then transformed into detailed supporting goals and objectives to guide the entire company. Based on those goals and objectives, along with the ability to create a fit between the strengths of the organisation and opportunities in the environment, headquarters design a business portfolio, deciding which businesses and products should receive more or fewer resources. The product/market expansion grid suggests four possible growth paths: market penetration, market development, product development and diversification. In turn, each business and product unit must develop detailed marketing plans in line with the company-wide plan. Under the strategic plan, the major functional departments – marketing, human resources, finance, accounting, purchasing, operations, information systems and others – must work together to accomplish strategic objectives. Marketing plays a key role in the company’s strategic planning 65

Chapter 2  Company and marketing strategy

by providing a marketing concept philosophy and inputs regarding attractive market opportunities. Within individual business units, marketing designs strategies for reaching the unit’s objectives and helps to carry them out profitably. Marketers alone cannot produce superior value for customers. A company’s success depends on how well each department performs its customer value-adding activities and how well the departments work together to serve the customer. Thus, marketers must work closely with partners in other departments to form an effective value chain that serves the customer and partner effectively with other companies to form a competitively superior value delivery network. Through market segmentation, targeting, differentiation and positioning, the company divides the total market into smaller segments, selects segments it can best serve, and decides how it wants to bring value to target consumers. It then designs an integrated marketing mix to produce the response it wants in the target market. The marketing mix consists of product, price, place/distribution and promotion/market communication decisions. To find the best strategy and mix and to put them into action, the company engages in marketing analysis, planning, implementation and control. The main components of a marketing plan are the executive summary, current marketing situation, threats and opportunities, objectives and issues, marketing strategies, action programmes, budgets and controls. To be successful, companies must not only plan but also be effective at implementation and make sure that their marketing budget is being well spent. Today’s marketers face growing pressures to show that they are adding value in line with their costs.

Key terms Strategic planning

45

Market segmentation

57

Mission statement

46

Market segment

57

Business portfolio

47

Product/market expansion grid

51

Portfolio analysis

47

Market targeting

57

Growth–share matrix

48

Positioning 57

Market penetration

50

Differentiation 58

Market development

51

Marketing mix

58

Product development

52

SWOT analysis

61

Diversification 52

Marketing implementation

62

Downsizing 52

Marketing control

63

Value chain

53

Marketing strategy

55

Return on marketing investment (marketing ROI)

64

Discussing the concepts 1. Define strategic planning and briefly describe the four steps that lead managers and the firm through the strategic planning process. Discuss the role marketing plays in this process.

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2. Describe the Boston Consulting Group’s approach to portfolio analysis. Briefly discuss why management may find it difficult to dispose of a ‘question mark’. In what ways may this portfolio approach be criticised?

Marketing by the numbers

an adequate job of describing marketer responsibilities in preparing and managing marketing programmes? Why? Do you see any issues with this framework in relation to service products?

3. Name and describe the four product/market expansion grid strategies by referring to companies or other organisations you know. 4. Discuss the differences between market segmentation, targeting, differentiation and positioning. What two simple questions do they address? 5. Define each of the four Ps in the marketing mix. Does the four Ps framework do

6. What is return on marketing investment? Why is it difficult to measure? Describe inherent problems in this approach.

Applying the concepts 1. Explain what a SWOT analysis involves. Develop a SWOT analysis for SJ and your university/school of business. 2. In a small group, discuss whether the following statement from Egypt’s leading mobile phone operator, Mobinil (with 35 million customers), meets the five criteria of a good mission statement: ‘To maintain our position as the leading mobile service provider in Egypt, providing the best quality service to our customers, the best working environment for our employees, top value for our shareholders and proudly contributing to the development of our community.’ 3. Suggest a company you know of that offers a broad product range, e.g. Sony Mobile Phones or Volkswagen. Apply the Boston Consulting Group portfolio model to the company’s product range and try to draw conclusions about the balance between the four categories in the portfolio model. Explain how this model has been useful in your analysis.

Marketing by the numbers The following exercise discusses other marketing profitability metrics in addition to return on marketing investment (marketing ROI) calculations described in this chapter. Overleaf is a profit-and-loss statement for a business: SEK Net sales

640,000,000

Cost of goods sold

280,000,000

Gross margin

360,000,000

Marketing expenses Sales expenses

50,000,000

Promotion expenses

20,000,000  70,000,000

General and administrative expenses Marketing salaries and expenses

12,000,000

Indirect overhead

40,000,000

Net profit before income tax

 52,000,000 238,000,000

1. Calculate the net marketing contribution (NMC) for this company. 2. Calculate both marketing return on sales (marketing ROS) and marketing ROI. Is this company doing well?

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References 1 For more on mission statements, see Joseph Peyrefitte and Forest R. David, ‘A content analysis of mission statements of United States firms in four industries’, International Journal of Management ( June 2006, pp. 296–301); Jeffrey Abrahams, 101 Mission Statements from Top Companies (Berkeley, CA: Ten Speed Press, 2007); and Jack and Suzy Welch, ‘State your business’, Bloomberg Businessweek (3 January 2008). 2 Anders Parment, Auto Brand. Building Successful Automotive Brands for the Future. New York: Kogan Page, 2014. 3 Mission statements are from Cold Stone Creamery (www.coldstonecreamery.com/assets/pdf/secondary/ Pyramidl.pdf); and eBay (http://pages.ebay.com/aboutebay/thecompany/companyoverview.html), accessed September 2008. 4 See lKEA.com. 5 There is also a vast literature in fields other than marketing that explains the deployment and aggregation of goals in a goal structure, where the overall company strategy is deployed, anchored and measured in different organisational layers. 6 The following discussion is based in part on information found at www.bcg.com/publications/files/ Experience_Curve_IV_Growth_Share_Matrix_1973.pdf (December 2008). 7 cf. Henry Mintzberg, Bruce Ahlstrand and Joseph B. Lampel, Strategy Safari. A Guide Tour Through the Wilds of Strategic Management, 2nd edn (Prentice Hall, 2008); Vasudevan Ramanujam and N. Venkatraman, ‘An inventory and critique of strategy research using the PIMS database’, Academy of Management Review, 9(1), 138–51 (1984); John A. Seeger, ‘Research note and communication. Reversing the images of BCG’s growth/ share matrix’, Strategic Management Journal, 5(1), 93–7 (1984). 8 For an interesting discussion on managing growth, see Matthew S. Olson, Derek van Beverand and Seth Verry, ‘When growth stalls’, Harvard Business Review (March 2008, pp. 51–61). 9 www.mcdonalds.se. 10 H. Igor Ansoff, ‘Strategies for diversification’, Harvard Business Review (September–October 1957, pp. 113–24). 11 cf. Anders Parment, Marknadsfor till 55plus (Liber, 2008). 12 cf. Fredrik Nilsson, Nils-Goran Olve and Anders Parment, Controlling for Competitiveness (Copenhagen Business School Press, 2011). 13 Simon Barrow and Richard Mosley, The Employer Brand: Bringing the Best of Brand Management to People at Work (Wiley & Sons, 2005). 14 Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985); and Michel E. Porter, ‘What is strategy?’, Harvard Business Review (November–December 1996, pp. 61–78). Also see ‘The value chain’, accessed at www.quickmba.com/strategy/value-chain ( July 2008); and Philip Kotler and Kevin Lane Keller, Marketing Management (Upper Saddle River, NJ: Prentice Hall, 2009, pp. 35–6 and pp. 252–3). 15 Anders Parment, Automobile Marketing. Distribution Strategies for Competitiveness (VDM Verlag, 2009). 16 Jack Trout, ‘Branding can’t exist without positioning’, Advertising Age (14 March 2005, p. 28). 17 The car owner must bring the car for inspection to a Volvo repair shop once a year to maintain the road assistance – a smart way of securing demand for authorised inspections and repairs and at the same time providing a consumer advantage. 18 ‘100 leading national advertisers’, special issue of Advertising Age (23 June 2008, p. 10). 19 The four Ps classification was first suggested by E. Jerome McCarthy, Basic Marketing: A Managerial Approach (Homewood, IL: Irwin, 1960). For the four Cs, other proposed classifications, and more discussion, see Robert Lauterborn, ‘New marketing litany: 4P’s passe; C-words take over’, Advertising Age (1 October 1990, p. 26); Don E. Schultz, ‘New definition of marketing reinforces idea of integration’, Marketing News (15 January 2005, p. 8) and Philip Kotler, ‘Alphabet soup’, Marketing Management (March–April 2006, p. 51). 20 Problems with ROI measures are well described in Kenneth Merchant and Wim Van der Stede, Management Control Systems. Performance Measurement, Evaluation and Incentives, 2nd edn (Prentice Hall, 2007). 21 For more discussion, see Bruce H. Clark, Andrew V. Abela and Tim Ambler, ‘Behind the wheel’, Marketing Management (May–June 2006, pp. 19–23); Christopher Hosford, ‘Driving business with dashboards’, BtoB

68

References

(11 December 2006, p. 18); and Allison Enwright, ‘Measure up: create a ROMI dashboard that shows current and future value’, Marketing News (15 August 2007, pp. 12–13). 22 For a full discussion of this model and details on customer-centred measures of return on marketing investment, see Roland T. Rust, Katherine N. Lemon and Valerie A. Zeithaml, ‘Return on marketing: using customer equity to focus marketing strategy’, Journal of Marketing ( January 2004, pp. 109–27); Roland T. Rust, Katherine N. Lemon and Das Narayandas, Customer Equity Management (Upper Saddle River, NJ: Prentice Hall, 2005); David Tiltman, ‘Everything you know is wrong’, Marketing (13 June 2007, pp. 28–9); Roland T. Rust, ‘Seeking higher ROI? Base strategy on customer equity’, Advertising Age (10 September 2007, pp. 26–7); and Valerie P. Valente, ‘Redefining ROI’, Advertising Age (28 January 2008, p. C7).

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Analysing the marketing environment

Chapter

three

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The marketing environment

■■

The company’s microenvironment

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The company’s macroenvironment

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Company case – The transparent car dealership: tearing down walls that disturb customer relationships

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Company case – Flying in the future? Business travellers, punctuality and environmental impact

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Responding to the marketing environment: proactive and reactive attitudes

▲­

Mini contents

Source: Arctic Images/Alamy

Chapter preview In Chapters 1 and 2, you learned about the basic concepts of marketing and the steps in the marketing process for building profitable relationships with targeted consumers. In Chapters 3–6, we’ll look deeper into the first step of the marketing process – understanding the marketplace and customer needs and wants. In this chapter, you’ll discover that marketing operates in a complex and changing environment. Other actors in this environment – suppliers, intermediaries, customers, competitors, publics, and others – may work with or against the company. Major environmental forces – demographic, economic, ecological, technological, political and cultural – shape marketing opportunities, pose threats and affect the company’s ability to build customer relationships. To develop effective marketing strategies, you must first understand the environment in which marketing operates.

Learning objectives After reading this chapter, you should be able to: 1 Describe the environmental forces that affect a company’s ability to serve its customers. 2 Explain how changes in the demographic and economic environments affect marketing decisions. 3 Identify the major trends in a firm’s ecological and technological environments. 4 Explain the key changes in the political and cultural environments. 5 Discuss how companies can react to the marketing environment.

The marketing environment

The marketing environment A company’s marketing environment consists of the actors and forces outside marketing that affect marketing management’s ability to build and maintain successful relationships with target customers. More than any other group in a company, marketers must be the environmental trend-trackers and opportunity-seekers. And this is a round-the-clock-job rather than one done during office hours. It’s about putting out feelers to pick up what is happening in the marketplace: what people are saying about products, brands and competitors, and best practice that may emerge in a context inherently different from the one where smart marketers apply it. Although every manager in an organisation needs to observe the outside environment, marketers have two special aptitudes. They have disciplined methods – marketing research and marketing intelligence – for collecting information about the marketing environment. They also spend more time in customer and competitor environments. By carefully studying the environment, marketers can adapt their strategies to meet new marketplace challenges and opportunities. The marketing environment is made up of a microenvironment and a macroenvironment. The microenvironment consists of the actors close to the company that affect its ability to serve its customers – the company, suppliers, marketing intermediaries, customer markets, competitors, and publics. The company maintains relationships with these actors and can influence their behaviour to an extent. The macroenvironment consists of the larger societal forces that affect the microenvironment – demographic, economic, ecological, technological, political and cultural forces. We look first at the company’s microenvironment.

Marketing environment – The actors and forces outside marketing that affect marketing management’s ability to build and maintain successful relationships with target customers. Microenvironment – The actors close to the company that affect its ability to serve its customers — the company, suppliers, marketing intermediaries, customer markets, competitors and publics. Macroenvironment – The larger societal forces that affect the microenvironment – demographic, economic, ecological, technological, political, and cultural forces.

A marketer is always interested in what is happening in modern consumer markets. Just because you’re on holiday in New York City doesn’t mean you will ignore the marketing messages that are all around you. Source: Anders Parment

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Chapter 3 Analysing the marketing environment

the company’s microenvironment The microenvironment includes all of the actors close to the company that affect, positively or negatively, its ability to create value for, and relationships with, its customers. Figure 3.1 shows the major actors in the marketer’s microenvironment. Marketing success will require building relationships with other company departments, suppliers, NGOs that promote sustainability, marketing intermediaries, customers, competitors, politicians, journalists and other publics, which combine to make up the company’s value delivery network. In designing marketing plans, marketing management takes other company groups into account – e.g. top management, finance, R&D, operations and accounting. All of these interrelated groups form the internal environment. Top management sets the company’s mission, objectives, broad strategies and policies. Marketing managers make decisions within the strategies and plans made by top management. As we discussed in Chapter 2, marketing managers must work closely with other company departments. Other departments have an impact on the marketing department’s plans and actions. And under the marketing concept, all of these functions must ‘think consumer’. They should work in harmony to provide superior customer value and relationships. Suppliers form an important link in the company’s overall customer value delivery system. They provide the resources needed by the company to produce its goods and services. Supplier problems can seriously affect marketing. Marketing managers must watch supply availability and costs. Supply shortages or delays, labour strikes and other events can hit sales in the short term and damage customer satisfaction in the long run. Rising supply costs may force price increases that can harm the company’s margins, sales volume and profitability. Most marketers today treat their suppliers as partners in creating and delivering customer value. Marketing intermediaries help the company to promote, sell and distribute its products to final buyers. They include resellers, physical distribution firms, marketing services agencies and financial intermediaries. Resellers are distribution channel firms that help the company find customers or make sales to them. These include wholesalers and retailers who buy and resell merchandise. Selecting and partnering with resellers is not easy. No longer do manufacturers have many small, independent resellers from which to choose. They now face large and growing reseller organisations such as ICA, El-Giganten and Byggmax – companies that frequently have enough power to dictate terms or even shut smaller manufacturers out of large markets. Physical distribution firms help the company to stock and move goods from their points of origin to their destinations. Marketing services agencies are the marketing research firms, advertising agencies, media firms and marketing consulting firms that help the company to target and promote its products to the right markets. Financial intermediaries include banks, credit companies, insurance companies and other businesses that help finance transactions or insure against the risks associated with the buying and selling of goods. Like suppliers,

The com pan y

rs

Co m p

Marketing

lics Pub

74

lie

Custom keting ers Mar ediaries m r inte

rs ito et

Su pp

Figure 3.1 Principal actors in the company’s microenvironment

The company’s microenvironment

By using their market power, El-Giganten can force suppliers to deliver products at low prices. If suppliers disagree, the option to terminate the contract is sometimes exercised. Source: Ronny Johannesson/ KVP/ Scanpix/Press Association Images

marketing intermediaries form an important component of the company’s overall value ­delivery system. The company’s marketing environment also includes various publics. A public is any group that has an actual or potential interest in or impact on an organisation’s ability to achieve its objectives. Seven types of publics may be identified: ●●

Financial publics. This group influences the company’s ability to obtain funds. Banks, investment houses and stockholders are the major financial publics. Many companies see investor relations (IR) as a key strategic priority.

●●

Media publics. This group carries news, features and editorial opinion. It includes newspapers, magazines, internet forums, radio and television stations, bloggers etc. In building relationships with a segment of consumers, the channels provided through the radio and magazines to particular listeners and readers can be very useful.

●●

Government publics. Management must take government developments into account. Marketers must often consult the company’s lawyers on issues of product safety, truth in advertising and other matters. In most countries, there are certain laws that restrict ­organisational decision-making.

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Citizen-action publics. A company’s marketing decisions may be questioned by consumer organisations, environmental groups, minority groups and others. Its public relations department can help it to stay in touch with consumer and citizen groups.

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Local publics. This group includes neighbourhood residents and community organisations. Large companies usually appoint a community relations officer to deal with the community, attend meetings, answer questions and contribute to worthwhile causes. Poor relations with the local public may be very troublesome for the company and restrict its market opportunities.

●●

General public. A company needs to be concerned about the general public’s attitude toward its products and activities. The public’s image of the company affects its buying.

●●

Internal publics. This group includes workers – who may be organised through unions – managers, volunteers and the board of directors. When employees feel good about their company, the positive attitude spills over to external publics, and strengthens the image that employees and consumers project about the company. 75

Chapter 3  Analysing the marketing environment

The media public must be considered in many of the decisions companies make. And it’s not easy to control what journalists and bloggers report and say. Sometimes they store up information and release it just when a story seemed to have lost its relevance. The explosion in the magazines market is one of the trends that has made it difficult to follow what is written and said about a company. Source: Anders Parment

As we’ve emphasised throughout, customers are the most important actors in the company’s microenvironment. The aim of the entire value delivery system is to serve target customers and create strong relationships with them. The company might target any or all of four types of customer markets. Consumer markets consist of individuals and households that buy goods and services for personal consumption. Business markets buy goods and services for further processing or for use in their production process, whereas reseller markets buy goods and services to resell at a profit. Government markets are made up of government agencies that buy goods and services to produce public services or transfer the goods and services to others who need them. These four types of markets may be local, domestic or international markets. Over time, international markets have been more available to any type of company. The European Commission (EC) has made some effort to reduce barriers across EC countries and create a market in which the nationality of companies doing business with each other is not an issue.

The company’s macroenvironment The company and all of the other actors operate in a larger macroenvironment of forces that shape opportunities and pose threats to the company. The macroenvironment consists of broader forces that affect the actors in the microenvironment, and companies normally have no, or very limited, influence on forces in the macroenvironment. As the company is unlikely 76

The company’s macroenvironment

logical Eco

Figure 3.2  Influential forces in the company’s macroenvironment

Company

to have any significant influence on these forces, it is very important that companies scan the macroenvironment to stay in touch with what is happening. Figure 3.2 shows the six major forces in the company’s macroenvironment. In the remaining sections of this chapter, we examine these forces and show how they affect marketing.

Demographic environment Demography is the study of human populations in terms of size, density, location, age, gender, occupation and other statistics. The demographic environment is of major interest to marketers because changes in demographics – in the nature of human populations – mean changes in markets. The biggest demographic change is perhaps the changing age structure of the population. Changes in the world demographic environment have major implications for businesses. The world population is growing at a fast pace. In 2015 there were 7.3 billion people and in 2025 it will surpass 8 billion.1 The world’s large and highly diverse population poses both opportunities and challenges, and the unevenly distributed population growth will fundamentally influence the way markets and market opportunities emerge and grow. More than a quarter of a century ago, to curb its skyrocketing population, the Chinese government passed regulations limiting families to one child each. As a result, Chinese children have been showered with attention and luxuries under what’s known as the ‘six-pocket syndrome’, with as many as six adults – two parents and four doting grandparents – indulging the whims of an only child. These children now range in age from newborns to late twenties, and they affect markets for everything from children’s products to financial services, restaurants and luxury goods. Parents with only one child at home now spend about 40 per cent of their income on their cherished offspring, creating huge market opportunities for marketers, and for children’s educational products in particular.2 Despite the one-child principle, China’s population of 1.4 billion people is still growing although slower than before. In 1969, the yearly growth rate in China was 2.85 per cent; in 2014 it was 0.59.3 In Western countries, birth rates are low and if it wasn’t for the increasing life expectancy and immigration, many countries would face decreasing numbers of citizens. The problem is not as serious in the Nordic countries as it is in southern Europe: the birth rate in Sweden is around 1.8 children per woman, which is not far off the figure of 2.1 that is considered to be the replacement level; Spain (1.38) and Italy (1.34) are a long way behind.4 One explanation for this is the generous transfer systems that make it possible for many employees to combine maternity or paternity leave with a decent living standard and long-term career progress.5

Demography – The study of human populations in terms of size, density, ­location, age, gender, occupation and other statistics.

Baby boomers Baby boomer refers to people born during the demographic birth boom following World War II. Definitions vary but in general the baby boomers cohort is defined as individuals born between 1945 and the very early 1960s. In general, baby boomers are associated with a 77

Chapter 3  Analysing the marketing environment

rejection or redefinition of traditional values, and they came of age during a turbulent period with the 1968 movement, high economic growth but later stagflation, a strong emergence and growth of a youth culture with popular culture including music, apparel etc. It has been suggested that baby boomers are in a state of denial regarding their own aging, and are leaving an undue economic burden on their children for their retirement and care. Many baby boomers have now retired and have in aggregate terms higher purchase power and more time than younger consumers.6

Generation X The Generation Xers – definitions vary but in most cases they include people born between the early 1960s and the mid- to late 1970s – are defined as much by their shared experiences as by their age.7 Generation Xers have been found to be particularly individualistic and have a critical mindset when it comes to commercialism and marketing.8 They have been subjected to a lot more advertising and marketing than earlier generations, and they are more sceptical of advertising that insults your intelligence, embarrasses competitors and overemphasises what is ‘cool’. Thus, from a marketing viewpoint, the Generation Xers are a sceptical bunch. They tend to research products before they consider a purchase, and they tend to be less receptive to overt marketing pitches. However, once labelled as ‘the MTV generation’ and viewed as slackers who whined about boring and badly paid jobs, the Generation Xers have grown up and are now taking over. The Generation Xers are displacing the lifestyles, culture and materialistic values of the baby boomers. The emergence and development of Generation Xers and their critical view on marketing emphasises the need for marketers to be creative and stay one step ahead of consumers.

Generation Y Generation Y (also called the Millennials) are those born between the late 1970s and the mid1990s (also here, definitions vary), and they are changing the way we look upon consumer and labour markets in many respects.9 Their utter fluency and comfort with digital technology is only one of many jigsaw pieces in the Generation Y puzzle. These individuals have grown up in a branded society overcrowded with commercial messages and a never-ending supply of choices and opportunities. On consumer markets, they are demanding, aware of their rights and generally not very loyal. They see brands as an integrated part of consumption and personal image-building. Thus, personal branding, which is easily managed through social media, comes naturally to them. Virtual networking, new communication technologies and intensive feedback are normal parts of their everyday life. Employers are increasingly asked by Generation Y employees to offer a good work environment, attractive terms and the opportunity for personal development, thus reflecting Generation Y’s need for self-realisation not only in relation to consumption but also at work. In today’s transparent society, having the right employees appears to be increasingly important. Thus, recruiting employees that fit the organisation’s strategy and culture is necessary.10 These changes and tendencies cannot be explained by the age of Generation Y individuals alone. A number of changes at different levels – society, the market environment and the way organisations are responding to the emerging situation – are together creating a new set of circumstances for individuals whose attitudes, priorities and choices are presenting an important challenge – and opportunity – to companies.11

Generational marketing Do marketers need to create separate products and marketing programmes for each generation? Some experts warn that marketers need to be careful about turning off one generation each time they craft a product or message that appeals effectively to another. Others caution that each generation spans decades of time and many socioeconomic levels.12 Defining people by their birth date may be less effective than segmenting them by their lifestyle, life stage or the common values they seek in the products they buy. Over time, 78

The company’s macroenvironment

a multitude of consumption styles has emerged within each age group, so age alone may not be sufficient to segment a market, unless the product is generic by nature. We will discuss many other ways to segment markets in Chapter 7.

Changing family structures The traditional household in the Scandinavian model consists of a husband, a wife and children. For some time other family constellations have been making an impact from a structural point of view but also through increased cultural acceptance. In recent decades in particular the ideal of the two- or three-child family has been losing some of its lustre. More people are divorcing or separating, choosing not to marry, are single live-alones or adult live-togethers of one or both sexes, marrying later or marrying without intending to have children. Marketers must increasingly consider the special needs of non-traditional households, because they are now growing more rapidly than traditional households. Each group has distinctive needs and buying habits. The number of working women has also increased greatly, a change that began earlier in Sweden than in most other countries. Meanwhile, more men are staying home with their children on paternity leave, managing the household while their wives go to work. According to reliable statistics (from Försäkringskassan, the Swedish transfer payment authority), the average number of male stay-at-home days doubled from year 2000 to 2014.13

Geographic shifts in population We are witnessing a period of great migratory shifts between and within countries. The Swedish population is not particularly mobile (cf. the USA where 14 per cent of all residents move each year), but while geographic shifts are limited the direction is clear: Swedes move from rural to metropolitan areas. Such population shifts interest marketers because people in different regions buy differently. For example, people in northern Sweden buy more reindeer meat per capita than people in other parts of Sweden; people in Skåne and Stockholm drink more alcohol;14 and people in Skåne dine out more often because of a more continental climate and buying habits. Although urbanisation has been going on for more than a century, the shifts have not been uniform. In the 1950s and 1960s, there was a massive exodus of inhabitants and retailing from

Urbanisation and geographic shifts in population make reliable public transport crucial for inhabitants’ everyday life. With many people commuting on a daily basis, cancelled trains or traffic accidents reveal how sensitive the system is. Source: Anders Parment

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Chapter 3  Analysing the marketing environment

Shopping malls are normally located at a certain distance from city centres. They have been increasing in number and size at the same time as city centres, to an increasing extent, are being designed to attract diners, late-night shoppers and those interested in cultural activities. Thus city centres that are being renovated to stimulate commercial activity are competing with an increasing number of shopping malls. Where will it all end up? Source: Peter Erik Forsberg/ Lifestyle/Alamy

People in Skåne dine out more often than in many other parts of Sweden because of the more continental climate and buying habits. Source: Getty Images/John Freeman

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The company’s macroenvironment

the cities to the suburbs, and the rise of the motor car led to the emergence of the shopping mall. Politicians were very generous in giving over land to malls, as they were afraid of being at a competitive disadvantage in relation to other cities. Then, in the 1990s there was another shift that contributed to the revitalisation of city centres. By moving commercial activity to the suburbs and to shopping malls, city centres had become unattractive to stores and investors; after 6 pm the risk of criminal activity increased as there were fewer people around. But by encouraging restaurants, clubs and stores, and cutting or excluding car traffic altogether, city centres once again became attractive places – to work in, for going out after work, and to live in.15

A better-educated, more white-collar and more professional population Consumers are becoming better educated and more aware of their rights, and they also have more tools available to compare prices and offers.16 These changes have contributed to a new attitude towards using consumer power in dealing with companies, whether they are letting hotel rooms, selling food or providing university education. The rising number of switched-on and well-educated people will further increase the demand for quality products, books, magazines, travel, personal computers and internet services. The workforce is also becoming more white-collar, and traditional blue-collar jobs now often require computer skills and training in handling advanced machines and other vehicles. Car mechanics increasingly need advanced computer skills for troubleshooting, and they must be able to discuss the often costly repairs with increasingly demanding customers. A lift repairer used to be a job with a lot of freedom and little surveillance by head office. However, with GPS technology, advanced repair equipment and pressure on efficiency and profitability, the situation has changed. After having implemented new systems at a major lift manufacturer, about half the old workforce decided to quit their jobs in the after-sales service department, and efficiency improved by 50–100 per cent.17 Blue-collar workers are increasingly inclined to change jobs as their competence level increases, and they get better paid as their employer becomes more dependent upon them.18

Company case the transparent car dealership: tearing down walls that disturb customer relationships As in many other industries, in car dealerships there has long been a clear division between the sales and after-sales departments. The former has generated sales, cash flow and profitability while the latter has been seen as a support department. However, the poor profitability of car retailing turned management’s focus towards the after-sales business. Although the profitability of after-sales – inspections, repairs and spare parts – varies depending on the transfer price method used,19 few question the idea that after-sales make a major contribution to profitability. As a rule of thumb, after-sales represents two-thirds of the profits but only one-third of the turnover.20 Traditionally, car sales staff are well dressed, have a commission-based salary that allows them to earn good money and drive a company car, while after-sales staff drive old cars, have low salaries and a low status in the organisation. But there is a lot of evidence to suggest that while sales staff might sell the first car, it is the after-sales department that determines whether the customer will come back and buy a second and third car of the same brand or from the same dealer.

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Smart dealerships have discovered the inherent inconsistencies in having a strict separation between sales and after-sales. A number of measures have been implemented to remedy the situation and one that has had far-reaching motivational and ideological implications has been the decision to open up the workshop in some dealerships. Instead of being a closed-off department, with a manager taking care of customers, a glass wall has been erected between the repair shop and the customer-facing area, and customers get to meet the mechanic directly. By tearing down the walls, everybody can see what car mechanics do, thus helping to allay suspicions of them not working efficiently, and where these suspicions were true, the mechanics are encouraged to change their ways. Being seen as an integrated part of the dealer’s offer can also help to boost mechanics’ self-esteem and motivation.

Questions 1 What do you think will happen to the status of car mechanics – both within the organisation and in relation to customers – in dealerships with a traditional approach and those with a transparent approach (i.e. a glass wall)? 2 Customers’ ability to trust inspections and repairs is crucial to the long-term viability of a dealership. What do you think will happen to the potential to build trust among customers – and to charge them – if car mechanics talk directly to them instead of through a manager?

Economic environment Markets require buying power as well as people. The economic environment consists of factors that affect consumer purchasing power and spending patterns. Like other environments discussed in this chapter, the economic environment can offer both opportunities and threats, and a change that provides an opportunity to one company could be damaging to another, as when economic downturns make life difficult for providers of expensive holidays, dining, and events while those offering value-for-money gain market shares. Marketers must pay close attention to major trends and consumer spending patterns both across and within their world markets. Nations vary greatly in their levels and distribution of income. Some countries have industrial economies, which constitute rich markets for many different kinds of goods. At the other extreme are subsistence economies – they consume most of their own agricultural and industrial output and offer few market opportunities. In between are developing economies – which can offer outstanding marketing opportunities for the right kinds of products. Consider India with its population of 1.3 billion people. In the past, only India’s elite could afford to buy a car. In fact, only one in seven Indians now owns one. But recent dramatic changes in India’s economy have produced a growing middle class and rapidly rising incomes. Now, to meet the new demand, European, North American and Asian car makers are introducing smaller, more affordable vehicles into India. But they’ll have to find a way to compete with India’s Tata Motors, which has unveiled the least expensive car ever in this market, the Tata Nano. Dubbed ‘the people’s car’, the Nano sells for only 100,000 rupees (about SEK 20,000). It can seat four passengers, gets 21 km/litre, and travels at a top speed of 96 km/h. The car is designed to be India’s Ford Model T or Volkswagen Beetle – the car that puts the developing nation on wheels. For starters, Tata hopes to sell one million of these vehicles a year.21 The following are some of the major economic trends that affect marketing opportunities in Sweden, in particular.

Changes in income and spending The relationship between income and spending is not as straightforward as one might think. In the first decade of this century, many consumers fell into a consumption frenzy, fuelled 82

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by income growth, a boom in the stock market, rapid increases in housing values, and other economic good fortune. At the same time, other consumers have been more careful with how they spend their money. The frenetic spending and high expectations of good years will sooner or later reach an end – there has been no boom period in history that lasted forever. The economic downturn in 2008 and 2009 hit those individuals, companies and nations that had overconsumed in the past more than others, and many ‘tapped-out’ consumers in different countries had to repay debts acquired during earlier spending splurges, sweating out increased mortgage and household expenses, and saving ahead for their retirement.

Consumer spending patterns Food, housing, and transportation use up the most household income; however, consumers at different income levels have different spending patterns. Some of these differences were noted over a century ago by the German economist Ernst Engel, who studied how people shifted their spending as their income rose. He found that as family income rises, the percentage spent on food declines, the percentage spent on housing remains about constant (except for such utilities as gas, electricity and public services, which decrease), and both the percentage spent on most other categories and that devoted to savings increase. Engel’s laws have generally been supported by later studies. Changes in major economic variables such as income, cost of living, interest rates and savings and borrowing patterns have a large impact on the marketplace. Companies watch these variables by using economic forecasting. Businesses do not have to be wiped out by an ­economic downturn or caught short in a boom. With adequate warning, they can take ­advantage of changes in the economic environment.

Changing cost structures The economic environment is not only about consumer spending – it is also about cost structures. These are constantly changing and companies must make an effort to track cost structures in different markets on a continuous basis. Many companies are likely to face serious problems if the country from which they source their products becomes more expensive than other countries as a result of concern over salaries, staff rights and increasing living standards,

As consumers’ incomes rise, they are likely to spend a lower percentage of their income on food, the same percentage on housing and more on other categories, including saving for the future. Source: Joakim Serrander/ Scanpix/Press Association Images

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although these are clearly advantages for the people of that country. Companies sourcing from low-cost countries, in particular, may find that attempts to improve quality, workplace conditions and the corporate social responsibility image result in higher costs – thus requiring them to look for other countries to source from, in order to stay competitive. China and India – still sometimes seen as emerging economies although together they constitute 40 per cent of the world’s population and an increasing part of the worldwide GDP – offer great opportunities for cheap manufacturing, and the minimum wage is about SEK 2,000 a month for a blue-collar worker. This may be seen as a threat or an opportunity. However, some managers in the West don’t acknowledge the threat of low-cost countries, arguing that ‘they may be cheap but we have more competence’. Although that may be true in the short run, and even perhaps in the long run, those who underestimate the long-term opportunities of ‘emerging’ countries may be very disappointed. Remember the image and performance of South Korean firms in the 1990s? Few question the competence of Hyundai and Samsung today. Chinese telecom solutions provider Huwaei was only established in 1988 but overtook Ericsson in turnover in 2012. China has more engineers than there are citizens in Sweden, and the one-child policy has made the Chinese labour market extremely competitive: the attention paid to each child by both parents and two sets of grandparents (the ‘six-pocket syndrome’) drives the child’s performance. However, as manufacturing is not as labour-intensive as it used to be, salary levels are less of a factor – machinery and equipment will be the same across the world, provided certain standards are fulfilled, so what is the effect of low salaries if 80–90 per cent of the costs come from other areas?22

Ecological environment The ecological environment involves the natural resources that are needed as inputs by marketers or that are affected by marketing activities. Today’s enlightened companies are developing environmentally sustainable strategies in an effort to create a world economy that the planet can support indefinitely. Environmental concerns have grown steadily during the past few decades, and especially in recent years. In many cities around the world, air and water pollution have reached dangerous levels. Worldwide concern about climate change continues to mount,

Would you want these people to build the car and pay them Swedish salaries, or would you let Chinese workers build them? The answer is not obvious but we can be sure that relative cost structures will change in the future – Chinese labour costs may not be low for ever. Source: AFP/Getty Images

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and many environmentalists fear we will soon be buried in our own garbage. Companies need to deal seriously with this issue and there are no easy ways of doing it – hotels, airlines, food suppliers and fashion companies need to consider and fundamentally rethink the way their products and services affect the environment. Educated and informed consumers, as well as critical journalists and other stakeholders, will not be satisfied with anything but solutions that substantially contribute to lower emissions and more environmentally friendly ways of producing goods and services. Some industries are scrutinised particularly closely by environmentalists and others who care about the ecological implications of our consumption-oriented society. Airlines would have a difficult time even without the ecological considerations, fighting with low-cost providers, increased demands on security and high and fluctuating fuel prices. The latter by itself creates a planning problem. Consider the competitive disadvantage of those airlines that bought oil futures in 2014, planning for further increases in the oil price, only to find it dropped by 60 to 70 per cent. Once, fuel was one among many costs for airlines – due to falling ticket prices and rising fuel prices (although they fluctuate heavily), fuel and personnel costs are causing a lot of problems for major airlines. The ecological effects of air travel are severe. A return journey from Stockholm to New York (a distance of approximately 4,000 km each way) means more than a ton in CO2 emissions per economy-class traveller – with first-class travel and transfer in Zürich the effect is more than 7 tons. As a comparison, a typical petrol-driven family car – Volvo V70 T4 – contributes about 2,100 kg of CO2 in a year (at 15,000 km; 140 g/km), and may transport a driver and four passengers, or even six with additional child seating in the spacious trunk. However, many airlines take the ecological concerns seriously (see the SAS company case). The fashion industry has been subject to a lot of criticism since the production of cheap clothing substantially taxes natural resources. For instance, the production of a pair of jeans may require about 10,000 litres of water, not including the ecological effect of transport to Swedish consumers. Some fashion companies, e.g. H&M and Lindex, have responded by introducing an ecological product line, but with varying success, and H&M gives the opportunity to recycle worn-out clothes. In food retailing, the increasing supply of Fair Trade, KRAV-labelled, ecological and locally produced goods contributes to consumer and societal well-being.

Company case Flying in the future? Business travellers, punctuality and environmental impact Business travel is crucial to the function of Swedish enterprises and public authorities, and it creates many jobs in a variety of industries, including transport, travel and hospitality. For a business traveller, there are several criteria to consider in choosing means of transport: convenience, comfort, punctuality, cost and sustainability. In many cases, business travellers choose between train and air travel. Flying from Stockholm to Malmö or Gothenburg takes approximately one hour, while the train takes three hours from Stockholm to Gothenburg, and 4.5 hours from Stockholm to Malmö. When X2000 trains were launched in 1990, the Stockholm–Malmö travel time dropped to less than four hours: at the time, the train operator SJ owned the rail infrastructure, could give priority to X2000 trains, and there were fewer time-consuming stops along the way. In fact, in the final analysis, Stockholm to Gothenburg by train doesn’t take much longer (2 hours 50 minutes) than it does by air, as there is no check-in time and, for travellers going to an appointment in the city centre, the train station is much closer to the final destination.

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Over some shorter distances, e.g. Stockholm–Nörrköping (70 minutes), Stockholm–Skövde (one hour) and Skövde–Gothenburg (one hour), going by train is very competitive compared with other means of transport, since the train takes a nearly straight route through the topography. Although sustainability and convenience speak for the train, punctuality is often crucial. If the traveller doesn’t arrive on time, the business meeting will be delayed or cancelled, potentially hitting the company’s income, its client relationships and its staff satisfaction. A delayed train or flight home means the employee will perhaps miss another important appointment or family and leisure time. ‘Some clients don’t let me travel by train, since the risk that the appointment won’t go ahead is too great,’ says one frequent business traveller who attempts to minimize carbon footprint. In Sweden, there has been a discussion as to whether domestic flights south of Gävle should be allowed at all. However, Scandinavian Airlines (SAS) and other airlines may not have to worry about this, at least not in the next few decades. The Swedish railway infrastructure is in a poor condition compared with the European standard and the top speed of 200 km/hour is low compared with Germany (330 km/hour), France (320 km/ hour) and Spain (350 km/hour). The SJ3000 trains introduced in 2012 are in fact slower than the SJ2000 trains. There are numerous critical issues that frequent train travellers are well aware of: low rail capacity in Stockholm, in particular, run-down express trains and a signal and rail system that doesn’t work properly during winter time. It will take decades and hundreds of billions of SEK to create a modern, competitive infrastructure. While 96–7 per cent of Swiss trains arrive on time (max. 5 minutes late), only 70–80 per cent of Swedish long-distance trains arrive on time. What about airline punctuality? Although it’s difficult to state that flights are, on a global basis, more punctual than trains, this is definitely the case in Sweden. While Swedish trains are among the least punctual in the Western world, SAS is among the most punctual airlines in the world with an overall arrival punctuality of over 90 per cent. As is the case for trains, there is also an infrastructure for air transport and some airlines are lucky to fly to destinations with a good capacity for take-offs and landings, while others have to cope with destinations that have capacity problems. Some low-cost airlines add 15 or 20 minutes to the expected flight time (leisure travellers care less than business travellers about flight durations), and then brag about the high percentage of flights arriving on time: ‘SAS have a long history of making punctuality a top priority, second only to safety, and we are working very hard to achieve the very tough goals for punctuality and regularity. It is a second nature to the whole organisation to accomplish top-class on-time performance,’ says Ola Reinholdt, former Head of Flight Operations at SAS.

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Trains are unlikely to recruit large numbers of airline passengers until a reliable infrastructure for fast trains exists. ‘It is very important that we continue our efforts to have a very high level of punctuality. But to be competitive in relation to ground transport like trains over shorter distances it is also important that we continue our work to make flying more environmentally friendly. Our efforts, together with ATC (air traffic control), to create more “green approaches” – and in the future “green departures” – must continue and be intensified,’ says Reinholdt. ‘You can’t say punctuality is not important to leisure travellers, but missing a few hours on the beach or in Paris shopping is still not as bad as an important business meeting not taking place, so we do have to make sure our business travellers have us as their preferred supplier in the future,’ Reinholdt says. And of course it must be remembered that the business traveller and the leisure traveller are often the same person. ‘When our business travellers are on holiday and travel as leisure passengers, they expect us to be on time and their experience as leisure travellers also influences their opinion of us as business travel carriers.’ For both leisure and business travellers, competition among modes of transport is great and forces any actor in the travel market to improve their offer. When X2000 trains were introduced in the early 1990s, it made many business travellers think again about whether the plane or train was their preferred method of travel, and this battle will continue in the future. It’s tough for transport providers – but great for those of us who use their services.

Questions 1 Do you prefer flying or going by train, or perhaps going by car or Bus4You? Refer to distances you like to travel by different means of transport. 2 What are the future threats and opportunities associated with rail and air transport? 3 Imagine you are a 40-year-old manager with ten years in a senior management position. What would your purchasing criteria be when deciding on business travel? Sources: Christian Wenande, ‘SAS among world’s most punctual airlines’, The Copenhagen Post (28 January 2015). Interview with Ola Reinholdt, former Head of Flight Operations at SAS. The punctuality statistic derives from Flightstats, which tracks the performance of over 150,000 flights per day, and provides real-time flight status to millions of travellers worldwide each year (www.flightstats.com/). Flightstats includes both regional and so-called ‘major airlines’, which includes SAS and 30 other airlines.

Scandinavian Airlines (SAS) spends a lot of management time and money investigating opportunities to reduce the ecological impact of air travel in the future. The new Airbus 330 Enhanced and 350 XWB (delivered between 2015 to 2019) reduce fuel consumption and ecological impact. Source: SAS

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Government intervention in natural resource management is likely to increase in years to come. The governments of different countries vary in their concern for and effort spent ­promoting a clean environment, the pursuit of which may imply a reduction in the opportunities to create economic growth. However, China and other countries with very high growth ­figures are also implementing measures to reduce pollution and ecological impact. They have to do this to reduce the long-term ecological damage in the countries, but also to stay attractive among consumers, retail chains and investors. Many poorer nations do little about pollution, largely because they lack the needed funds or political will. This in turn makes them less attractive to source from, since companies that take corporate social responsibility seriously are likely to avoid sourcing from suppliers that do not take sustainability issues seriously. However, even richer nations lack the vast funds and political accord needed to mount a worldwide environmental effort. Much effort is being spent on reducing the ecological impact – cleaner aircraft engines, recyclable or biodegradable packaging products, cleaner fuel technologies, wind turbine technology, solar cell heating and cooling, recycled materials and components, and better pollution controls. However, unfortunately, even a substantial reduction in ecological impact cannot reverse the serious impact on the environment of our consumption-oriented society. So although companies are seeking to do more than just good deeds and are learning that ­environmentally responsible actions can also be good for business, there is no final solution to the sustainability issue in sight. The truth is that many companies’ success is dependent upon the production of goods and services that are not very environmentally friendly.

Technological environment The technological environment consists of offers that create new technologies, new products and market opportunities. This involves wonders such as antibiotics, robotic surgery, laptop computers and the internet, but also such horrors as nuclear missiles, chemical weapons and assault rifles. The technological environment has produced such mixed blessings as the car, television and credit cards. Our attitude towards technology depends on whether we are more impressed by its wonders than its blunders. For example, what would you think about having tiny little transmitters implanted in all the products you buy that would allow them to be tracked from their point of production through use and disposal? On the one hand, it would provide many advantages to both buyers and sellers. On the other hand, it could be a bit scary. Either way, it’s already happening.23 Envision a world in which every product contains a tiny transmitter, loaded with information. As you stroll through the supermarket aisles, shelf sensors detect your selections and beam adverts to your shopping trolley screen, offering special deals on related products. As your trolley fills, scanners detect that you might be buying for a dinner party; the screen suggests drinks and tapas to go with the meal you’ve planned. When you leave the store, exit scanners total up your purchases and automatically charge them to your credit card. At home, readers track what goes into and out of your pantry, updating your shopping list when stocks run low. For Sunday dinner, you pop a fish steak into your smart oven, which follows instructions from an embedded chip and cooks it to perfection. It might soon become a reality, thanks to tiny radio-frequency identification (RFID) transmitters – or ‘smart chips’ – that can be embedded in the products you buy. The RFID chips also give producers and retailers an amazing new way to track their products all the way from factories to recycling centres. New technologies create new markets and opportunities, but in many cases new technologies also replace older ones: digital photography hurt the film business and pay-per-view undermines the market for local video stores. When old industries fought or ignored new technologies, their businesses declined. Thus, marketers should watch the technological environment closely. Companies that do not keep up will soon find their products and offers outdated. High costs and risks make it increasingly difficult for individuals and also for small and mediumsized enterprises to create competitive innovations. Many companies are adding marketing people to R&D teams to try to obtain a stronger marketing orientation in new product development. New, complex products and technologies must be safe, and government agencies investigate and ban potentially unsafe products. This is particularly important for drugs and medical devices. 88

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Political and social environment Marketing decisions are strongly affected by developments in the political environment. The political environment consists of laws, government agencies and pressure groups that influence or limit various organisations and individuals in a given society. Even the most liberal advocates of the free-market system agree that the system works best with at least some regulation. Safety belts in cars, catalytic converters to reduce emissions from cars, pubs and clubs that close at 3 am, and a smoking ban in offices and restaurants are a few of the many examples of changes that were implemented by politicians against the will of the country’s citizens. After a while, people understood the meaning of the changes and began to like them. Well-conceived regulation can encourage competition and ensure fair markets for goods and services. Thus, governments develop public policy to guide commerce – sets of laws and regulations that limit business for the good of society as a whole. Almost every marketing activity is subject to a wide range of laws and regulations. Beyond regulation, most companies want to be socially responsible. Check the website of almost any company and you’ll find long lists of good deeds and environmentally

Political intervention may change the conditions for ­running a business. When smoking was banned in bars and restaurants in Sweden in 2005, many restaurant owners worried about their future. However, a lot of evidence suggests that the smoking ban is appreciated not only by non-smokers but also by many smokers. Source: Laura Leyshon/Scanpix/ Press Association Images

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responsible actions. Even though many large companies provide a sustainability report, there is reason to question the practice they engage in. Many companies are far less engaged in sustainability than they want to be perceived as being, a phenomenon called greenwashing.24 Legislation affecting business around the world has increased steadily over the years. The EC has been active in establishing a new framework of laws covering competitive behaviour, product standards, product liability and commercial transactions for EU nations – that laws are implemented in any EC country is then ensured by national competition authorities – (in Sweden, Konkurrensverket). Business competitive legislation has at least two purposes: first, to protect companies from each other by defining and preventing unfair competition; second, to protect consumers from unfair business practices such as selling shoddy products, invading consumer privacy or telling lies in advertising; third, to protect the interests of society against unrestrained business behaviour. Profitable business activity does not always create a better quality of life. Regulation arises to ensure that firms take responsibility for the social costs of their production or products.

Socially responsible behaviour Written regulations cannot possibly cover all potential marketing abuses, and existing laws are often difficult to enforce. However, beyond written laws and regulations, business is also governed by social codes and rules of professional ethics. Enlightened companies encourage their managers to look beyond what the regulatory system allows and simply do the right thing. These socially responsible firms actively seek out ways to protect the long-term interests of their consumers and the environment. Almost every aspect of marketing involves ethics and social responsibility. Unfor­ tunately, because these issues usually involve conflicting interests, well-meaning people can honestly disagree about the right course of action in a given situation. Thus, many industrial and professional trade associations have suggested codes of ethics. And more companies are now developing policies, guidelines and other responses to complex social responsibility issues. It remains a major responsibility to make sure that policies are ­followed, not only developed. A typical conflict is that of customer loyalty cards, e.g. the ICA card and the MedMera card, each having more than three million users. Much of the information is systematically developed by businesses seeking to learn more about their customers, sometimes without consumers realising that they are under the microscope. Older consumers, in particular, find it troublesome that ICA registers everything consumers buy – however, MedMera and many other cards do the same, but don’t make it as obvious to the consumers as ICA does. Legitimate businesses plant ‘cookies’ on consumers’ PCs and collect, analyse and share digital data from every mouse click consumers make on their websites. Critics are concerned that companies may now know too much, and that some companies might use digital data to take unfair advantage of consumers. Although most companies fully disclose their internet privacy policies, and most work to use data to benefit their customers, abuses do occur.

Cultural environment The cultural environment is made up of institutions and other forces that affect a society’s basic values, perceptions, preferences and behaviours. Cultural factors strongly affect how people think and how they consume, so marketers are keenly interested in the cultural environment. People grow up in a particular society that shapes their basic beliefs and values. They absorb a world-view that defines their relationships with others. The following cultural characteristics can affect marketing decision-making.

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The Western world dominates the consumption and culture spheres – but for how long? The dominance of a Western-oriented consumption-based culture is strong in most parts of the world. In Thailand and China, for instance, not only international hotel chains but also major upmarket shopping malls are representing a Western lifestyle. With the exception of a few department stores selling Thai products, the majority of the supplied goods are Western brands or Western-styled goods. And with very few e­ xceptions, f­ ashion and style magazines are all Asian versions of European and US magazines ­translated into the local language with no or few other modifications. The current global development means a transition of economic power from the formerly dominating United States and Europe to Asia, the Middle East, and South America. Many US and European companies have been acquired by owners from the Middle East and China – Volvo and Jaguar Land Rover are well-known instances. And they have kept the original brands and obviously want to maintain the country-of-origin perception of their acquired companies. However, with the Asian and Middle East economies getting stronger, while the United States and several European countries are struggling with low birth rates and financial problems, the direction for the future seems to be clear. With regard to consumption culture, the Western world still has a very strong impact. Although an increasing percentage of the products we buy are developed and ­manufactured in these countries, our knowledge stays very much with what happens in the Western world. This particularly holds for popular culture, with an extensive flow of TV programmes from the Western world to emerging countries, but hardly any flow back. Similar patterns are found in fashion clothing and other lifestyle products. It has been proven that many Asian consumers admire premium products from Europe in ­particular.

Questions 1. What do you think will happen in the future? 2. Is it likely that the unbalanced cultural export/import patterns will change as BRIC (Brazil, Russia, India and China) and other influential countries reach higher living standards and become more educated and knowledgeable in fields that will have an influence on the cultural sphere? Sources: Rajeev Batra, Venkatram Ramaswamy, Dana L. Alden, Jan-Benedict E.M. Stenkamp and S. Ramachander, ‘Effects of brand local and nonlocal origin on consumer attitudes in developing countries’, Journal of Consumer Psychology (2000), 9(2), 83–95; Hye-Jung Park, Nancy J. Rabolt and Jeon Kyung Sook, ‘Purchasing global luxury brands among young Korean consumers’, Journal of Fashion Marketing and Management: An International Journal (2008) 12(2), 244–59; Anders Parment, Marketing to the 90s Generation: Global Data on Society, Consumption and Identity (New York: Palgrave Macmillan, 2014); Llanxi Zhou and Michael K. Hui, ‘Symbolic value of foreign products in the People’s Republic of China’, Journal of International Marketing, Summer 2003, 11(2), 26–58.

Persistence of cultural values People in a given society hold many beliefs and values. Their core beliefs and values have a high degree of persistence. For example, most Swedes believe in working, and paying taxes, getting help from society if it’s needed, being honest, and having freedom in terms of where they live and their religious and political views. These beliefs shape more specific attitudes and behaviours found in everyday life. Core beliefs and values are passed on from parents to children and are reinforced by schools, business and government.

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Consumer privacy issues have to be balanced with the selling and customisation opportunities that come with loyalty cards and CRM systems – thus, technological innovations don’t only create opportunities but may also cause integrity problems and other issues not obvious to the company until they get customer feedback. Source: Courtesy of ICA AB

Secondary beliefs and values are more open to change. Voting for a political party is an example where secondary beliefs play a big role. Most people have core beliefs and values that make it very difficult to convince them to vote for a party with an ideology that represents values inconsistent with these core beliefs and values. Now marketers and political parties to an increasing extent are adopting marketing strategies and have some success in changing secondary values but little chance of changing core values. It is not uncommon for people who face a very different life situation from the one they grew up with to change their minds and vote for a different political party than they used to – however, they are not likely to adopt secondary values that are fundamentally inconsistent with their earlier ideas. So although core values are fairly persistent, cultural swings do take place and these provide an opportunity for marketers. Consider the impact of popular music groups, film stars and other celebrities on hairstyling and clothing norms among young people around the world. They may have more impact than the direct measurable effects on, for example, sales of products that appear in television programmes. For instance, Sex and the City, a sitcom featuring four 35- to 40-year-old women who live glamorous lives in New York City, may have had a significant impact on the culture among young females, in particular, as suggested in one study.25 The focus on career among the four Sex and the City characters may be typically American, but the fact that they all are females runs counter to the image of traditional family values, with a career-oriented husband and a wife who is less so. The high incidence of short-term relationships with men in Sex and the City is fundamentally inconsistent with traditional American values. Marketers want to predict cultural shifts in order to spot new opportunities or threats. Several firms offer ‘futures’ forecasts in this connection. Dealing with futures forecasts and scenarios as well as comparing the company’s major or domestic markets with other markets in terms of consumer behaviour may be a very clever way of understanding the company and its key customers.

People’s views of themselves People vary in their emphasis on serving themselves versus serving others. Some people seek personal pleasure, wanting fun, change and escape. Others seek self-realisation through religion, recreation or the avid pursuit of careers or other life goals. People use products, brands and services as means of self-expression, and they buy products and services that match their 92

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views of themselves. People don’t always see themselves as others see them, but as they are the ones making the buying decision, understanding their self-view is key for marketers. Consider the case of Do-It-Yourselfers (DIYers).26 DIYers not only tackle home ­improvement projects on their own, but they also view the experience as a form of self-­ expression. They view their homes as their havens, especially when it’s time to kick back and relax. Undertaking decorating, refurbishing and car maintenance projects to save money and have fun, DIYers view their projects as personal victories over the ­high-priced marketplace. Marketers can therefore target their products and services based on such self-views.

People’s views of others In recent decades, observers have noted several shifts in people’s attitudes towards others. For example, many trend trackers have seen a new wave of ‘cocooning’, in which people are going out less with others and are staying at home more to enjoy the creature comforts of home and hearth – from the networked home office to home entertainment centres. This trend suggests less demand for theatre-going and greater demand for home improvement, home office and home entertainment products. On the other hand, the demand for live experiences – speeches, concerts, cinema-going, etc. – has increased in many countries. With everything being available online, only such live experiences will stand out. This trend has been going on for a while in some industries – e.g. concerts have become more popular; accordingly, the income mix of musicians and other performers has shifted from a heavy emphasis on recorded material to concerts and other live experiences.

Helicopter parenting and the ‘sandwich generation’ – a cultural shift? Recently, the ‘sandwich generation’ has emerged as a concept that describes individuals in their forties and fifties who are squeezed between caring for their kids and their elderly parents as well. In a report from PEW Research Center, 48 per cent of those surveyed had financially supported children over the age of 18 in the previous year. More surprisingly maybe, 44 per cent of those over 60 had lent financial support to adult children in the previous year. Among the 60-plus set without jobs anymore, 43 per cent are still helping grown kids out with the bills. These figures indicate that older Americans are entering a new, more dangerous phase: supporting their adult kids not out of new income streams coming in, like annual salaries, but out of their own pot of existing savings. Pew Research Center’s director of social trends research, Kim Parker, argues that ‘this idea that older adults are no longer working, on a fixed income and dipping into their nest eggs to support adult children, is kind of a scary idea’. In the debate on the sandwich generation, it is argued that helicopter parents pay very close attention to their children’s issues, experiences and problems while at the same time taking care of their elderly parents. This debate was raging in Sweden in 2014 and 2015. The balancing act is in recognising one’s financial limits and being able to tell when parental generosity is doing more harm than good in a gradual and collaborative way. That might not be an easy task if the kids are used to getting extensive financial support from the parents long after they have come of age. So what happened with the old ideal of children learning to take care of their destiny and finances at an early stage? And children taking care of their parents as they get older? There are strong signs that we are witnessing a cultural shift. Sources: Pew Global Research, Washington DC (2013); Anders Parment, Marketing to the 90s Generation: Global Data on Society, Consumption, and Identity (New York: Palgrave ­Macmillan, 2014); T. Taylor, ‘A “sandwich generation” twist: Retirees helping adult kids’, Reuters, US (21 ­January 2014).

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Responding to the marketing environment: proactive and reactive attitudes Someone once observed, ‘There are three kinds of companies: those who make things happen, those who watch things happen, and those who wonder what’s happened.’27 Rather than simply watching and reacting, companies should take proactive steps with respect to the marketing environment. Many companies view the marketing environment as an uncontrollable element to which they must react and adapt. They passively accept the marketing environment and do not try to change it. They analyse the environmental forces and design strategies that will help the company avoid the threats and take advantage of the opportunities the environment provides. This reflects a reactive attitude – however, the attitudes of successful organisations are proactive, and these companies take a proactive stance towards the marketing environment by seeing changes as opportunities rather than threats. Rather than simply watching and reacting, aggressive actions are taken to affect the publics and forces in their marketing environment. Such companies hire lobbyists to influence legislation affecting their industries and stage media events to gain favourable press coverage. They form contractual agreements to better control their distribution channels and make sure product exposition, marketing and distribution are performed properly. By taking action, companies can often overcome seemingly uncontrollable environmental events. The increased opportunities for consumers to express their opinions on the internet are viewed by some companies as something over which they have no control; others work proactively to prevent or counter negative word of mouth. However, marketing management cannot always control environmental forces. In many cases, it must settle for simply watching and reacting to the environment. For example, a company would have little success trying to influence geographic population shifts, the economic environment or major cultural values. But whenever possible, smart marketing managers will take a proactive rather than reactive approach to the marketing environment.

Summary This chapter and the next two chapters examine the environments of marketing and how companies analyse these environments to better understand the marketplace and consumers. Companies must constantly watch and manage the marketing environment in order to seek opportunities and ward off threats. The marketing environment consists of all the actors and forces influencing the company’s ability to transact business effectively with its target market. The company’s microenvironment consists of other actors close to the company. It includes the company’s internal environment – its several departments and management levels – suppliers and marketing intermediaries, including resellers, physical distribution firms, marketing services agencies and financial intermediaries. Four types of customer markets include consumer, business, reseller and government markets, and all these types have become increasingly international. Competitors put pressure on the company to perform better, and various publics have an actual or potential interest in, or impact on, the company’s ability to meet its objectives. The macroenvironment consists of larger societal forces that affect the entire microenvironment. The six macroenvironmental forces making up the company’s macroenvironment consist of demographic, economic, ecological, technological, political and cultural forces. These forces shape opportunities and pose threats to the company. Demography is the study of the characteristics of human populations. Today’s demographic environment shows a changing age structure, shifting family profiles, geographic population shifts, a better-educated and more white-collar population 94

Discussing the concepts

and increasing diversity. The economic environment consists of factors that affect buying power and patterns: today consumers are more concerned about value, and consumer spending patterns are shifting, reflecting changed attitudes and market opportunities but also changes in the distribution of income. The ecological environment shows trends such as shortages of certain raw materials, higher pollution levels and more government intervention – changes that create marketing opportunities for alert, proactive companies. The technological environment creates both opportunities and challenges. Companies that fail to keep up with technological change will miss out on new product and marketing opportunities. The political environment consists of laws, agencies and groups that influence or limit marketing actions – proactive companies track what key Swedish, European and other politicians of leading countries say and look beyond the next election in trying to understand what is going on. The cultural environment is made up of institutions and forces that affect a society’s values, perceptions, preferences and behaviours. Typical changes here are the slow but obvious transition in Swedish society from a collectivistic culture a couple of decades ago to an individualistic culture where every consumer wants to create their own life experience and destiny. This fundamentally changes market opportunities and means that companies must deliver meaningful and enduring values. Companies can be reactive and passively accept the marketing environment as an uncontrollable element to which they must adapt, avoiding threats and taking advantage of opportunities as they arise; or they can take a proactive stance, working to change the environment rather than simply reacting to it. Whenever possible, companies should try to be proactive rather than reactive.

Key terms Marketing environment

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Generation Y

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Microenvironment 73

Economic environment

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Macroenvironment 73

Engel’s laws

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Suppliers 74

Ecological environment

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Marketing intermediaries

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Environmental sustainability

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Public 75

Technological environment

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Customers 76

Political environment

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Demography 77

Cultural environment

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Discussing the concepts 1. Name and describe the elements of a company’s microenvironment and give an example illustrating why each is important. 2. List some of the demographic trends of interest to marketers in Sweden who serve Swedish customers and discuss whether these trends pose opportunities or threats for marketers. 3. Again, list demographic trends of interest to marketers, but this time with a focus on selling Swedish products to a worldwide market.

4. Discuss current trends in the economic environment of which marketers must be aware and provide examples of companies’ responses to each trend. 5. Compare and contrast core beliefs/values and secondary beliefs/values. Provide an example of each and discuss the potential impact marketers have on each. 6. How should marketers, in general terms, respond to the changing environment?

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Applying the concepts 1. Anglo-Saxon cultural influences and the English language are very strong in a worldwide context and growing stronger all the time in the world. English is not only used in the UK and the US, but is also the official language in Canada, Australia, New Zealand, India, Pakistan and South Africa. How might the fact that English is the dominant language in international businesses affect a Swedish firm when exporting to: (a) Asia, (b) France, (c) the UK? 2. The French, in particular, are somewhat downhearted about the dominance of the English language in business.28 What steps can be taken to protect languages from becoming little more than regional dialects? 3. Choose two Swedish companies that have been very successful in international marketing, and one that has failed, and try to explain why they succeeded and failed by using the micro- and macroenvironmental forces introduced in the chapter.

References 1 ‘World Population Prospects: The 2012 Revision’ (XLS). Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, www.worldometers.com (April 2015). 2 See Frederik Balfour, ‘Educating the “little Emperors”: There’s a big market for products that help China’s ­coddled kids get ahead’, BusinessWeek (10 November 2003, p. 22); Clay Chandler, ‘Little Emperors’, Fortune (4 October 2004, pp. 138–50); ‘Hothousing little tykes’, Beijing Review (5 May 2005) accessed at www.bjreview.cn/EN/En-2005/05-18-e/china-5.htm; and ‘China’s “little Emperors’“, Financial Times (5 May 2007, p. 1). 3 www.worldometers.com (April 2015). 4 Anders Parment and Anna Dyhre, Sustainable Employer Branding. Guidelines, Worktools and Best Practices (Malmö: Liber, 2009). 5 The Swedish tax system, with very generous tax deductions for home mortgages, in combination with high inflation and rapidly increasing house prices made the Swedish situation in the 1970s and 1980s unique – many baby boomers have seen their houses (some also have summer houses) or apartments increase in value by more than 1,000 per cent since the 1970s. In addition, baby boomers experienced many years of substantial economic growth. 6 Reinhard Gerstnerand Guido Hunke (eds), 55 plus Marketing (Wiesbaden: Gabler, 2006); Anders Parment, Marknadsfor till 55 plus (Stockholm: Liber, 2008); Anders Parment, Generation Y in Consumer and Labor Markets (New York: Routledge, 2011); Bootie Cosgrove-Mather, ‘Baby boomers in denial over aging: with gray panthers fading, who will champion senior rights?’, CBS News (5 March 2004); Richard Louv, ‘For aging boomers, denial is destiny’, The San Diego Union-Tribune (13 June 2006); Robert Samuelson, ‘Boomer generation is in a state of denial, real clear polities (Washington Post Writers Group, 2007). See, e.g., Lloyd H. Rogler, ‘Historical generations and psychology. The case of the great recession and World War II’, American Psychologist, 57(12), 1013–23 (2002); Geoffrey Meredith and Charles D. Schewe, ‘The power of cohorts’, American Demographic (December 1994, pp. 22–31); Charles D. Schewe and Geoffrey Meredith, ‘Segmenting global markets by generational cohorts: determining motivations by age’, Journal of Consumer Behaviour, 4 (1), 51–63 (2004); Charles D. Schewe, Geoffrey Meredith and Stephanie Noble, ‘Defining moments: ­segmenting by cohorts’, Marketing Management, 9(3), 48–53 (Fall 2000); Charles D. Schewe, Geoffrey Meredith and Alex Hiam, Managing by Defining Moments (New York: John Wiley & Sons, 2002). 7 Scott Schroder and Warren Zeller, ‘Get to know Gen X and its segments’, Multichannel News (21 March 2005, p. 55); Jim Shelton, ‘When children of divorce grow up’, Knight Ridder Tribune Business News, (4 March 2007, p. 1); and James H. Barnett III and Ana Veciana-Suarez, ‘The leaders of today are a diverse group’, ­McClatchy-Tribune Business News (21 January 2008). 8 Martin M. Evans, Gordon Foxall and Ahmad Jamal, Consumer Behaviour, 2nd edn ( John Wiley & Sons, 2009).

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9 Anders Parment, Generation Y – Framtidens Konsumenter och Medarbetare Gor Entre (Liber, 2008); Anders Parment, Generation Y – Mitarbeiter der Zukunft. Herausforderung und Erfolgsfaktor fur das Personalmanagement (Gabler, 2009). 10 Anders Parment, Generation Y in Consumer and Labour Markets (London: Routledge, 2011); Anders Parment, Marketing to the 90s Generation: Global Data on Society, Consumption and Identity (New York: Palgrave Macmillan, 2014); Youth Barometer 2015: Ungdomsbarometern, Generationsrapporten (Youth BarometerReport on Generational Cohorts) (Stockholm: Ungdomsbarometern AB, 2015). 11 Anders Parment, ‘The Study of Generations in Consumer Marketing, Working Paper (Stockholm University School of Business, 2010). 12 Charles, D. Schewe, Kathleen Debevec, Thomas J. Madden, William, D. Diamond, Anders Parment and Andrew Murphy, ‘“If you’ve seen one you’ve seen them all!” Are young millennials the same world wide?,’ Journal of International Consumer Marketing, 25(1), 3–15 (2013). 13 Källa: Försakringskässan, press release (25 September 2014). 14 See Centralförbundet foralkohol – och narkotikaupplysning (CAN: The Swedish Council for Information on Alcohol and Other Drugs); Drogutvecklingen i Sverige (Use of Alcohol and Drugs in Sweden, 2009) report no. 117. 15 Jerker Soderlind, Stadens Renassans. Fran Sarhalle Tillsamhalle. Om Narhetsprincipen Istadsplaneringen (SNS Verlag, 1998); and Madeline Johnson, ‘Devilish definitions as urban masses evolve, new terms and labels are emerging to try to describe and distinguish them’, Financial Times (29 December 2007). 16 Anders Parment, Distributionsstrategier. Kritiska Valpa Konkurrensintensiva Marknader (Liber, 2006); Anders Parment, Generation Y. Framtidens Konsumenter och Medarbetare Gor Entre (Liber, 2008). 17 On-site visit at Kone in Chicago ( June 2007). 18 Anders Parment and Anna Dyhre, Sustainable Employer Branding. Guidelines, Worktools and Best Practices (Liber, 2009). 19 Some dealerships use market prices as the transfer price method, which results in after-sales showing high profits while the profitability of new and used cars deteriorates (particularly the latter, as they have to pay full market price for repairing used cars although their market value will not increase accordingly). They ­actually have to pay full retail price for something a buyer – or someone who trades in a car – can obtain more cheaply from a standalone repair garage. 20 For a further investigation of this, see Anders Parment, Automobile Marketing (VDM Verlag, 2009). 21 Gavin Rabinowitz, ‘Carmaker in India unveils $2,500 car’, USA Today (10 January 2008) accessed at www. usatoday.com; Gavin Rabinowitz, ‘India’s Tata motors unveils $2,500 car, bringing car ownership within reach of millions’, Associated Press (10 January 2008); and Mark Phelan, ‘Automaker Tata’s presence already felt in Detroit area’, McClatchy-Tribune Business News (17 March 2008). 22 To learn more about doing business in China, read Asa Kafling, The Chinese Volvo: Sino-Foreign Joint Ventures and Perceived Performance (Linköping Studies in Arts and Science, 2009). 23 See ‘RFID market nears $7b’, Journal of Commerce Online Edition (9 July 2007); Scott Denne, ‘After being ­overhyped, RFID starts to deliver’, Wall Street Journal (7 November 2007, p. 5F); ‘WalMart expands RFID requirements’, McClatchy-Tribune Business News (30 January 2008); ‘Sam’s Club gets serious about RFID’, Modern Materials Handling (March 2008, p. 18); and information accessed online at www.autoidlabs.org, September 2008. 24 Mikael Ottosson and Anders Parment, Sustainable Marketing: How Social, Environmental and Economic Considerations Can Contribute Towards Sustainable Companies and Markets (Lund: Studentlitteratur, 2015). 25 Anders Parment, Generation Y in Consumer and Labour Markets (Routledge, 2011). 26 Adapted from descriptions found at www.yankelovich.com/products/lists.aspx, November 2006. 27 See Philip Kotler, Kotler on Marketing (New York: Free Press, 1999, p. 3); and Kotler, Marketing Insights from A to Z (Hoboken, NJ: John Wiley & Sons, 2003, pp. 23–4). 28 See, e.g., http://news.bbc.co.Uk/1/hi/world/europe/6341795.stm.

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Marketing information and customer insights

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Assessing marketing information needs

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Developing marketing information

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Best practice – Pizza Hut – a database can make the difference between attracting and keeping customers

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Analysing and using marketing information

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Marketing research in small businesses and non-profit organisations

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International marketing research

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Public policy and ethics in marketing research

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Company case – Tracking consumers on the web: smart targeting or a little creepy?

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Mini contents

Source: Lena Granefelt/Getty Images

Chapter preview In this chapter, we continue our exploration of how marketers gain insights into consumers and the marketplace. We look at how companies develop and manage information about important marketplace elements – customers, competitors, products and marketing programmes. To succeed in today’s marketplace, with an enormous supply of information, companies must know how to turn mountains of marketing information into fresh customer insights that will help them deliver greater value to customers. Good products and marketing programmes begin with good customer information. Companies also need an abundance of highly qualified information on competitors, resellers and other actors and marketplace forces. But more than just gathering information, marketers must use the information to gain powerful customer and market insights.

Learning objectives After reading this chapter, you should be able to: 1 Explain the importance of information in gaining insights about the marketplace and customers. 2 Define the marketing information system and discuss its parts. 3 Outline the steps in the marketing research process. 4 Explain how companies analyse and use marketing information.

Marketing information and customer insights

Marketing information and customer insights Marketing information by itself has little value. The value is in the customer insights gained from the information and how these insights are used to make better marketing decisions. To create value for customers and to build meaningful relationships with them, marketers must first gain fresh, deep insights into what customers need and want. Companies use such ­customer insights to develop competitive advantage. A classic example is Apple’s successful iPod. It wasn’t the first digital music player but Apple was the first to get it right. Apple’s research uncovered a key insight about how people want to consume digital music – they want to take all their music with them but they want personal music players to be unobtrusive. This insight led to two key design goals – make it as small as a deck of cards and build it to hold thousands of songs. Add a dash of Apple’s design and usability magic to this insight, and you have a recipe for a blockbuster. Starting with the iPod, Apple developed and introduced a range of products and services including the iPad, the iPhone, iCloud, and the iWatch, all connected in the same eco-system. Customer and market insights may be very difficult to obtain. Customer needs and buying motives are often anything but obvious – as we will analyse deeper in the next chapter, consumers themselves usually can’t tell you exactly what they need and why they buy. To gain good customer insights, marketers must effectively manage marketing information from a wide range of sources. Today’s marketers have ready access to plenty of marketing information. In fact, most marketing managers are overloaded with data and indeed often overwhelmed by it. Despite this data glut, marketers frequently complain that they lack enough information of the right kind. A classic expression among marketers is: ‘Half the marketing spending would be enough; the problem is to know which half’. Volvo Car’s successful campaign in 2014 illustrates what we’re talking about here: it built on Zlatan, Robyn and Swedish House Mafia, but Zlatan was by far the most successful part of the campaign. As a result, the emphasis soon changed towards exposing Zlatan in the campaign. Marketers don’t need more information, they need better information. And they need to make better use of the information they already have. A company’s marketing research and information system must add value to the vast amount of information that is normally ­available, thus providing customer insights. Companies that gather, disseminate and apply deep customer insights have the opportunity to obtain powerful, profitable, and sustainable competitive advantages. Based on such thinking, many companies are now restructuring and renaming their ­marketing research and information functions. For example, the head of marketing research at Kraft Foods is called the director of consumer insights and strategy. Customer insights groups collect customer and market information from a wide ­variety of sources – ranging from traditional marketing research studies to mingling with and ­observing consumers, to monitoring consumer online conversations about the company and its p ­ roducts. In this process, however, companies must be careful not to go too far and become ­customer-controlled. The idea is not to give customers everything they request. Rather, it’s to understand customers to the core and give them what they need.1 Companies must design effective marketing information systems that give managers the right information, in the right form, at the right time. A marketing information system (MIS) consists of people and procedures for assessing informational needs, developing the needed information and helping decision-makers to use the information to generate and validate actionable customer and market insights. Figure 4.1 shows that the MIS begins and ends with information users – marketing managers, internal and external partners, and others who need marketing information. It interacts with these information users to assess information needs and with the marketing environment to develop needed information through internal company databases, marketing intelligence activities and marketing research. Moreover, the MIS helps users to analyse and use the information to develop customer insights, make marketing decisions and manage customer relationships.

Customer insights— Fresh understandings of customers and the marketplace derived from marketing information that become the basis for creating customer value and relationships.

Marketing information system (MIS)—People and procedures for assessing informational needs, developing the needed information and helping decision-makers to use the information to generate and validate actionable customer and market insights.

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Figure 4.1  The marketing information system

Analysis

Marketing managers and other information users Planning Implementation

Control

Marketing information system Developing needed information Assessing information needs

Internal databases

Information analysis

Marketing intelligence

Marketing research

Distributing and using information

Marketing environment Target markets

Marketing channels

Competitors

Publics

Macroenvironment forces

Assessing marketing information needs The MIS primarily serves the company’s marketing and other managers but may also provide information to external partners, such as suppliers, resellers or marketing services agencies. In designing an information system, the company must consider the needs of all of these users. A good marketing information system balances the information users would like to have against what they really need and what is feasible to offer. Some managers will ask for whatever information they can get without thinking carefully about what they really need. Too much information can be as harmful as too little. Some managers may omit things they ought to know, or they may not know to ask for some types of information they should have. For example, managers might need to know about surges in favourable or unfavourable consumer ‘word-of-web’ discussions about their brands on blogs or online social networks. Because they do not know about these discussions, they do not think to ask about them. The MIS must monitor the marketing environment in order to provide decision-makers with information they should have in order to better understand customers and make key marketing decisions. Sometimes the company cannot provide the needed information, either because it is not available or because of MIS limitations. For example, a brand manager might want to know how competitors will change their advertising budgets next year and how these changes will affect industry market shares. The information on planned budgets is unlikely to be available. Even if it is, the company’s MIS may not be advanced enough to forecast resulting changes in market shares. Finally, the costs of obtaining, analysing, storing and delivering information can mount quickly. The company must decide whether the value of insights gained from additional information is worth the cost of providing it, and both value and cost are often hard to assess. In many cases, additional information will do little to change or improve a manager’s decision, or the costs of the information may exceed the returns from improved customer insights and decision-making.2 102

Developing marketing information

Developing marketing information The problem isn’t finding information but finding the right information – from inside and ­outside sources – and turning it into customer insights. Marketers can obtain the needed ­information from internal data, marketing intelligence and marketing research.

Internal data Many companies build extensive internal databases, electronic collections of consumer and market information obtained from data sources within the company network. Marketing managers can readily access and work with information in the database to identify marketing opportunities and problems, plan programmes and evaluate performance. Information in the database can come from many sources. The marketing department furnishes information on customer transactions, demographics, psychographics and buying behaviour. The customer service department keeps records of customer satisfaction or service problems. The accounting department prepares financial statements and keeps detailed records of sales, costs and cash flows. Operations reports on production schedules, shipments and inventories. The sales force reports on reseller reactions and competitor activities, and marketing channel partners provide data on point-of-sale transactions. Harnessing such information can provide powerful customer insights and competitive advantage. Here is an example of how one company uses its internal database to make better marketing decisions:

Best practice Pizza Hut – a database can make the difference between attracting and keeping customers Pizza Hut’s database contains detailed customer data on 40 million US households, gleaned from phone orders, online orders and point-of-sale transactions at its more than 7,500 restaurants around the nation. The company can slice and dice the data by favourite toppings, what you ordered last, and whether you buy a salad with your cheese and pepperoni pizza. It then uses all this data to enhance customer relationships. For example, based on extensive analysis of several years of ­purchase transactions, Pizza Hut designed a VIP (Very Into Pizza) programme to retain its best customers. It invites these customers to join the VIP programme for $14.95 and receive a free large pizza. Then, for every two pizzas ordered each month, VIP customers automatically earn a coupon for another free large pizza. Pizza Hut tracks VIP purchases and targets members with additional e-mail offers. In all, the campaign not only retained Pizza Hut’s top customers but attracted new customers as well. The programme also generated a lot of online buzz. Says one blogger, ‘So who is always on my mind when I feel like pizza? Who is sending me coupons and free things that make me want to get pizza rather than make dinner? You got it, Pizza Hut. They had me buy in and now they’ll have my loyalty. They make it so easy that I wouldn’t want to bother getting it anywhere else.’ 3

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Internal databases can usually be accessed more quickly and cheaply than other information sources, but they also present some problems. Because internal information was often collected for other purposes, it may be incomplete or in the wrong form for making marketing decisions. For example, sales and cost data used by the accounting department for preparing financial statements must be adapted for use in evaluating the value of a specific customer segment, sales force or channel performance. We don’t need to disturb customers by asking them to fill in a survey and these data are often free of charge – they already exist in the accounting system and the enterprise system. However, data can become outdated quickly; keeping the database current requires a major effort. In addition, a large company produces mountains of information, which must be well integrated and readily accessible so that managers can find it easily and use it effectively. Managing that much data requires highly sophisticated equipment and techniques.

Marketing intelligence Marketing intelligence— The systematic collection and analysis of publicly available information about consumers, competitors and developments in the marketplace.

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Marketing intelligence is the systematic collection and analysis of publicly available information about consumers, competitors and developments in the marketplace. The goal of marketing intelligence is to improve strategic decision-making by understanding the consumer environment, assessing and tracking competitors’ actions, and providing early warnings of opportunities and threats. Marketing intelligence gathering has grown dramatically as more and more companies are now busily eavesdropping on the marketplace and snooping on their competitors. Techniques range from monitoring internet buzz or observing consumers first-hand to quizzing the company’s own employees, benchmarking competitors’ products, researching the internet and social forums, lurking around industry trade shows, and even rooting through rivals’ rubbish bins. Useful? Yes, but ethically questionable. Good marketing intelligence can help marketers to gain insights into how consumers talk about and connect with their brands. Many companies send out teams of trained observers to mix and mingle with customers as they use and talk about the company’s products. Other companies routinely monitor consumers’ online chatter. Companies also need to actively ­monitor competitors’ activities. Firms use competitive intelligence to gain early warnings of competitor moves and strategies, new-product launches, new or changing markets, and ­potential competitive strengths and weaknesses. Much competitor intelligence can be collected from people inside the company – executives, engineers and scientists, purchasing agents and the sales force. The company can also obtain important intelligence information from suppliers, resellers and key customers. Or it can get good information by observing competitors and monitoring their published information. It can buy and analyse competitors’ products, monitor their sales, check for new patents and examine various types of physical evidence. Even checking out competitors’ parking lots may be useful – full lots might indicate plenty of work and prosperity; half-full lots might suggest hard times. Some companies have even rifled through their competitors’ garbage, which is legally considered abandoned property once it leaves the premises. In one classic garbage-snatching incident, Procter & Gamble (P&G) admitted to ‘dumpster diving’ at rival Unilever’s headquarters. Unilever’s dumpsters yielded a wealth of information about strategies for Unilever’s hair care brands. However, when news of the questionable tactics reached top P&G managers, they were shocked and immediately stopped the project. Although P&G claims it broke no laws, it noted that dumpster raids violated its business policies. Bad will costs are difficult to estimate but might be extensive. Competitors often reveal intelligence information through their annual reports, business publications, trade show exhibits, press releases, advertisements and web pages. The web has become an invaluable source of competitive intelligence. Using internet search engines, marketers can search specific competitor names, events or trends and see what turns up. Moreover, most companies now place volumes of information on their websites, providing details to attract customers, partners, suppliers, investors or franchisees. This can provide a wealth of

Marketing research

useful information about competitors’ strategies, markets, new products, facilities and other happenings. Investigating competitors’ job advertisements is useful in understanding what the competitors are going to do next. Intelligence seekers can also pore through any of thousands of online databases. Some are free. For example, the Committee of European Securities Regulators’ database provides a huge stockpile of financial information on public competitors, and the European Patent Office database reveals patents that competitors have filed. For a fee, companies can subscribe to thousands of online databases and information search services. The growing use of marketing intelligence raises a number of sustainability and ethical issues. Although most of the preceding techniques are legal, and some are considered to be shrewdly competitive, some may involve questionable ethics. Clearly, companies should take advantage of publicly available information. However, they should not stoop to snoop. With all the legitimate intelligence sources now available, a company does not need to break the law or accepted codes of ethics to get good intelligence.

Marketing research Whereas marketing intelligence involves actively scanning the general marketing environment, marketing research involves more focused studies to gain customer insights relating to specific marketing decisions. Google wants to know how web searchers will react to a proposed redesign of its site, Sony wants to know how many and what kinds of people will buy its next-generation mobile phones, or Electrolux wants to know how social media will change buyer expectations of white goods in the future. In such situations, marketing intelligence will not provide the detailed information needed. Managers will need marketing research. Marketing research is the systematic design, collection, analysis and reporting of data relevant to a specific marketing situation facing an organisation. Companies use marketing research in a wide variety of situations. For example, marketing research gives marketers insights into customer motivations, purchase behaviour and satisfaction. It can help them to assess market potential and market share or to measure the effectiveness of pricing, product, distribution and promotion activities. Some large companies have their own research departments that work with marketing ­managers on marketing research projects. This is how big companies handle marketing research. These companies, like their smaller counterparts, frequently hire outside research specialists to consult with management on specific marketing problems and conduct marketing research studies. Sometimes firms simply purchase data collected by outside companies to aid in their decision-making. The marketing research process has four steps (see Figure 4.2): defining the problem and research objectives, developing the research plan, implementing the research plan, and ­interpreting and reporting the findings.

Marketing research— The systematic design, ­collection, analysis and reporting of data relevant to a specific marketing ­situation facing an ­organisation.

Defining the problem and research objectives Marketing managers and researchers must work closely together to define the problem and agree on research objectives. The manager best understands the decision for which information is needed; the researcher best understands marketing research and how to obtain the information.

Defining the problem and research objectives

Developing the research plan for collecting information

Implementing the research plan – collecting and analysing the data

Interpreting and reporting the findings

Figure 4.2  The marketing research process

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Exploratory research—­ Marketing research to gather preliminary ­information that will help define problems and suggest hypotheses. Descriptive research—­ Marketing research to better describe marketing problems, situations or markets, such as the market potential for a product or the demographics and attitudes of consumers. Causal research—Marketing research to test hypotheses about cause-and-effect relationships.

Primary data—Information collected for the specific purpose at hand.

Defining the problem and research objectives is often the hardest step in the research process. The manager may know that something is wrong, without knowing the specific causes. After the problem has been defined carefully, the manager and researcher must set the research objectives. A marketing research project might have one of three types of objectives. The objective of exploratory research is to gather preliminary information that will help define the problem and suggest hypotheses. This approach is suitable in situations where marketing researchers have few ideas about how to deal with the marketing problem at hand. Descriptive research aims at describing things, such as the market potential for a product or the demographics and attitudes of consumers who buy the product. The objective of causal research is to test hypotheses about cause-and-effect relationships, e.g. price elasticities. For example, would a 10 per cent decrease in tuition at an MBA university programme result in an enrolment increase sufficient to offset the reduced tuition? Managers often start with exploratory research and later follow with descriptive or causal research. The statement of the problem and research objectives guides the entire research process. The manager and researcher should put the statement in writing to be certain that they agree on the purpose and expected results of the research.

Developing the research plan Once the research problems and objectives have been defined, researchers must determine the exact information needed, develop a plan for gathering it efficiently, and present the plan to management. The research plan outlines sources of existing data and spells out the specific research approaches, contact methods, sampling plans and instruments that researchers will use to gather new data. Research objectives must be translated into specific information needs. The proposed research might call for the following specific information: ●●

The demographic, economic and lifestyle characteristics of current users.

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Characteristics and usage patterns of targeted new users: what do they need and expect from the product, where do they buy it, when and how do they use it, and what existing brands and price points are most popular (if similar products are already available)?

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Retailer reactions to the proposed new product line: would they stock it and where would they display it? Failure to get retailer support would hurt sales.

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Forecasts of sales to both new and current customers. Will the new product increase the company’s overall profits?

The research plan should be presented in a written proposal. A written proposal is especially important when the research project is large and complex or when an outside firm carries it out. The proposal should cover the management problems addressed and the research objectives, the information to be obtained, and the way the results will help management ­decision-making. The proposal also should include research costs. To meet the manager’s information needs, the research plan can call for gathering secondary data or primary data, or both. Secondary data consist of information that already exists somewhere, having been collected for another purpose. Primary data consist of information collected for the specific purpose at hand.

Gathering secondary data Researchers usually start by gathering secondary data. The company’s internal database provides a good starting point. However, the company can also tap into a wide assortment of external information sources, including commercial data services and government sources. Companies can buy secondary data reports from outside suppliers, or collect secondary data on their own. Using commercial online databases, marketing researchers can conduct their own searches of secondary data sources. General database services put huge amounts of information at the 106

Marketing research

keyboards of marketing decision-makers. Beyond commercial websites offering information for a fee, almost every industry association, government agency, business publication and news medium offers free information to those tenacious enough to find their websites. Well-designed internet searches can be a good starting point to any marketing research project. Secondary data can usually be obtained more quickly and at a lower cost than primary data. Also, secondary sources can provide information that is not available to a company or would be too expensive to collect. However, secondary data must be evaluated carefully to make certain it is relevant (fits research project needs), accurate (reliably collected and reported), current (up-to-date enough for current decisions) and impartial (objectively collected and reported).

Primary data collection Just as researchers must carefully evaluate the quality of secondary information, they also must take great care when collecting primary data to make sure that it will be relevant, accurate, current and unbiased. Designing a plan for primary data collection calls for a number of ­decisions on research approaches, contact methods, sampling plan and research instruments (see Table 4.1).

Research approaches Research approaches for gathering primary data include observation, surveys and experiments.

Observational research  This involves gathering primary data by observing relevant people, actions and situations. For example, a bank might evaluate possible new branch locations by checking traffic patterns, neighbourhood conditions and the location of competing branches. The toy company Fisher-Price has set up an observation laboratory in which it can observe the reactions of children to new toys. The Fisher-Price Play Lab is a sunny, toy-strewn space where lucky youngsters get to test Fisher-Price prototypes, under the watchful eyes of designers who hope to learn what will get children worked up into a new-toy frenzy. Others companies employ eye-tracking in their research. The eye of the consumer holds a wealth of valuable information, and yet sometimes it doesn’t tell the whole story. In today’s media-saturated markets, it is often necessary to go beyond traditional marketing research methods to fully explore how a consumer reacts to a given product, advertisement or website. Eye-tracking combines advanced visual behaviour analyses with traditional marketing research techniques to provide a comprehensive evaluation of the entire consumer experience. Eye-tracking hence provides insight into what consumers first look at and how long they look at different elements when seeing an ad, in what order and perhaps most importantly, what they’re missing. As eye-tracking reveals what consumers are thinking as they’re exposed to the advertisement, this helps marketers create more effective campaigns. In addition to reducing marketing communications costs, it also makes the company contribute less to media saturation, and it leaves a better impression of the company as it communicates more smartly with presumptive buyers. Observational research can obtain information that people are unwilling or unable to provide. In some cases, observation may be the only way to obtain the needed information. In contrast, feelings, attitudes and motives, or private behaviour, are difficult to observe. The same

Research approaches

Contact methods

Sampling plan

Research instruments

Observation

Mail

Sampling unit

Questionnaire

Survey

Telephone

Sample size

Mechanical instruments

Experiment

Personal online

Sampling procedure

Table 4.1  Planning primary data collection

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Eye-tracking reveals what customers are thinking in an efficient way, hence it helps marketers to create competitive offers.

Ethnographic research— A form of observational research that involves sending trained observers to watch and interact with consumers in their ‘natural habitat’.

holds for long-term or infrequent behaviour. Consumers may be reluctant to participate in primary data collection since it takes up their time and they are busy with other things. And asking consumers may make them more critical – questions may inform them about aspects of the offer they didn’t think about before they participated in the data collection programme. Finally, observations can be very difficult to interpret. Because of these limitations, researchers often use observation along with other data collection methods. A wide range of companies now use ethnographic research. This involves sending trained observers to watch and interact with consumers in their ‘natural habitat’. Municipalities ­applying place branding have found that an ethnographic method is necessary to go beyond the platitudes often used in communicating the characteristics and advantages of a place. ­Ethnographic research makes it possible to identify the core identity of the place and reveal characteristics that may be very useful in the marketing and branding of the place. Observational and ethnographic research often yield the kind of details that just don’t emerge from traditional research questionnaires or focus groups. Whereas traditional quantitative research approaches seek to test known hypotheses and obtain answers to well-defined product or strategy questions, observational research can generate fresh customer and market insights. ‘The beauty of ethnography,’ says a research expert, is that it ‘allows companies to zero in on their customers’ unarticulated desires’. Another researcher agrees: ‘Classic market research doesn’t go far enough. It can’t grasp what people can’t imagine or articulate.’ Think of the Henry Ford quote: ‘If I had asked people what they wanted, they would have said faster horses.’ By asking people representing the intended target groups, it is possible to go beyond established categories.4

Survey research  Survey research, the most widely used method for primary data collection, is the approach best suited for gathering descriptive information. A company that wants to know about people’s knowledge, attitudes, preferences or buying behaviour can often find out by asking them directly. The major advantage of survey research is its flexibility – it can be used to obtain many different kinds of information in many different situations. Surveys addressing almost any marketing question or decision can be conducted by phone or mail, in person, or on the web. However, survey research also presents some problems. Sometimes people are unable to answer survey questions because they cannot remember or have never thought about what they do and why. People may be unwilling to respond to unknown interviewers or about things they consider private. Respondents may answer survey questions even when they do not know the answer in 108

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order to appear smarter or more informed. Or they may try to help the interviewer by giving pleasing answers. Respondents may not know their preferences or why they behave in a specific manner. Finally, busy people may not take the time, or they might resent the intrusion into their privacy, resulting in data being non-representative. This group of busy people with qualified jobs and high incomes might be the most profitable, and if they are underrepresented in surveys, there is a risk that the research input moves the company and its offers in the wrong direction.

Experimental research  Whereas observation is best suited for exploratory research and surveys for descriptive research, experimental research is best suited for gathering causal information. Experiments involve selecting matched groups of subjects, giving them different treatments, controlling unrelated factors and checking for differences in group responses. Thus, experimental research tries to explain cause-and-effect relationships. For example, before adding a new sandwich to its menu, McDonald’s might use experiments to test the effects on sales of two different prices it might charge. It could introduce the new sandwich at one price in one city and at another price in another city. If the cities are similar, and if all other marketing efforts for the sandwich are the same, then differences in sales in the two cities could be related to the price charged. Past experiences will help researchers identifying cities relevant for the purpose of such research.

Contact methods Information can be collected by mail, telephone, personal interview or online. Table 4.2 shows the strengths and weaknesses of each of these contact methods.

Mail, telephone and personal interview  Mail questionnaires can be used to collect large amounts of information at a low cost per respondent. Respondents may give more honest answers to more personal questions on a mail questionnaire than to an unknown interviewer in person or over the phone. Also, no interviewer is involved to bias the respondent’s answers. However, mail questionnaires are not very flexible – all respondents answer the same ­questions in a fixed order. Mail surveys usually take longer to complete, and the response rate – the number of people returning completed questionnaires – is often very low. As stated above, busy people in particular tend not to fill in and return questionnaires. Finally, the researcher often has little control over the mail questionnaire sample. Even with a good mailing list, it is hard to control who at the mailing address fills out the questionnaire. Some individuals may fill in the survey twice – not all programmes will notice that. Telephone interviewing is one of the best methods for gathering information quickly, and it provides greater flexibility than mail questionnaires. Interviewers can explain difficult questions and, depending on the answers they receive, skip some questions or probe on others. Response rates tend to be higher than with mail questionnaires, and interviewers can ask to

Mail

Telephone

Personal

Online

Flexibility

Poor

Good

Excellent

Good

Quantity of data that can be collected

Good

Fair

Excellent

Good

Control of interviewer effects

Excellent

Fair

Poor

Fair

Control of sample

Fair

Excellent

Good

Excellent

Speed of data collection

Poor

Excellent

Good

Excellent

Response rate

Poor

Poor

Good

Good

Cost

Good

Fair

Poor

Excellent

Table 4.2  Strengths and­ ­weaknesses of contact methods

Source: Adapted with permission of the authors from Marketing Research: Measurement and Method, 7th edn, by Donald S. Tull and Del I. Hawkins. Copyright 1993 by Macmillan Publishing Company.

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Focus group interviewing— Personal interviewing that involves inviting six to ten people to gather for a few hours with a trained interviewer to talk about a product, service, ­organisation or idea. The interviewer ‘focuses’ the group discussion on ­important issues.

Focus group interviewing is a great opportunity for marketers as this method catches the dynamics of people interacting with each other under the supervision of a moderator. Source: Johner Images/Alamy

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speak to respondents with the desired characteristics or even by name. However, in many cases, the data collection is outsourced to a third party that is focused on completing the task as simply as possible. Moreover, respondents may be difficult to find and may not do their best to contribute to the research question. However, with telephone interviewing, the cost per respondent is higher than with mail questionnaires. Also, people may not want to discuss personal questions with an interviewer. The method introduces interviewer bias – the way interviewers talk, how they ask questions and other differences may affect respondents’ answers. Different interviewers may interpret and record responses differently, and under time pressures some interviewers might even cheat by recording answers without asking questions. Finally, in this age of do-not-call lists such as Nix and promotion-harassed consumers, potential survey respondents are increasingly hanging up on telephone interviewers rather than talking to them. Collecting data has become a general problem, since many customers are tired of interviewers and requests to fill in surveys. Personal interviewing takes two forms – individual and focus group interviewing. Individual interviewing involves talking with people in their homes or offices, on the street, or in shopping malls. Such interviewing is flexible. Trained interviewers can guide interviews, explain difficult questions and explore issues as the situation requires. They can show subjects actual products, advertisements or packages and observe reactions and behaviour. However, individual personal interviews may cost three to four times as much as telephone interviews. Focus group interviewing consists of inviting six to ten people to meet with a trained moderator to talk about a product, service, organisation or idea. Participants are often paid a small sum for attending. The moderator encourages free and easy discussion, hoping that group interactions will bring out actual feelings and thoughts. At the same time, the moderator ‘focuses’ the discussion – hence the name focus group interviewing. Researchers and marketers watch the focus group discussions from behind one-way glass and comments are recorded in writing or on video for later study. Videoconferencing and internet technology may be used to connect marketers in distant locations with live focus group action. Along with observational research, focus group interviewing has become one of the major qualitative marketing research tools for gaining fresh insights into consumer thoughts and feelings. However, focus group studies present some challenges. They usually employ small samples to keep time and costs down, and it may be hard to generalise from the results. Moreover, consumers in focus groups are not always open and honest about their real feelings, behaviour and intentions in front of other people.

Marketing research

Other researchers are combining focus groups with hypnosis in an effort to get deeper, more vivid insights. Consider this example:5 Volvo equals safety. In focus group after focus group, participants said the same thing. But to check these findings, Volvo called in a hypnotist. Members of Volvo focus groups were asked to test-drive a car. Immediately afterwards, they were hypnotised and asked their true feelings about the brand. It wasn’t pretty: many revealed that Volvo also equals being middle-aged. That idea ‘for some people was suffocating’, says a Volvo researcher. ‘Hypnosis helped get past the cliches. We needed the conversation taken to a deeper, more emotional place.’6

Still other researchers are changing the environments in which they conduct focus groups. To help consumers relax and to elicit more authentic responses, they use settings that are more comfortable and more relevant to the products being researched. There is a vast amount of literature on focus groups and some of it suggests very strict criteria for how the focus group interview should proceed.7

Online marketing research The internet has had a dramatic impact on the conduct of marketing research. Increasingly, researchers are collecting primary data through online marketing research – internet surveys, online panels, experiments and online focus groups. Online research can take many forms. A company can include a questionnaire on its website and offer incentives for completing it. It can use e-mail, web links or web pop-ups to invite people to answer questions and possibly win a prize. It can create online panels that provide regular feedback or conduct live discussions or online focus groups. Beyond surveys, researchers can conduct experiments on the web. They can experiment with different prices, use different headlines or offer different product features on different websites or at different times to learn the relative effectiveness of their offers. Or they can set up virtual shopping environments and use them to test new products and marketing programmes. Finally, a company can learn about the behaviour of online customers by following their click streams as they visit the website and move to other sites. The success of various methods to make the visitor stay at the website and ‘get informed’ about the company, its products and offers could thus be tracked and evaluated. The internet is especially well suited to quantitative research. As response rates for traditional survey approaches decline and costs increase, the web is increasingly replacing mail and the telephone as the dominant data collection methodology. Web-based survey research offers some real advantages over traditional phone and mail approaches. The most obvious advantages are speed and low costs. Researchers can quickly and easily distribute internet surveys to thousands of respondents simultaneously via e-mail or by posting them on selected websites. Responses can be almost instantaneous, and because respondents themselves enter the information, researchers can tabulate, review and share research data as they arrive. There are no or very small marginal costs for collecting additional survey responses – the website visitor does the job. To motivate them to answer, the respondent may get a discount voucher, e.g. SEK 50 discount for the next purchase from Lindex or 500 SJ Prio points. Beyond their speed and cost advantages, web-based surveys also tend to be more interactive and engaging, easier to complete and less intrusive than traditional phone or mail surveys. As a result, they often garner higher response rates. The internet is an excellent medium for reaching the hard-to-reach – the often-elusive teen, single, affluent and well-educated audiences. It’s also good for reaching people who lead busy lives. Such people are well represented online, and they can respond in their own space and at their own convenience. A major problem is controlling who’s in the online sample. Without seeing respondents, it’s difficult to know who they really are. Finally, online surveys can be dry and lacking in dynamics compared with other, more-personal approaches. Qualitative web-based research approaches such as online focus groups offer many advantages over traditional focus groups. Participants can log in from anywhere so it works well for bringing

Online marketing research—Collecting primary data online through internet surveys, online focus groups, web-based experiments or tracking consumers’ online behaviour.

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together people from different parts of the country or world, especially those in higher-income groups who can’t spare the time to travel to a central site. Also, researchers can conduct and monitor online focus groups from just about anywhere, eliminating travel, lodging and facility costs. Finally, although online focus groups require some advance scheduling, results are almost immediate. Online focus groups can take any of several formats. Most occur in real time, in the form of online chat room discussions in which participants and a moderator sit around a virtual table exchanging comments. Alternatively, researchers might set up an online message board on which respondents interact over the course of several days or a few weeks. Participants log in daily and comment on focus group topics. The focus group moderator monitors the online interactions and redirects the discussion as required to keep the group on track. This ongoing message board format gives participants a chance to reflect on their responses, talk to others and check out products in the real world as the group progresses. However, online focus groups can lack the real-world dynamics of more personal approaches. The interactivity, spontaneity and immediacy of focus groups can be kept if it takes the form of an ongoing message board, but the eye contact, body language and direct personal interactions found in traditional focus group research will be missing. The internet format with typed commentary and online ‘emoticons’ such as :-) to signify happiness greatly restricts respondent expressiveness. The impersonal nature of the internet can prevent people from interacting with each other in a normal way and getting excited about a concept. Adding real-time audio and video to online focus groups is likely to improve the quality but requires extensive scheduling. Perhaps the most explosive issue facing online researchers concerns consumer privacy. Some fear that unethical researchers will use the e-mail addresses and confidential responses gathered through surveys to sell products after the research is completed. They are concerned about the use of technologies that collect personal information online without the respondent’s consent. Failure to address such privacy issues could result in angry, less co-operative consumers and, finally, increased government intervention. Despite these concerns, most online marketing research has grown rapidly.

Sampling plan Marketing researchers usually draw conclusions about large groups of consumers by studying a small sample of the total consumer population. A sample is a segment of the population selected for marketing research to represent the population as a whole. Ideally, the sample should be representative so that the researcher can make accurate estimates of the thoughts and behaviours of the larger population. Designing the sample requires three decisions. First, who is to be surveyed (what ­sampling unit)? The answer to this question is not always obvious. For example, to study the decisionmaking process for a family automobile purchase, should the researcher interview the owner, the main user (who may not be the same person as the official owner), both if it’s a couple, other family members, e.g. children, dealership salespeople, or all of these? The researcher must determine what information is needed and who is most likely to have it. If, as recent evidence suggests, children have a stronger influence upon their parents’ purchase decisions than they used to have, this should be considered by market researchers. Second, how many people should be surveyed (what sample size)? Large samples give more reliable results than small samples but cost more, and it is not necessary to sample the entire target market or even a large portion to get reliable results. If well chosen, samples of less than 1 per cent of a population can often give good reliability (cf. national election surveys which, based on a sample of a few thousand Swedes, give an accurate view of the percentages different parties get in the election). Third, how should the people in the sample be chosen (what sampling procedure)? Table 4.3 describes different kinds of samples. Using probability samples, each population member has a known chance of being included in the sample, and researchers can calculate confidence limits for sampling error. But when probability sampling costs too much or takes too much time, marketing researchers often take non-probability samples, even though their sampling 112

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Sample type

Procedure

Table 4.3  Types of samples

Probability sample Simple random sample

Every member of the population has a known and equal chance of selection

Stratified random sample

The population is divided into mutually exclusive groups (such as age groups), and random samples are drawn from each group

Cluster (area) sample

The population is divided into mutually exclusive groups (such as blocks), and the researcher draws a sample of the groups to interview

Non-probability sample Convenience sample

The researcher selects the easiest population members from which to obtain information

Judgment sample

The researcher uses his or her judgment to select population members who are good prospects for accurate information

Quota sample

The researcher finds and interviews a prescribed number of people in each of several categories

error cannot be measured and the researcher must be aware of tendencies in the data collected. These varied ways of drawing samples have different costs and time limitations as well as different accuracy and statistical properties. Which method is best depends on the needs of the research project.

Research instruments In collecting primary data, marketing researchers have a choice of two main research ­instruments – the questionnaire and mechanical devices.

Questionnaires  The questionnaire is by far the most common instrument, whether administered in person, by phone or online. Questionnaires are very flexible in the sense that there are many ways to ask questions. Closed-end questions include all the possible answers, and subjects make choices among them – which might be a problem if respondents suggest that the phenomenon to be researched may not fit into the categories. Examples include multiple-choice questions and scale questions. Open-end questions allow respondents to answer in their own words. In a survey of airline users, Malmö Aviation might simply ask, ‘What is your opinion of Malmö Aviation?’ Or it might ask people to complete a sentence: ‘When I choose an airline, the most important consideration is . . .’ These and other kinds of open-end questions often reveal more than closed-end questions because they do not limit respondents’ answers. Open-end questions are especially useful in exploratory research, when the researcher is trying to find out what people think but not measuring how many people think in a certain way. There may also be some restrictions placed upon the answer: in measuring brand strength and profile, respondents maybe asked to name three associations to a particular brand. Closed-end questions, on the other hand, provide answers that are easier to interpret and tabulate. Researchers should also use care in the wording and ordering of questions. They should use simple, direct, unbiased wording. Questions should be arranged in a logical order. The first question should create interest if possible, and difficult or personal questions should be asked last so that respondents do not become defensive (see Table 4.4). Mechanical instruments  Although questionnaires are the most common research instrument, researchers also use mechanical instruments to monitor consumer behaviour. MMS (­Mediamätning i Skandinavien) attaches people meters to television sets in selected homes to 113

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Table 4.4  A ‘questionable questionnaire’

Suppose that a summer camp director has prepared the following questionnaire to use in ­interviewing the parents of prospective campers. How would you assess each question? 1.

What is your income to the nearest thousand SEK?  People don’t usually know their income to the nearest thousand SEK, nor may they want to reveal their income. Moreover, a researcher should never open a questionnaire with such a personal question.

2.

Are you a strong or weak supporter of overnight summer camping for your children?  What do ‘strong’ and ‘weak’ mean in this respect?

3.

Do your children behave well at a summer camp? Yes [ ] No [ ]  ‘Behave’ is a relative term. Furthermore, are yes and no the best response options for this question? Besides, will people answer this honestly and objectively? Why ask the question in the first place?

4.

How many camps mailed or e-mailed information to you last year?  This year? Who can remember this?

5.

What are the most salient and determinant attributes in your evaluation of summer camps? What are salient and determinant attributes? Don’t use big words on me!

6.

Do you think it is right to deprive your child of the opportunity to grow into a mature person through the experience of summer camping?  A loaded question. Given the bias, how can any parent answer yes?

record who watches which programmes. Retailers use checkout scanners to record shoppers’ purchases. Retailers may measure the floor traffic through visitor counters. Other mechanical devices measure subjects’ physical responses. For example, advertisers use eye cameras to study viewers’ eye movements while watching adverts – on what points their eyes focus first and how long they linger on any given ad component. IBM’s BlueEyes technology interprets human facial reactions by tracking pupil, eyebrow and mouth movements. BlueEyes offers a host of potential marketing uses, such as marketing machines that ‘know how you feel’ and react accordingly. An elderly man squints at the screen of an automated-banking machine, and the font size doubles almost instantly. A woman at a shopping centre kiosk smiles at a travel advert, prompting the device to print out a travel discount coupon.8 Neuromarketing measures brain activity to learn how consumers feel and respond. More specifically, neuromarketing studies consumers’ sensorimotor, cognitive, and affective responses to marketing stimuli. Researchers use technologies such as functional magnetic resonance imaging (fMRI) to measure changes in activity in parts of the human brain. In addition, neuromarketing measures changes in consumers’ physiological state. One method used here is bio­metrics, which measures, for example, heart rate and respiratory rate in addition to galvanic skin response in order to learn why consumers make the decisions they do, and which brain areas are responsible. Companies such as Google, CBS and A&E Television are using neuromarketing research to measure consumer thoughts on their products and advertisements. Although neuromarketing techniques can measure consumer involvement and emotional responses minute by minute, such brain responses can be difficult to interpret. Even though neuromarketing is developing rapidly among large companies in particular, which have the opportunity to run their own neuromarketing research centres, and in academic research, neuromarketing is usually used in combination with other research approaches to gain a more complete picture of what goes on inside consumers’ heads.9

Implementing the research plan The researcher next puts the marketing research plan into action. This involves collecting, processing and analysing the information. Data collection can be carried out by the 114

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company’s marketing research staff or by outside firms. The data collection phase of the marketing research process is generally the most expensive and the most subject to error. Researchers should watch closely to make sure that the plan is implemented correctly. They must guard against problems with contacting respondents, with respondents who refuse to co-operate or who give biased answers, and with interviewers who make mistakes or take shortcuts. Particularly if the data collection is outsourced to a company based on a ­lowest-bid principle, there may be a risk that the execution is not as good as intended and reported. At the end of the day, a data collection company wants to get more projects and so it may not provide feedback on implementation problems to its contractors. Researchers must also process and analyse the collected data to isolate important ­information and findings. They need to check data for accuracy and completeness and code it for analysis. The researchers then tabulate the results and compute statistical measures.

Interpreting and reporting the findings The market researcher must now interpret the findings, draw conclusions and report them to management. The focus should be on important findings and insights that are useful in the major decisions faced by management. However, interpretation should not be left only to the researchers. They are often experts in research design and statistics, but the marketing manager knows more about the problem and the decisions that must be made. Although it increases decision-making complexity, it may make sense to include individuals holding further positions to give more input to analysing the findings. The best research means little if the manager blindly accepts faulty interpretations from the researcher. Similarly, managers may be biased – they might tend to accept research results that show what they expected and to reject those that they did not expect or hope for. In many cases, findings can be interpreted in different ways, and discussions between researchers and managers will help point to the best interpretations.

Analysing and using marketing information Information gathered in internal databases and through marketing intelligence and m ­ arketing research usually requires additional analysis. And managers may need help applying the ­information to gain customer and market insights that will improve their marketing decisions. This help may include advanced statistical analysis to learn more about the relationships within a set of data. Information analysis might also involve the application of analytical models that will help marketers make better decisions. Once the information has been processed and analysed, it must be made available to the right decision-makers at the right time. In the following sections, we look deeper into analysing and using marketing information.

Customer relationship management We’ve talked generally about managing customer relationships throughout the book. But here, the term customer relationship management (CRM) has a much narrower data-management meaning. It refers to capturing and using customer data from all sources to manage customer interactions and build customer relationships. The question of how best to analyse and use individual customer data presents special problems. Most companies are awash with information about their customers. In fact, smart companies capture information at every possible customer touch point, including customer purchases, sales force contacts, service and support calls, website visits, satisfaction surveys, credit and payment interactions, and market research studies.

Customer relationship management (CRM) – Managing detailed information about individual customers and carefully managing customer ‘touch points’ to maximise customer loyalty.

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The trouble is that this information is usually scattered widely across the organisation. It is buried deep in the separate databases and records of different company departments. To overcome such problems, many companies are now turning to CRM to manage detailed information about individual customers and carefully manage customer touch points in order to maximise customer loyalty. CRM first burst onto the scene in the early 2000s. Many companies rushed in, implementing overly ambitious CRM programmes that produced disappointing results and many failures.10 More recently, however, companies have been moving ahead more cautiously and implementing CRM systems that really work. CRM consists of sophisticated software and analytical tools that integrate customer information from all sources, analyse it in depth and apply the results to build stronger customer relationships. CRM integrates everything that a company’s sales, service and marketing teams know about individual customers to provide a 360-degree view of the customer relationship. Companies can use CRM to pinpoint high-value customers, target them more effectively, crosssell the company’s products and create offers tailored to specific customer requirements. CRM analysts develop data warehouses and use sophisticated data mining techniques to unearth the riches hidden in customer data. A data warehouse is a company-wide electronic database of finely detailed customer information that needs to be sifted through for gems. The purpose of a data warehouse is not just to gather information, but also to pull it together into a central, accessible location. For example, ICA’s loyalty card (ICA-kortet) gives customers customised offers based on purchase history. In addition to a 1 per cent refund on all purchase transactions (with a few exceptions, e.g. stamps and lottery tickets), a customer buying large amounts of frozen prawns, wholewheat bread and dark chocolate will get a 10–20 per cent discount on the same products as a benefit the next month. Once a month, ICA cardholders get personalised mail with a refund and offers, and ICA co-operates with other companies and uses their CRM system to provide a marketing channel for other companies’ products. Consumers are getting used to loyalty card data being used in this kind of way and we’ll see more personalised offers as new techniques are developed and consumers begin to accept them. CRM benefits don’t come without cost or risk, either in collecting the original customer data or in maintaining and mining it. The most common CRM mistake is to view CRM only as a technology and software solution. CRM is just one part of an effective overall customer relationship management strategy.

Distributing and using marketing information As well as the marketing information that is readily available to the managers and others who make marketing decisions or deal with customers, non-routine information for special situations and on-the-spot decisions may be needed by marketing managers. For example, a sales manager having trouble with a large customer may want a summary of the account’s sales and profitability over the past year. Or a retail store manager who has run out of a best-­selling product may want to know the current inventory levels in the chain’s other stores. The ­company intranet often provides ready access to research information, reports, shared work documents, contact information for employees and other stakeholders, and more.

Marketing research in small businesses and non-profit organisations Managers of small businesses and non-profit organisations often think that marketing research can only be done by experts in large companies with big research budgets.

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Marketing research in small businesses and non-profit organisations

Managers of small businesses and non-profit organisations can also use marketing research, even though their research budgets are very limited. However, methods are applied in a less formal manner. Source: Lena Granefelt/ Getty Images

However, many of the marketing research techniques discussed in this chapter can be used by smaller organisations in a less formal manner and at little expense. Managers of small businesses and non-profit organisations can obtain good marketing insights simply by observing things around them and talking to their customers. They can conduct informal surveys using small convenience samples. Small organisations can also obtain most of the secondary data available to large businesses. And many associations, local media, chambers of commerce and government agencies provide special help to small organisations. For example, the European Small Business Alliance (www.esba-europe.org) offers free publications and gives advice on topics ranging from starting, financing and expanding a small business to ordering business cards. To keep costs of data collection low, students can be hired, and they may want to use the experience in a project. Finally, small businesses can collect a considerable amount of information at very little cost on the internet. They can scour competitor and customer websites and use internet search engines to research specific companies and issues. Although these informal research methods are less complex and less costly, they must still be conducted with care. Managers must think carefully about the objectives of the research, formulate questions in advance, recognise the biases introduced by smaller samples and less skilled researchers, and conduct the research systematically.11

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International marketing research International marketing researchers follow the same steps as domestic researchers. However, these researchers often face more, and different, problems. Whereas domestic researchers deal with fairly homogeneous markets within a single country, international researchers deal with diverse markets in many different countries. These markets often vary greatly in their levels of economic development, cultures and customs, and buying patterns. In many foreign markets, the international researcher may have a difficult time finding good secondary data. Some countries have almost no research services at all. Although some of the largest international research services do operate in many countries, most research firms operate in only a handful of countries. Thus, even when secondary information is available, it usually must be obtained from many different sources on a country-by-country basis, making the information difficult to combine or compare. Because of the scarcity of good secondary data, international researchers often must collect their own primary data. For example, they may find it difficult simply to develop good samples. Researchers in developed countries can use current telephone directories, e-mail lists, census tract data, and any of several sources of socioeconomic data to construct samples. However, such information is largely lacking in many countries. Once the sample is drawn, a European researcher can usually reach most respondents easily by telephone, by mail, via the internet, or in person. Reaching respondents is often not so easy in other parts of the world. Researchers in Mexico cannot rely on telephone, internet and mail data collection – most data collection is door to door and concentrated in three or four of the largest cities. In some countries, e.g. Mexico and Kenya, few people have phones or personal computers. For example, there are only 116 mobile phone subscribers per 1,000 people in Cuba and 218 in Ethiopia while there are 1,518 in Singapore, 1,704 in Finland, and 2,368 in Hong Kong.12 One indicator may not be enough, though. Although there are 1,371 mobile phone subscribers per 1,000 people in Kenya, an estimated 30 per cent of the mail is never delivered. Likewise, South Africa, with 1,176 mobile phone subscribers per 1,000 people, is known as a country with a non-­reliable mail infrastructure. In many developing countries, poor roads and transportation systems make certain areas hard to reach, making personal interviews difficult and expensive.13 Cultural differences from country to country cause additional problems for international researchers. Language is the most obvious obstacle, which makes interpretation a severe problem. Translating a questionnaire from one language to another is anything but easy. Many idioms, phrases and statements mean different things in different cultures. For example, a Danish executive noted, ‘Check this out by having a different translator put back into English what you’ve translated from English. You’ll get the shock of your life. I remember an example in which “out of sight, out of mind” had become “invisible things are insane”.’14 Questionnaires must be prepared in one language and then translated into the languages of each country researched. Responses then must be translated back into the original language for analysis and interpretation. This adds to research costs and increases the risk of error. Consumers in different countries also vary in their attitudes toward marketing research. ­People in one country may be very willing to respond; in other countries, non-response can be a major problem. Customs in some countries may prohibit people from talking with strangers. In ­certain cultures, research questions often are considered too personal. For example, in many Latin ­American countries, people may feel embarrassed to talk with researchers about their choices of shampoo, deodorant or other personal care products. Similarly, in most Muslim countries, mixed-gender focus groups are taboo, as is recording female-only focus groups on camera. Even when respondents are willing to respond, they may not be able to because of high functional illiteracy rates. Despite these problems, as global marketing grows, global companies have little choice but to conduct such international marketing research. Although the costs and problems associated with international research may be high, the costs of not doing it – in terms of missed opportunities and mistakes – might be even higher. Once recognised, many of the problems associated with international marketing research can be overcome or avoided. 118

Public policy and ethics in marketing research

public policy and ethics in marketing research Most marketing research benefits both the sponsoring company and its consumers. Through marketing research, companies learn more about consumers’ needs, resulting in more satisfying products and services and stronger customer relationships. However, the misuse of marketing research can also harm or annoy consumers. Two major public policy and ethics issues in marketing research are intrusions on consumer privacy and the misuse of research findings.

Intrusions on consumer privacy Many consumers feel positive about marketing research and believe that it serves a useful purpose. Some actually enjoy being interviewed and giving their opinions. However, others strongly resent or even mistrust marketing research. They worry that marketers are building huge databases full of personal information about customers. Or they fear that researchers might use sophisticated techniques to probe our deepest feelings, peek over our shoulders as we shop or eavesdrop on our conversations and then use this knowledge to manipulate our buying. There are no easy answers when it comes to marketing research and privacy. For example, is it a good or bad thing that marketers track and analyse consumers’ web clicks and target adverts to individuals based on their browsing behaviour?

Company case tracking consumers on the web: smart targeting or a little creepy? On the internet today, everybody knows who you are. In fact, legions of internet companies also know your gender, your age, the neighbourhood you live in, that you like fashion clothing and that you spent, say, three hours and 43 seconds on a website for pet lovers on a rainy day in January. All that data streams through myriad computer networks, where it’s sorted, catalogued, analysed and then used to deliver adverts aimed squarely at you, potentially anywhere you travel on the web. It’s called behavioural targeting – tracking consumers’ online browsing behaviour and using it to target adverts to them. What you do when you aren’t searching – the other 95 per cent of the time you spend online – is pure gold to advertisers. And companies are busy mining that gold, helping advertisers to target adverts based on just about everything you do on the internet. By dropping ‘cookies’ onto every web browser that calls up one of its sites, a search engine amasses a staggering amount of data about its users. Yahoo!’s head of research and data, Usama Fayyad, supervises the 12 terabytes of user information that flow into Yahoo!’s servers every day. Fittingly, Fayyad is a former rocket scientist, whose resumé includes a seven-year stint at a jet propulsion lab. He’s an intense numbers guy who went on to found two data-mining companies, one of which he sold to Yahoo!. Fayyad and his group crunch all that online user data, blend it with information about what people do on Yahoo!’s search engine, and feed it into models that predict consumer behaviour. This has led Fayyad to an important conclusion: what you do on the web reveals far more about you than what you type into a search box.

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Armed with this mass of data, Yahoo! often sells ad space based not on a site’s content but on an individual consumer’s online behaviour. Say you spent time at Yahoo! Autos sizing up cars based on fuel efficiency, then clicked over to Yahoo!’s Green Center to read about alternative fuels, then looked at cars on Blocket. Fayyad can probably predict your next move. In fact, he says he can tell with 75 per cent certainty which of the Yahoo! Autos visitors will actually purchase a car within the next three months. And the next time you visit Yahoo! Sports or Finance, you’ll probably see adverts for hybrid cars. Also moving quickly into online display advertising are a special breed of behavioural targeting advertising agencies, such as Audience Science (http://audiencescience.com). To get an even broader view of what consumers are thinking and doing online, such agencies track consumer behaviour across multiple websites. These companies ‘are, in effect, taking the trail of crumbs people leave behind as they move around the internet, and then analysing them to anticipate people’s next steps’, says the analyst. This lets them merge audience data from one group of sites with advert placements on another. So if you surf home lawn and garden sites, don’t be surprised to see adverts for Stiga’s lawn products the next time you visit weather.com. But what about consumer privacy? As you’ve no doubt already considered, that’s the downside and the biggest danger to the rapidly expanding world of behavioural targeting. As the practice becomes more common, it faces growing consumer backlash. One observer calls it ‘the dark art of behavioural ad targeting’ – eavesdropping on consumers without their knowledge or consent. ‘When you start to get into the details, it’s scarier than you might suspect,’ says the director of a consumer privacy rights group. ‘We’re recording preferences, hopes, worries and fears.’ A coalition of privacy groups has already asked the US Federal Trade Commission, for example, to consider a ‘do not track’ list (akin to telephone do-not-call lists) to let consumers opt out of behavioural ad targeting. Despite privacy concerns, proponents claim that behavioural targeting benefits more than abuses consumers. ‘What we have here is person-centric marketing,’ says the CEO of Tacoda. ‘That’s been the Holy Grail of brand advertisers for a long, long time.’ Behavioural advert targeting takes information from users’ web browsing behaviour and feeds back adverts that are more relevant to their needs and interests. Abusive or beneficial, it’ll be a hard sell to consumers. As one analyst observes, following consumers online and stalking them with adverts just ‘feels a little creepy’. Sources: Brian Morrissey, ‘Aim high: ad targeting moves to the next level, Adweek (14 January 2008, pp. 49–50); Louise Story, ‘To aim ads, web is keeping a closer eye on you’, New York Times (10 March 2008); Jonathan Lemonnier, ‘Contextual targeting boosts loyal following’, Advertising Age (14 April 2008); Tim Peterson, ‘Google tests way to track consumers from mobile browers to the apps they use. For Advertisers, one mobile user has previously often looked like two’, Advertising Age (7 August 2014).

Increasing consumer resentment has become a major problem for the marketing research industry, leading to lower survey response rates in recent years. Consumers may also have been taken in by previous ‘research surveys’ that actually turned out to be attempts to sell them something. Still other consumers confuse legitimate marketing research studies with promotional efforts and say ‘no’ before the interviewer can even begin. Just as companies face the challenge of unearthing valuable but potentially sensitive consumer data while also maintaining consumer trust, consumers wrestle with the trade-offs between personalisation and privacy. The marketing research industry is considering several options for responding to this problem, e.g. establishing councils for ‘Your opinion counts’ and ‘Respondent bill of rights’. In the end, if researchers provide value in exchange for information, customers will gladly provide it. For example, Amazon.com’s customers do not mind if the firm builds a database of products they buy in order to provide future product recommendations. This saves time and provides value. Similarly, hotels.com and booking.com users gladly complete surveys rating hotels 120

Summary

because they can view the overall ratings of others when making hotel booking decisions. The best approach is for researchers to ask only for the information they need, to use it responsibly to provide customer value, and to avoid sharing information without the customer’s permission.

Summary To create value for customers and to build meaningful relationships with them, marketers must first gain fresh, deep insights into what customers need and want. Such insights come from good marketing information. The challenge is to transform today’s vast volume of consumer information into actionable customer and market insights. A company’s marketing research and information system must do more than simply generate lots of information. The real value of marketing research and marketing information lies in how it is used – in the customer insights that it provides. The marketing process starts with a complete understanding of the marketplace and consumer needs and wants. Thus, the company needs sound information in order to produce superior value and satisfaction for customers. The company also requires information on competitors, resellers and other actors and forces in the marketplace. Increasingly, marketers are viewing information not only as an input for making better decisions but also as an important strategic asset and marketing tool. The marketing information system (MIS) consists of people and procedures for assessing information needs, developing the needed information, and helping decision-makers to use the information to generate and validate actionable customer and market insights. A well-designed information system begins and ends with users. The MIS first assesses information needs, primarily to serve the company’s marketing and other managers. Then, the MIS develops information from internal databases, marketing intelligence activities and marketing research. Internal databases provide information on the company’s own operations and departments. Such data can be obtained quickly and cheaply but often needs to be adapted for marketing decisions. Marketing intelligence activities supply everyday information about developments in the external marketing environment. Market research consists of collecting information relevant to a specific marketing problem faced by the company. Lastly, the MIS helps users to analyse and use the information to develop customer insights, make marketing decisions and manage customer relationships. The first step in the marketing research process involves defining the problem and setting the research objectives, which may be exploratory, descriptive or causal research. The second step consists of developing a research plan for collecting data from primary and secondary sources. The third step calls for implementing the marketing research plan by gathering, processing and analysing the information. The fourth step consists of interpreting and reporting the findings. Additional information analysis helps marketing managers apply the information and provides them with sophisticated statistical procedures and models from which to develop more rigorous findings. Both internal and external secondary data sources often provide information more quickly and at a lower cost than primary data sources, and they can sometimes yield ­information that a company cannot collect by itself. However, the required information might not exist in secondary sources. Researchers must also evaluate secondary information to ensure that it is relevant, accurate, current and impartial. Primary research must also be ­evaluated for these features. Each primary data collection method – observational, survey and experimental – has its own advantages and disadvantages. Similarly, each of the various research contact methods – mail, telephone, personal interview and online – also has its own advantages and drawbacks. Information gathered in internal databases and through marketing intelligence and marketing research usually requires more analysis. This may include advanced statistical analysis or the 121

Chapter 4  Managing marketing information to gain customer insights

application of analytical models that will help marketers make better decisions. To analyse individual customer data, many companies have now acquired or developed special software and analysis techniques – called customer relationship management (CRM) – that integrate, analyse and apply the extensive customer data contained in their databases. The MIS must make the information available to the managers and others who make marketing decisions or deal with customers. In some cases, this means providing regular reports and updates; in other cases it means making non-routine information available for special situations and on-the-spot decisions. Today’s marketing managers can gain direct access to the information system at any time and from virtually any location. Marketing research can also be conducted effectively by small businesses and non-profit organisations with limited budgets by applying methods in a less formal manner. International marketing researchers follow the same steps as domestic researchers but often face more, and different, problems. All organisations need to act responsibly to major public policy and ethical issues surrounding marketing research, including issues of intrusions on consumer privacy and misuse of research findings.

Key terms Customer insights

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Commercial online databases

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Marketing information system (MIS)

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Observational research

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Internal databases

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Ethnographic research

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Marketing intelligence

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Survey research

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Marketing research

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Experimental research

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Exploratory research

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Focus group interviewing

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Descriptive research

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Online marketing research

111

Causal research

106

Online focus groups

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Secondary data

106

Sample 112

Primary data

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Customer relationship management (CRM) 115

Discussing the concepts 1. Discuss the real value of marketing research and marketing information and how that value is attained. 2. Which information is more valuable to marketing managers – information from internal databases, from marketing intelligence or from marketing research? How do these information sources differ? 3. Explain the differences between primary and secondary data. When is each appropriate and how are they collected? 4. What are the advantages and disadvantages of web-based survey research over traditional survey research?

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5. How does customer relationship management (CRM) help companies develop customer insights and deliver superior customer value? What might the drawbacks of CRM be? 6. Refer to a small organisation you know. Suggest a few marketing information problems and how these can be solved in the light of the insights you gained during this chapter. 7. What are the similarities and differences when conducting research in another country versus the domestic market?

References

Applying the concepts 1. Visit a free online web survey site of your own choice. Using the tools at the site, design a five-­ question survey on the entertainment opportunities in your area. Send the survey to ten friends and look at the results. What did you think about the online survey method? The results will not be statistically significant but you will learn something from applying this research process. 2. Assume you are interested in opening a children’s retail clothing store specialising in upmarket children’s fashions for all children up to the age of 10. You are unsure whether there is enough demand in your area to be profitable. In a small group, discuss what information you need before making this decision and decide on which secondary sources can provide that information. Furthermore, assume you plan to conduct a survey to better estimate demand for this product and describe the best primary data collection method for your needs. 3. One source of competitive marketing intelligence is a company’s website. Visit Apple’s and Sony’s websites and, in addition, the homepage of your university/business school to search for information that might be useful to competitors. Write a brief report of what you found.

References 1 For more discussion, see Robert Schieffer and Eric Leininger, ‘Customers at the core’, Marketing Management ( January/February 2008, p. 317). 2 See Steve Wills and Sally Webb, ‘Measuring the value of insight – it can and must be done’, International Journal of Market Research, 49(2), 155–65 (2007). 3 See Samar Farah, ‘Loyalty delivers’, Deliver (1 September 2006), www.delivermagazine.com/the-­ magazine/2006/09/01/loyalty-delivers; Jennifer Brown, ‘Pizza Hut delivers hot results using data w ­ arehousing’, Computing Canada (17 October 2003, p. 24); and www.yum.com/investors/fact.asp, accessed September 2008. 4 Spencer E. Ante, ‘The science of desire’, BusinessWeek (5 June 2006, p. 100); and Rhys Blakely, ‘You know when it feels like somebody’s watching you …’, Times (14 May 2007, p. 46). 5 Adapted from information in Kenneth Hein, ‘Hypnosis brings groups into focus’, Brandweek (23 May 2008, p. 4). 6 Anders Parment, Automobile Marketing. Distribution Strategies for Competitiveness (VDM Verlag, 2009). 7 See, e.g., Bente Halkier, Fokusgrupper (Liber, 2009); Bonnie Goebert and Herma Rosentahl, Beyond Listening: Learning the Secret Language of Focus Groups (Wiley, 2001). 8 See ‘Creating computers that know how you feel’, www.almaden.ibm.com/cs/BlueEyes/index.html, accessed November 2008. 9 For more on neuromarketing, see Tameka Kee, ‘NeuroFocus unveils “best practices”, for getting into ­consumers’ brains’, MediaPost Publications (23 April 2008), accessed at http://publications.mediapost.com; Steve McClellan, ‘Mind over matter: new tools put brands in touch with feelings’, Adweek (18 February 2008), accessed at www. adweek.com; and Stewart Elliott, ‘Is the ad a success? The brain waves tell all’, New York Times (31 March 2008). 10 Darell K. Rigby, Frederick F. Reichheld and Phil Schefter, ‘Avoid the four perils of CRM’, Harvard Business Review, 80(2), 101–9 (2002). 11 For some good advice on conducting market research in a small business, see ‘Marketing Research . . . Basics 101’, accessed at www.sba.gov/starting_business/marketing/research.html, August 2008; and ‘Researching Your Market’, US Small Business Administration, accessed at www.sba.gov/idc/groups/public/documents/ sba_homepage/pub_mt8.pdf, November 2008. 12 http://en.wikipedia.org/wiki/List_of_countries_by_number_of_mobile_phones_in_use (April 2015). 13 Phone, PC and other country media stats are from http://devdata.worldbank.org/query/default.htm and www.nationmaster.com, July 2008. 14 Subhash C. Jain, International Marketing Management, 3rd edn (Boston: PWS-Kent, 1990, p. 338). For more discussion on international marketing research issues and solutions, see Michael Fielding, ‘Shift the focus: ethnography proves fruitful in emerging economies’, Marketing News (1 September 2006, pp. 18, 20); Robert B. Young and Rajshekhar G. Javalgi, ‘International marketing research: a global project management perspective’, Business Horizons (March–April 2007, pp. 113–22); and Gordon A. Wyner, ‘The world isn’t flat yet’, Marketing Research (Summer 2007, p. 6).

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Consumer markets and consumer buyer behaviour

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Company case – Harley-Davidson

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Model of consumer behaviour

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Characteristics affecting consumer behaviour

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Types of buying decision behaviour

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The buyer decision process

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The buyer decision process for new products

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Mini contents

Source: Lonely Planet Images/Alamy

Chapter preview In the previous chapter, you studied how marketers obtain, analyse and use information to understand the marketplace and to assess marketing programmes. In this chapter, we’ll continue with a closer look at the most important element of the marketplace – consumers. The aim of marketing is to affect how consumers – and customers – think and act. To affect the whats, whens and hows of buying behaviour, marketers must first understand the whys. In this chapter, we look at final consumer buying influences and processes. In the next chapter, we’ll study the buying behaviour of business customers. Understanding buyer behaviour is an essential but very difficult task. We first look at Harley-Davidson, the maker of top-selling heavyweight motorcycles. Who rides these big Harley ‘Hogs’? What moves them to abandon home and hearth for the open road, tattoo their bodies with the Harley-Davidson emblem, and flock to Harley rallies by the hundreds of thousands? You might be surprised, but Harley-Davidson knows very well.

Learning objectives After reading this chapter, you should be able to: 1 Define the consumer market and construct a simple model of consumer buyer behaviour. 2 Name the four major factors that influence consumer buyer behaviour.

 

Company case harley-Davidson Few brands engender such intense loyalty as that found in the hearts of Harley-Davidson owners. Harley buyers are granite-like in their devotion to the brand. ‘You don’t see people tattooing Yamaha on their bodies,’ observes the publisher of one motorcycle industry publication. And according to another industry insider, ‘For a lot of people, it’s not that they want a motorcycle; it’s that they want a Harley – the brand is that strong.’ Each year, in early March, more than 350,000 Harley bikers rumble through the streets of Daytona Beach, Florida, to attend the Daytona Bike Week celebration. Bikers from across the US lounge on their Harleys, swap biker tales and sport T-shirts proclaiming ‘I’d rather push a Harley than drive a Honda.’ Riding such intense emotions, Harley-Davidson has rumbled its way to the top of the heavyweight motorcycle market. Harley’s ‘Hog’ motorcycles, as they have come to be called, capture almost 50 per cent of the heavyweight segment. For several years running, sales have outstripped supply, with customer waiting lists of up to two years for popular models. Harley-Davidson’s marketers spend a great deal of time thinking about customers and their buying behaviour. They want to know who their customers are, what they think and how they feel, and why they buy a Harley rather than a Yamaha or a Kawasaki or a big Honda motorcycle. What is it that makes Harley buyers so fiercely loyal? These are difficult questions; even Harley owners themselves don’t know exactly what motivates their buying. But Harley management puts top priority on understanding customers and what makes them tick. Who rides a Harley? You might be surprised. Motorcycles are attracting a new breed of riders – older, more affluent and better educated. ‘While the outlaw bad-boy biker image is what we might typically associate with Harley riders,’ says an analyst, ‘they’re just as likely to be CEOs and investment bankers.’ ‘You take off the leathers and the helmet and you’ll never know who you’ll find,’ says one hard-core Harley enthusiast, himself a former media producer. The average Harley customer is a 47-year-old high-income male. More than 12 per cent of Harley purchases today are made by women. Harley customers are buying a lot more than just a quality bike and a smooth sales pitch. To a Harley owner, whether it’s the guy who sweeps the floors of the factory or the CEO at that factory, it’s about something much deeper. To the hard-core Harley fan, it’s all about independence, freedom and power. ‘It’s much more than a machine,’ says the analyst. ‘It is part of their own self-expression and lifestyle.’ Another analyst suggests that owning a Harley makes you ‘the toughest, baddest guy on the block. Never mind that [you’re] a dentist or an accountant. You [feel] wicked astride all that power.’ Your Harley renews your spirits and announces your independence. The image of driving a Harley reflects the product’s emotional appearance – you do it because you like the product and the culture it represents, not because painstaking analysis brought you there. Strong emotions and motivations are captured in a classic Harley-Davidson advertisement. The ad shows a close-up of an arm, the bicep adorned with a Harley-Davidson tattoo. The headline asks, ‘When was the last time you felt this strongly about anything?’ The ad copy outlines the problem and suggests a solution: ‘Wake up in the morning and life picks up where it left off. What once seemed exciting has now become part of the numbing routine. It all begins to feel the same. Except when you’ve got a Harley-Davidson. Something strikes a nerve. The heartfelt thunder rises up, refusing to become part of the background. Suddenly things are different. Clearer. More real. As they should have been all along. Riding a Harley changes you from within. The effect is permanent. Maybe it’s time you started feeling this strongly. Things are different on a Harley.’1

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Chapter 5  Consumer markets and consumer buyer behaviour

Consumer buyer ­behaviour – The buying behaviour of final consumers – individuals and households that buy goods and services for personal consumption. Consumer market – All the individuals and households that buy or acquire goods and services for personal consumption.

The Harley-Davidson example shows that many different factors affect consumers. Buying behaviour is never simple, yet understanding it is the essential task of marketing management. Consumer buyer behaviour refers to the buying behaviour of final consumers – individuals and households that buy goods and services for personal consumption. All of these final consumers combine to make up the consumer market, which consists of around seven billion people. Consumers around the world vary tremendously in age, income, education level and tastes. They also buy an incredible variety of goods and services. How these diverse consumers relate with each other, and with other elements of the world around them, impacts their choices among various products, services and companies. In this chapter, we’ll examine the fascinating array of factors that affect consumer behaviour.

Model of consumer behaviour Consumers make many buying decisions every day, and the buying decision is the focal point of the marketer’s effort. Most large companies research consumer-buying decisions in great detail to answer questions about what consumers buy, where they buy, how – and how much – they buy, when they buy, and why they buy. Marketers can study actual consumer purchases to find out what they buy, where and how much. But learning about the whys of consumer buying behaviour is not so easy – the answers are often locked deep within the c­ onsumer’s mind. And consumers themselves may not be aware of the true answers to the whys of buying – an important insight that give rises to many questions, e.g. about ­consumer-­generated data. ‘The human mind doesn’t work in a linear way,’ says one marketing expert. ‘The idea that the mind is a computer with storage compartments where brands or logos or recognisable packages are stored in clearly marked folders that can be accessed by cleverly written ads or commercials simply doesn’t exist. Instead, the mind is a whirling, swirling, jumbled mass of neurons bouncing around, colliding and continuously creating new concepts and thoughts and relationships inside every single person’s brain all over the world.’2 Consumers themselves don’t know exactly what influences their purchases, and even if they know, they may avoid the facts in dealing with selling companies, answering questions in marketing research or filling in surveys. The central question for marketers is: how do consumers respond to various marketing efforts the company might use? The starting point is the stimulus–response model of buyer behaviour shown in Figure 5.1. This figure shows that marketing and other stimuli enter the consumer’s ‘black box’ and produce certain responses. Marketers must figure out what is in the buyer’s black box. Marketing stimuli may consist of the four Ps – product, price, place and promotion – or major forces and events in the buyer’s environment: economic, technological, political, ecological and cultural. All these inputs enter the buyer’s black box, where they are turned into a set of observable buyer responses: the buyer’s brand and company relationship behaviour and what he or she buys, when, where and how often.

Figure 5.1  Stimulus–response model of buyer behaviour

Marketing and other stimuli Marketing Product Price Place Promotion

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Other Economic Technological Political Ecological Cultural

Buyer’s black box Buyer characteristics Buyer decision process

Buyer responses Product choice Brand choice Dealer choice Purchase timing Purchase amount

Characteristics affecting consumer behaviour

The marketer wants to understand how the stimuli are changed into responses inside the consumer’s black box, which has two parts. First, the buyer’s characteristics influence how he or she perceives and reacts to the stimuli. Second, the buyer’s decision process itself affects the buyer’s behaviour. We look first at buyer characteristics as they affect buyer behaviour and then discuss the buyer decision process.

Characteristics affecting consumer behaviour Consumer purchases are influenced strongly by cultural, social, personal and psychological characteristics, shown in Figure 5.2. For the most part, marketers cannot control such factors, but they must take them into account. Many, many levels of factors affect our buying ­behaviour – from broad cultural and social influences to motivations, beliefs and attitudes lying deep within us. The multitude of explanations to a particular purchase decision makes it difficult to figure out what are the key characteristics. For example, why did you buy that specific piece of clothing, vacation trip, car, mobile phone or apartment?

Cultural factors Cultural factors exert a broad and deep influence on consumer behaviour. The marketer needs to understand the role played by the buyer’s culture, subculture and social grade.

Culture Culture is the most basic determinant of a person’s wants and behaviour. Human behaviour is largely learned. Growing up in a society, a child learns basic values, perceptions, wants and behaviours from the family, other social arenas, popular culture and societal institutions. A child normally learns or is exposed to values like achievement and success in different dimensions; material comfort or prioritising living standards through other means than consumption and material comfort; individualism vs. collectivism; freedom; humanitarianism; youthfulness; conservatism; enjoying life; and fitness and health. Every group or society has a culture, and cultural influences on buying behaviour can vary greatly not only from country to country, but also within countries.3 Failure to adjust to these differences can result in ineffective marketing or embarrassing mistakes. Marketers are always trying to spot cultural shifts in order to discover new products that might be wanted. For example, the cultural shift towards greater concern about health and fitness has created a huge industry for health-and-fitness services, exercise equipment and clothing, organic foods and a variety of diets. The shift towards environmental and social responsibility has resulted in a greater demand for sustainable products, from ecological ­clothing to cars run on non-fossil fuels to train travel.

Cultural Culture

Social Reference groups

Subculture

Social class

Family

Roles and status

Figure 5.2  Factors influencing consumer behaviour

Personal Age and lifecycle stage Occupation

Psychological Motivation Perception

Economic situation

Learning

Lifestyle

Beliefs and attitudes

Personality and self-concept

Buyer

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Chapter 5  Consumer markets and consumer buyer behaviour

Subculture Subculture – A group of people with shared value systems based on common life experiences and ­situations.

Each culture contains smaller subcultures, or groups of people with shared value systems based on common life experiences and situations. Subcultures include nationalities, religions and geographic regions, but a creative marketer will find many more subcultures that provide marketing opportunities. The differences between subcultures and cultures are not always clear, and some groups might feel embarrassed by being seen as a subculture. As a consequence, a marketer should conduct the subculture analysis with prudence.

Mature consumers – the baby boomer generation  Mature consumers are becoming a very attractive market around the world, and in developed countries in particular. This segment is, contrary to popular belief, not necessarily ‘stuck in their ways’. On the contrary, one study showed that for products such as computers and mobile phones older consumers are more willing to shop around and switch brands than their younger counterparts.4 As most baby boomers are now retired, they have more time and more money than the ­generation succeeding them, and so the best strategy is to appeal to their active, multidimensional lives. However, purchase criteria and the purchase process must be understood. Social grade – Relatively permanent and ordered divisions in a society whose members share similar values, interests and ­behaviours.

Baby boomers are not as stuck in their ways as you might think. It’s all about reaching them in the right way, and offering products and solutions that add consumer value. Source: Ingram

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Social grade  Almost every society has some form of social grade structure. Social grades are society’s relatively permanent and ordered divisions whose members share similar values, interests and behaviours. Social grade is not determined by a single factor, such as income, but is measured as a combination of occupation, income, education, wealth and other variables. In some social systems, members of different classes are reared for certain roles and find it very difficult to change their social positions. In other countries, e.g. Scandinavia and the US, the lines between social grades are not rigid; people can move to a higher social grade or drop into a lower one. One of the early works on social grade by Ailsa Higgins from 1980 suggests that Sweden doesn’t really have a grade system.5 At the time, Sweden stood out as a country with limited use of social grades. In the real world, however, Sweden has social grades just like any other country although differences among grades may not be as vast as in, for example, the US, China or Russia. In the US, class and grade can be very explicit, while in Sweden it is hardly discussed, although it is discussed more now than back in the 1980s. But while Americans may

Characteristics affecting consumer behaviour

be more ‘showy’ about their status, in Europe social grade is often obvious to those who are sensitive and observant. One may wonder about the differences between social grade and social class. There is a slight difference between these two concepts, and class is a more common concept in the US while grade has become stronger in Europe. From a marketing perspective, social grade is more interesting as it focuses on purchasing power rather than professional status and qualifications. Social grade normally only provides a classification for the working population. Studies from the UK indicate that social grade is a strong predictor of certain phenomena related to consumption, e.g. readership of a quality newspaper, where the index is ten times higher in group AB than in group D. Substantial differences were also found in internet usage and holidaying abroad.6 Marketers are interested in social grade because people within a given social grade tend to exhibit similar buying behaviour. Social grades show distinct product and brand preferences in areas such as clothing, home furnishings, leisure activity and car purchase and use.

Social factors A consumer’s behaviour is also influenced by social factors, such as the consumer’s small groups, family, and social roles and status.

Groups and social networks Many small groups influence a person’s behaviour. Groups that have a direct influence and to which a person belongs are called membership groups. In contrast, reference groups serve as direct (face-to-face) or indirect points of comparison or reference in forming a person’s attitudes or behaviour. People often are influenced by reference groups to which they do not belong. For example, an aspirational group is one to which the individual wishes to belong, as when young business students hope someday to reach the level of success of entrepreneurs like Steve Jobs or Jeff Bezos (founder and CEO of Amazon), or the (even higher) level of wealth of Stefan Persson or Ingvar Kamprad. Similar examples may be found in any field – a politician may aspire to become prime minister, a football player to become David Beckham and a musician to become the new Abba, Beatles or Michael Jackson. These groups can be very powerful in influencing behaviour. The individual will often adopt the behaviour of the aspirational group in the hope of either being accepted as a member or at least being seen as having some of its characteristics. In market communication, images of aspirational groups are often used to communicate the message that the use of a particular product will help you belong to that aspirational group.7 Marketers try to identify the reference groups of their target markets. A reference group may be defined as an actual or imaginary individual or group with a significant influence on an individual’s evaluations, aspirations or behaviour.8 Reference groups expose a person to new behaviours and lifestyles, influence the person’s attitudes and self-concept, and create pressures to conform that may affect the person’s product and brand choices. The importance of group influence varies across products and brands. It tends to be strongest when the product or brand is visible and has a strong impact on the individual’s self-view and image. High-involvement, fashionable and expensive products are thus likely to be typical of reference group influence. In most cases, reference groups have a stronger impact when they do things that are generally seen as desirable – doing good for society, earning a lot of money while at the same time helping poor people (Bill Gates is one example) or solving international crises (e.g. Hans Blix’s involvement in the Iraq disarmament crisis in 2003).

Word-of-mouth influence and buzz marketing  Marketers of brands subjected to strong group influence must determine how to reach opinion leaders – people within a reference group who, because of special skills, knowledge, personality or other characteristics, exert social influence on others. Some experts call this segment the influentials or leading adopters. One recent study

Opinion leader – Person within a reference group who, because of special skills, knowledge, ­personality or other ­characteristics, exerts social influence on others.

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found that these influencers are ‘four times more likely than average consumers to belong to five or more organisations, four times more likely to be considered experts, and twice as likely to recommend a product they like’. Thus, their social coverage is vast. And when influential friends talk, consumers listen. A number of survey studies emphasise that people trust ‘recommendations from consumers’9 and this holds across different generations.10 Marketers often try to identify opinion leaders for their products and direct marketing efforts toward them. They use buzz marketing by enlisting or even creating opinion leaders to serve as ‘brand ambassadors’ who spread the word about their products. Many companies are now creating brand ambassador programmes in an attempt to turn influential but everyday customers into brand evangelists. Another example of buzz marketing used by many companies is the introduction of a new smart phone. By identifying, say, 100 ambassadors in social contexts that fit with the desired customer profile, and by choosing ambassadors with high credibility in their social setting, a buzz can be created with tens of thousands of people seeing the new phone within a few days. The very active ambassadors use them at work, with customers, with family and friends, and at parties, and they may even write about the new product on internet forums or in blogs. This is likely to be a very effective marketing method, since it is relatively cheap and provides an opportunity to influence the adoption–diffusion process of the new product (see the end of the chapter).

Online social networks  Online social networks range from blogs, e.g. Twitter and Sina Weibo (used in mainland China), to social networking websites, such as Facebook, LinkedIn, and more specialised sites. VK with 300 million users is popular in Russia and former Soviet states and academia.edu and researchgate.net are popular among researchers/academics. These sites are not very well known among the general public. The most important social networks to consider for marketers change over time, but the principle of being tuned in to sites where our actual and desired customers are congregating will not. Thus, an inactive company that doesn’t follow its customers will run the risk of being outside the dialogue. Instead of throwing more one-way commercial messages in the path of ad-weary consumers, marketers hope to use social networks to interact with consumers and become a part of their conversations and lives. Companies have the choice of participating in social media – if

Mobile phones are a perfect example of a product around which it is possible to create a buzz. Source: 123 RF

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they don’t, users are likely to do it anyway. Here, an interesting divergence arises between customer-created information, also called grassroot information, and information supplied by companies. The former is likely to be honest, challenging, unstructured and politically incorrect, and may be dangerous to the company’s brand. The latter is structured, politically correct and in line with corporate policies. However, there is a substantial risk, particularly in light of the emerging communication landscape11 (see Chapter 12), that the company-created information will appear boring and lacklustre. Consider the case of universities launching videos on YouTube.com to attract new students. In some cases, student organisations have created videos that are funny, appealing and have been produced at low cost, just for the fun of it. In other cases, the Faculty of Arts and Sciences set up a team of people to create a video on studying arts and sciences, often inspired by the huge success of videos from other universities. However, the results are often terrible. While student organisations can make a video on the funny side of being a student, with little or no consideration for what is politically correct, the faculty board is likely to undermine creativity (if it existed in the first place) by placing demands on the group to reflect different student groups’ interests, to consider equality among sexes, races and age groups, and avoid making any statements that might be harmful to the university’s policies. What’s more, it is likely to be very expensive.

Family Family members can strongly influence buyer behaviour. The family is the most important consumer-buying organisation in society, and it has been researched extensively. Marketers are interested in the roles and influence of parents and children – or any other combination of people at hand – in the buying of different products and services. The role of different household members varies widely by product category and by stage in the buying process. Buying roles change with evolving consumer lifestyles. There is also a strong cultural component so the patterns will differ not only across regions in the world, but also across groups in a particular geographic area. Changes, not only in demographics and household compositions but also in attitudes, suggest that marketers in industries that have sold their products to only men or only women are now courting the opposite sex. The development towards a higher degree of equality among the sexes in many product categories has at least two driving forces (and these may be overlapping): first, an ideologically based desire to increase equality, resulting in men buying an increasing percentage of food and clothing for their children, and women purchasing the family car; second, a broader set of purchase interests, e.g. women buying an increasing percentage of technological devices, and men increasingly buying face cream, clothing and hair care products.

Roles and status A person belongs to many groups – family, clubs, organisations – and young people in ­particular project different identities and images in different contexts.12 The person’s position in each group can be defined in terms of both role and status. A role consists of the activities people are expected to perform according to the people around them. Each role carries a status ­reflecting the general esteem given to it by society. People usually choose products appropriate to their roles and status. Consider the various roles a mother plays. In her company, she plays the role of a brand manager; in her family, she plays the role of wife and mother; at her favourite sporting events, she plays the role of avid fan. As a brand manager, she will buy the kind of clothing that reflects her role and status in her company.

Personal factors A buyer’s decisions are also influenced by personal characteristics, such as the buyer’s age and life-cycle stage, occupation, economic situation, lifestyle, personality and self-concept. 133

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Age and life-cycle stage People change the goods and services they buy over their lifetimes. Tastes in food, clothes, furniture and recreation are often age-related. Buying is also shaped by the stage of the family life cycle – the stages through which families might pass as they mature over time. Marketers often define their target markets in terms of life-cycle stage and develop appropriate products and marketing plans for each stage. There is also a generational component in this – people are likely to maintain aspects of their consumption patterns as they mature, thus creating a change in the marketplace compared with the preceding generation. 134

Characteristics affecting consumer behaviour

Marketers need to ­understand family dynamics in ­consumption decision-making. Source: Monkey Business Images/ Shutterstock

Traditional family life-cycle stages include young singles and married couples with ­children. Today, however, marketers are increasingly catering to a growing number of alternative, non-traditional stages such as unmarried couples, singles marrying later in life, childless couples, same-sex couples, single parents, extended parents (those with young adult children returning home) and others.

Occupation A person’s occupation affects the goods and services they buy. Executives buy more business suits than social workers, while nurses and doctors, just like taxi drivers, bus drivers and airline captains, are not particularly interested in buying day-by-day work clothes because their employers supply them. Marketers try to identify the occupational groups that have an above-average interest in their products. A company may even specialise in making products for a given occupational group or subgroup, e.g. pink stethoscopes for younger, female doctors or insurance packages for teachers, doctors or airline captains.

Economic situation A person’s economic situation will affect their product choice. Marketers of income-sensitive goods watch trends in personal income, savings and interest rates. If economic indicators point to a recession, marketers can take steps to redesign, reposition and re-price their products carefully. Some marketers target consumers who have lots of money and resources, charging prices to match. For example, Rolex positions its luxury watches as ‘a tribute to elegance, an object of passion, a symbol for all time’. Other marketers target consumers with more modest means. The Swiss watchmaker Swatch makes more affordable watches, offering a ‘low cost, high quality, and accurate watch with synthetic material’.

Lifestyle People coming from the same subculture, social grade and occupation may have quite different lifestyles. Lifestyle is a person’s pattern of living as expressed in his or her psychographics. 135

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It involves measuring consumers’ major ‘AIO’ dimensions – activities (work, hobbies, shopping, sports, social events), interests (food, fashion, family, recreation) and opinions (about themselves, social issues, business, products). Lifestyle captures something more than the person’s social grade or personality. It profiles a person’s whole pattern of acting and interacting in the world. When used carefully, the lifestyle concept can help marketers understand changing consumer values and how they affect buying behaviour. Consumers don’t just buy products, they buy the values and lifestyles those products represent. Gant or Lexington sell more than just clothing or home furnishings. They sell a lifestyle to which their customers aspire. Thus, people’s product choices are becoming more and more like value choices. Accordingly, statements like ‘I feel like this car, or this show, is more reflective of who I am’ are becoming increasingly common.

Personality and self-concept

Brand personality – The specific mix of human traits that may be attributed to a particular brand.

Each person’s distinct personality influences his or her buying behaviour. Personality refers to the unique psychological characteristics that lead to relatively consistent and lasting responses to one’s own environment. Personality is usually described in terms of traits such as self-­ confidence, dominance, sociability, autonomy, defensiveness, adaptability and aggressiveness. Personality can be useful in analysing consumer behaviour in relation to certain product or brand choices. The idea is that brands also have personalities, and that consumers are likely to choose brands with personalities that match their own. A brand personality is the specific mix of human traits that may be attributed to a particular brand. One researcher identified five brand personality traits:13 1. Sincerity (down-to-earth, honest, wholesome and cheerful); 2. Excitement (daring, spirited, imaginative, and up-to-date); 3. Competence (reliable, intelligent, and successful); 4. Sophistication (upper class and charming); 5. Ruggedness (outdoorsy and tough). Most well-known brands are strongly associated with one particular trait: the car maker Jeep with ‘ruggedness’, Apple with ‘excitement’, the British Broadcasting C ­ orporation (BBC) with ‘competence’, Jaguar and Estée Lauder14 with ‘sophistication’ and the Dove brand of soap with ‘sincerity’. Hence, these brands will attract persons who are high on the same personality traits. Many marketers use a concept related to personality – a person’s self-concept (also called self-image). The basic self-concept premise is that people’s possessions contribute to and reflect their identities – that is, ‘we are what we have’. Mercedes-Benz ran a successful advertising campaign in the mid-1980s: ‘You are what you drive’. Thus, in order to understand consumer behaviour, the marketer must first understand the relationship between consumer self-concept and possessions.

Psychological factors A person’s buying choices are further influenced by four major psychological factors: motivation, perception, learning and beliefs and attitudes.

Motivation Motive (drive) – A need that is sufficiently pressing to direct the person to seek to satisfy it.

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A person has many needs at any given time. Some are biological, arising from states of tension such as hunger, thirst or discomfort. Others are psychological, arising from the need for recognition, esteem or belonging. A need becomes a motive when it is aroused to a sufficient level of intensity. A motive (or drive) is a need that is sufficiently pressing to direct the person to seek satisfaction. Psychologists have developed theories of human motivation. Two of the most

Characteristics affecting consumer behaviour

popular – the theories of psychologists Sigmund Freud and Abraham Maslow – have quite different meanings for consumer analysis and marketing. Freud assumed that people are largely unconscious about the real psychological forces ­shaping their behaviour. He saw the person as growing up and repressing many urges. These urges are never eliminated or under perfect control; they emerge in dreams, in slips of the tongue, in neurotic and obsessive behaviour, or ultimately in psychoses. Freud’s theory suggests that a person’s buying decisions are affected by subconscious motives that even the buyer may not fully understand. Thus, an ageing consumer who buys a sporty BMW 335i convertible might explain that he simply likes the feel of the wind in his thinning hair. At a deeper level, he may be trying to impress others with his success. At a still deeper level, he may be buying the car to feel young and independent again. The term motivation research refers to qualitative research designed to probe consumers’ hidden, subconscious motivations. Consumers often don’t know or can’t describe why they act as they do. Thus, motivation researchers use a variety of probing techniques to uncover underlying emotions and attitudes toward brands and buying situations. Some companies employ teams of psychologists, anthropologists and other social ­scientists to carry out motivation research. One advertising agency routinely conducts one-on-one, ­therapy-like interviews to delve into the inner workings of consumers. Another company asks consumers to describe their favourite brands as animals or cars (say, cars vs. dogs; BMWs vs. Volvos) in order to assess the prestige associated with various brands. Still others rely on ­hypnosis, dream therapy or soft lights and mood music to plumb the murky depths of consumer psyches. Such projective techniques seem ridiculous, and some marketers dismiss such motivation research as ineffective. But many marketers use such touchy-feely approaches, now sometimes called interpretive consumer research, to delve into consumer psyches and develop better ­marketing strategies.15 Abraham Maslow sought to explain why people are driven by particular needs at particular times. Why does one person spend much time and energy on personal safety and another on gaining the esteem of others? Maslow’s answer is that human needs are arranged in a ­hierarchy, as shown in Figure 5.3, from the most pressing at the bottom to the least pressing at the top.16 They include physiological needs, safety needs, social needs, esteem needs and self-actualisation needs. A person tries to satisfy the most important need first. When that need Figure 5.3  Maslow’s hierarchy of needs Source: Adapted from Abraham H. Maslow, Motivation and Personality, 2nd edn (Prentice Hall, Inc., 1970).

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is satisfied, it will stop being a motivator and the person will then try to satisfy the next most important need. For example, starving people (physiological need) will not take an interest in the latest happenings in the art world (self-actualisation needs), or in how they are seen or esteemed by others (social or esteem needs), or even in whether they are breathing clean air (safety needs). But as each important need is satisfied, the next most important need will come into play. Maslow’s hierarchy of needs has been subject to a lot of criticism,17 but it remains an important model in understanding various aspects of human behaviour – not least because of its widespread understanding and use among scholars and practitioners from different disciplines.

Perception

Perception – The process by which people select, organise and interpret information to form a meaningful picture of the world.

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A motivated person is ready to act. How the person acts is influenced by his or her own perception of the situation. All of us learn by the flow of information through our five senses: sight, hearing, smell, touch and taste. However, each of us receives, organises and interprets this sensory information in an individual way. Perception is the process by which people select, organise and interpret information to form a meaningful picture of the world. People can form different perceptions of the same stimulus because of three perceptual processes: selective attention, selective distortion and selective retention. People are exposed to a great amount of stimuli every day, and thousands of marketing messages every day. In fact, it is very difficult to identify the number since there are various definitions and extensive disagreement among researchers. Nonetheless, it is impossible for a person to pay attention to all these stimuli. Selective attention – the tendency for people to screen out most of the information to which they are exposed – means that marketers must work especially hard to attract the consumer’s attention. Even noticed stimuli do not always come across in the intended way. Each person fits incoming information into an existing mindset. Selective distortion describes the tendency of people to interpret information in a way that will support what they already believe. For example, if you distrust a company, you might perceive even honest adverts from the company as questionable. Another example is post-purchase bias: after having completed a purchase transaction, consumers seek information that will support and confirm their choices. Thus, a person buying a Sony Ericsson mobile phone will pay more attention to tests where the Sony Ericsson was a test winner than to those where it did not do well. Think also about where people live, and how they – consciously and subconsciously – seek information that confirms their decision to live there, as well as their decision not to live in another place. ‘Stockholm, no way’ is as common in rural areas as ‘no way would I ever consider living there’ about rural areas in Stockholm or Gothenburg. Selective distortion means that marketers must try to understand the mindsets of consumers and how these will affect interpretations of advertising and sales information. Thus, an advert with appeal in rural Norrland may not work in the Öresund region, and vice versa. People will also forget much of what they learn. They tend to retain information that supports their attitudes and beliefs. Because of selective retention, consumers are likely to remember good points made about a brand they favour and to forget good points made about competing brands. Because of selective attention, distortion and retention, marketers must work hard to get their messages through. This explains why marketers use so much drama and repetition in sending messages to their market. Interestingly, although most marketers worry about whether their offers will be perceived at all, some consumers worry that they will be affected by marketing messages without even knowing it – through subliminal advertising. In 1957, a researcher announced that he had flashed the phrases ‘Eat popcorn’ and ‘Drink Coca-Cola’ on a screen in a cinema every five seconds for 1/300th of a second. He reported that although viewers did not consciously recognise these messages, they absorbed them subconsciously and bought 58 per cent more popcorn and 18 per cent more Coke. Suddenly advertisers and consumer-protection groups became intensely

Characteristics affecting consumer behaviour

Selective perception: it’s impossible for people to pay attention to the thousands of ads they’re exposed to every day, so they screen most of them out. Source: Lonely Planet Images/ Alamy

interested in subliminal perception. People voiced fears of being brainwashed, and Canada and the state of California declared the practice illegal. Although the researcher later ­admitted ­making up the data, the issue has not died. Some consumers still fear that they are being manipulated by subliminal messages. Numerous studies by psychologists and consumer researchers have found little or no link between subliminal messages and consumer behaviour. Brain wave studies have found that in certain circumstances, our brains may register subliminal messages. However, it appears that subliminal advertising simply doesn’t have the power attributed to it by its critics. Most advertisers scoff at the notion of an industry conspiracy to manipulate consumers through ‘invisible’ messages. One industry insider says that most marketers have difficulty in getting a 2 per cent increase in sales with the help of $50 million of media advertising and extremely subliminal images of sex, money, power and other motivators of human emotion, and is thus sceptical about the idea of being able to manipulate consumers.18 In addition, consumers are getting more critical so companies have to develop increasingly powerful tools to deal with this development.

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Learning When people act, they learn. Learning describes changes in an individual’s behaviour arising from experience. Learning theorists suggest that most human behaviour is learned. Learning occurs through the interplay of drives, stimuli, cues, responses and reinforcement. A drive is a strong internal stimulus that calls for action. A drive becomes a motive when it is directed toward a particular stimulus object. For example, a person’s drive for self-actualisation might motivate him or her to look into buying a camera. The consumer’s response to the idea of buying a camera is conditioned by the surrounding cues. Cues are minor stimuli that determine when, where and how the person responds. For example, the person might spot several camera brands in a shop window, hear of a special sale price or discuss cameras with a friend. These are all cues that might influence a consumer’s response to his or her interest in buying the product. Suppose the consumer buys an Acne dress. If the experience is rewarding, the consumer will probably use the dress more, and her response will be reinforced. Then, the next time the consumer shops for a dress, or for jeans, a jacket or some similar product, the probability is greater that she will buy an Acne product. The practical significance of learning theory for marketers is that they can build up demand for a product by associating it with strong drives, using motivating cues and providing positive reinforcement.

Beliefs and attitudes Through doing and learning, people acquire beliefs and attitudes. These, in turn, influence their buying behaviour. A belief is a descriptive thought that a person has about something. Beliefs may be based on real knowledge, opinion or faith, and may or may not carry an emotional charge. Marketers are interested in the beliefs that people formulate about specific products and services, because these beliefs make up product and brand images that affect buying behaviour. If some of the beliefs are wrong and prevent purchase, the marketer will want to launch a campaign to correct them. People have attitudes regarding politics, clothes, music, food and almost everything else. ­Attitude describes a person’s relatively consistent evaluations, feelings and tendencies towards an object or idea. Attitudes put people into a frame of mind of liking or disliking things, of m ­ oving towards or away from them. Our Acne clothes buyer may hold attitudes such as ‘Buy the best’, ‘The Swedes make the best fashion items in the world’, and ‘Aesthetics and self-expression are among the most important things in life’. If so, the Acne dress would fit well into the ­consumer’s existing attitudes. Attitudes are difficult to change. A person’s attitudes fit into a pattern that is both complex and difficult to understand, and to change one attitude may require difficult adjustments in many others. Thus, a company should usually try to fit its products into existing attitudes rather than attempt to change attitudes. For example, Becel pro.activ butter reduces the level of harmful cholesterol, and eating carrots has the advantage, in addition to being a healthy food ingredient and snack, of putting some colour into the face, similar to tanning. We can now appreciate the many forces acting on consumer behaviour. The consumer’s choice results from the complex interplay of cultural, social, personal and psychological factors.

Types of buying decision behaviour Some purchases are simple and routine, even habitual. Others are far more complex – ­involving extensive information-gathering and evaluation – and are subject to sometimes subtle influences. For example, think of your buying behaviour for a tube of toothpaste, an iPad, financial services and a ski trip – it is likely to differ greatly for each one. More complex ­decisions usually involve more buying participants and more buyer deliberation. Figure 5.4 shows types of consumer buying behaviour based on the degree of buyer involvement and the degree of differences among brands. 140

Types of buying decision behaviour

Figure 5.4  Four types of buying behaviour Source: Adapted from Henry Assael, Consumer Behaviour and Marketing Action, 6th edn (Boston, MA: Kent Publishing 1988, p. 67).

Complex buying behaviour Consumers undertake complex buying behaviour when they are highly involved in a purchase and perceive significant differences among brands. Consumers may be highly involved when the product is expensive, risky, purchased infrequently and highly self-expressive. Typically, the consumer has much to learn about the product category and there are a lot of emotions involved in all steps of the purchase process. The buyer will pass through a learning process, first developing beliefs about the product, then attitudes, and then making a thoughtful purchase choice. Marketers of high-­involvement products must understand the information-gathering and evaluation behaviour of high-­ involvement consumers. They need to help buyers learn about product-class attributes and their relative importance. They need to differentiate their brand’s features, perhaps by ­describing the brand’s benefits using print media with long copy. They must motivate store salespeople and the buyer’s acquaintances to influence the final brand choice.

Complex buying ­ behaviour – Consumer buying behaviour in ­situations characterised by high involvement in a purchase and significant perceived differences among brands.

Dissonance-reducing buying behaviour Dissonance-reducing buying behaviour occurs when consumers are highly involved with an expensive, infrequent or risky purchase, but see little difference among brands. For example, consumers buying carpeting may face a high-involvement decision because carpeting is expensive and self-expressive. Yet buyers may consider most carpet brands in a given price range to be the same. In this case, because perceived brand differences are not large, buyers may shop around to learn what is available, but buy relatively quickly. They may respond primarily to a good price or to purchase convenience. After the purchase, consumers might experience post-purchase dissonance (after-sale ­discomfort) when they notice certain disadvantages of the purchased carpet brand or hear favourable things about brands not purchased. To counter such dissonance, the marketer’s after-sale communications should provide evidence and support to help consumers feel good about their brand choices.

Dissonance-reducing buying behaviour – Consumer buying ­behaviour in situations characterised by high involvement but few perceived differences among brands.

Habitual buying behaviour Habitual buying behaviour occurs under conditions of low-consumer involvement and little significant brand difference. Many groceries will be found here: let’s take salt as an example. Consumers have little involvement in this product category – they simply go to the store and reach for a brand. If they keep reaching for the same brand, it is out of habit rather than strong brand loyalty. Consumers appear to have low involvement with most low-cost, frequently purchased products. In such cases, consumer behaviour does not pass through the usual belief–attitude–­ behaviour sequence. Consumers do not search extensively for information about the brands, evaluate brand characteristics and make weighty decisions about which brands to buy. Instead, they passively receive information as they watch television or read magazines. Recent research suggests that older buyers are more inclined to trust store personnel and rely less on marketing

Habitual buying ­ behaviour – Consumer buying behaviour in ­situations ­characterised by low consumer ­involvement and few s­ ignificantly perceived brand ­differences.

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communications, while the opposite holds for Generation Y buyers. Hence, information ­collection and marketing influence varies across buyer categories.19 Advertisement repetition creates brand familiarity rather than brand conviction. Consumers do not form strong attitudes towards a brand; they select the brand because it is familiar. Because they are not highly involved with the product, consumers may not evaluate the choice even after purchase. Thus, the buying process involves brand beliefs formed by passive learning, followed by purchase behaviour, which may or may not be followed by evaluation. Because buyers are not highly committed to any brands, marketers of low-involvement products with few brand differences often use price and sales promotions to stimulate product trial. In advertising for a low-involvement product, ad copy should stress only a few key points. Visual symbols and imagery are important because they can be remembered easily and associated with the brand. Ad campaigns should include high repetition of short-duration messages. Television is usually more effective than print media because it is a low-involvement medium suitable for passive learning. Advertising planning is more likely to succeed if it is based on classical conditioning theory, in which buyers learn to identify a certain product by a symbol repeatedly attached to it.

Variety-seeking buying behaviour Variety-seeking buying behaviour – Consumer buying behaviour in ­situations characterised by low consumer involvement but significant perceived brand differences.

Consumers undertake variety-seeking buying behaviour in situations characterised by low consumer involvement but significant perceived brand differences. In such cases, consumers often do a lot of brand switching. For example, when buying cookies or ice-cream, a consumer may hold some beliefs, choose a cookie brand without much evaluation, and then evaluate that brand during consumption. But the next time, the consumer might pick another brand out of boredom or simply to try something different. Brand switching occurs for the sake of variety rather than because of dissatisfaction. Recent evidence suggests that variety-seeking buying behaviour is on the increase, following a general trend in consumer markets of greater choice. Consumers’ attitudes adapt to the new circumstances, and loyalty only comes when consumers find it attractive to stay with the same brand or retailer.20 In the case of variety-seeking purchase behaviour, the marketing strategy of the market leader may differ from that of minor brands. The market leader will try to encourage habitual buying behaviour by dominating shelf space, keeping shelves fully stocked, and running frequent reminder advertising. Challenger firms will encourage variety-seeking by offering lower prices, special deals, coupons, free samples and advertising that presents reasons for trying something new.

The buyer decision process Now that we have looked at the influences that affect buyers, we are ready to look at how consumers make buying decisions. The actual purchase decision is just part of a much larger buying process – starting with need recognition and continuing through to how you feel after making the purchase. Marketers want to be involved throughout the buyer decision process. The buyer purchase process consists of five stages: need recognition, information search, ­evaluation of alternatives, purchase decision, post-purchase behaviour (Figure 5.5). The figure suggests that consumers pass through all five stages with every purchase. But in more routine purchases, consumers often skip or reverse some of these stages. A woman buying her regular brand of toothpaste would recognise the need and go right to the

Figure 5.5  Buyer decision process

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purchase decision, skipping information search and evaluation. However, we use the model in ­Figure 5.5 since it shows all the considerations that arise when a consumer faces a new and complex purchase situation. However, the buying process starts long before the actual purchase and continues long afterwards. Some criticism has been directed towards the rational nature of the purchase process and the sequential order of the stages, in particular.21 Marketers need to focus on the entire buying process rather than just the purchase decision. Buyers may pass quickly or slowly through these stages, and some of the stages may even be reversed. For instance, a person buying a summer house, a sailing boat, or a holiday to New Zealand is likely to be emotionally involved and sensitive to service experiences during the purchase process that don’t live up to expectations. A car that breaks down, low-quality paintwork and landscaping at the summer house or poor attitude of the travel agent are things that will probably reduce the overall ­service experience.

Need recognition The buying process starts with need recognition – the buyer recognises a problem or need. The need can be triggered by internal stimuli when one of the person’s normal needs – hunger, thirst, sex – rises to a level high enough to become a drive. A need can also be triggered by external stimuli. For example, an advertisement or a discussion with a friend might get you thinking about buying a new apartment or boat. At this stage, the marketer should research consumers to find out what kinds of needs or problems arise, what brought them about, and how they led the consumer to this particular product.

Information search An interested consumer may or may not search for more information. If the consumer’s drive is strong and a satisfying product is near to hand, the consumer is likely to buy it then and there. If not, the consumer may store the need in their memory or undertake an information search related to the need – once again, a higher degree of consumer involvement means more research and considerations undertaken in each step of the purchase process. For example, once you’ve decided you need a new sailing boat, you will probably pay more attention to boat adverts, boats owned by friends and boat conversations. Or you may actively search the web, talk to friends and gather information in other ways. The amount of searching you do will depend on the strength of your drive, the amount of information you start with, the ease of obtaining more information, the value you place on additional information and the satisfaction you get from searching. Consumers can obtain information from any of several sources. These include personal sources (family, friends, neighbours, acquaintances), commercial sources (advertising, salespeople, dealer websites, packaging, displays), public sources (mass media, consumer rating organisations, internet searches) and experiential sources (handling, examining, using the product – e.g. test-driving the car). The relative influence of these information sources varies with the product and the buyer. At least hitherto, the consumer has received the most information about a product from commercial sources – those controlled by the marketer. Although a lot of information on the internet claims to be independent it is nonetheless under the influence of site and brand owners, marketers, advertisers and users who try to integrate commercial messages. Grassroots information increases in importance and makes it increasingly difficult for marketers to convince buyers, at least to the extent that marketing messages deviate from what grassroots sources say.22 The most effective sources, however, tend to be personal. Commercial sources normally inform the buyer, but personal sources legitimise or evaluate products for the buyer. This appears to hold for all generations but is even stronger among young people who are less loyal and use faster communication vehicles.23 It’s rare that an advertising campaign can be 143

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as effective as a friend or neighbour leaning over the fence and saying, ‘This is a wonderful product.’ Increasingly, that ‘fence’ is a virtual one, as more and more customers pour through the online ratings, reviews and discussions with other buyers on internet forums before making a purchase.24 As more information is obtained, the consumer’s awareness and knowledge of the available brands and features increase, and the information might also help the consumer to drop certain brands from consideration. A company must design its marketing mix to make prospects aware of and knowledgeable about its brand. It should carefully identify consumers’ sources of information and the importance of each source.

Evaluation of alternatives Alternative evaluation – The stage of the buyer ­decision process in which the consumer uses ­information to evaluate alternative brands in the choice set.

How does the consumer choose among the alternative brands? The marketer needs to know about alternative evaluation – that is, how the consumer processes information to arrive at brand choices. Consumers do not use a simple and single evaluation process in all buying situations. Instead, several evaluation processes are at work. The consumer arrives at attitudes towards different brands through some evaluation procedure. How consumers go about evaluating purchase alternatives depends on the individual consumer and the specific buying situation. In some cases, consumers use careful calculations and logical thinking. At other times, the same consumers do little or no evaluating; instead they buy on impulse and rely on intuition. Sometimes consumers make buying decisions on their own; sometimes they turn to friends, consumer guides or salespeople for buying advice. On other occasions, they distrust salespeople and ask friends who happen to be experts in the field. Suppose you’ve narrowed your car choices to three brands. And suppose that you are primarily interested in four attributes – styling, brand image, operating economy and price. By this time, you’ve probably formed beliefs about how each brand rates on each attribute. If one car rated best on all the attributes, we could predict that you would choose it. However, the brands will no doubt vary in appeal. You might base your buying decision on only one attribute, e.g. styling above everything else, and you would buy the car that you think has the best styling. But most buyers consider several attributes, each with a different importance. If we knew the importance that you assigned to each of the four attributes, we could predict your car choice more reliably. Researchers in the field of social cognitive research suggest that the ranking or weight of each criterion may only be used when approaching the purchase decision if the criterion supports the individual’s feelings and intuition – thus arguments are used to support or reject a decision that has already been made. In the case of buying a car, the warranty may thus be used as a criterion if the desired car comes with an extensive warranty package, but may not be included at all in the decision if the desired car lacks a warranty package.25 If marketers know what evaluative processes go on, they can take steps to influence the buyer’s decision.

Purchase decision In the evaluation stage, the consumer ranks brands and forms purchase intentions. Generally, the consumer’s purchase decision will be to buy the most preferred brand, but two factors can come between the purchase intention and the purchase decision. The first factor is the a­ ttitudes of others. If someone important to you thinks that you should buy the more expensive car, then the chances of you buying a more expensive car are higher. Says one car buyer: ‘I’d decided to go for the smallest engine, but the salesman told me only older people choose the smallest engine. And I didn’t want to be that person so I paid 10 per cent more for a 2.5 litre engine.’ The second factor is unexpected situational factors. The consumer may form a purchase intention based on factors such as expected income, expected price and expected product benefits. However, unexpected events may change the purchase intention. For example, the economy might take a turn for the worse, a close competitor might drop their price, a friend 144

The buyer decision process

working for a competitor may lose his job, or a friend might report being disappointed in your preferred car. Thus, preferences and even purchase intentions do not always result in actual purchase choice.

Post-purchase behaviour The marketer’s job does not end when the product is bought. After purchasing the product, the consumer will be satisfied or dissatisfied and will engage in post-purchase behaviour of interest to the marketer. What determines whether the buyer is satisfied or dissatisfied with a purchase? The answer lies in the relationship between the consumer’s expectations and the product’s perceived performance. If the product falls short of expectations, the consumer is disappointed; if it meets expectations, the consumer is satisfied; if it exceeds expectations, the consumer is delighted. The larger the gap between expectations and performance, the greater the consumer’s dissatisfaction. This suggests that sellers should promise only what their brands can deliver so that buyers are satisfied. Almost all major purchases result in cognitive dissonance, or discomfort caused by post-­ purchase conflict. After the purchase, consumers are satisfied with the benefits of the chosen brand and are glad to avoid the drawbacks of the brands that were not bought. However, every purchase involves compromise. So consumers feel uneasy about acquiring the drawbacks of the chosen brand and about losing the benefits of the brands not purchased. Thus, consumers feel at least some post-purchase dissonance for every purchase.26 A typical example is a young couple moving from the city centre of a fairly big city to a house in the suburbs – more time will be spent on house maintenance and travel to work, and a feeling of not being young anymore may contribute to post-purchase dissonance. Longing back to the good, old days in the city centre activates cognitive dissonance. Why is it so important to satisfy the customer? Customer satisfaction is a key to building profitable relationships with consumers – to keeping and growing consumers and reaping their customer lifetime value. Satisfied customers buy a product again, talk favourably to others about the product, pay less attention to competing brands and advertising, and buy other products from the company. And last but not least, they talk to others about their experiences, regardless of whether they will buy the product again. A dissatisfied consumer responds differently. Bad word of mouth often travels farther and faster than good word of mouth. It can quickly damage consumer attitudes about a company and its products. But companies cannot simply rely on dissatisfied customers to volunteer their complaints when they are dissatisfied. Most unhappy customers never tell the company about their problem. Therefore, a company should measure customer satisfaction regularly. It should set up systems that encourage customers to complain. In this way, the company can learn how well it is doing and how it can improve. Here, it’s once again important to distinguish between high-involvement and low-involvement products. In the former case, a brand or product falling short of buyer expectations may result in many complaints to the selling company, a substantial amount of negative word-of-mouth both in the social environment and on internet forums. For low-involvement products, consumers often don’t have the energy and motivation to take specific actions if they are dissatisfied, e.g. a new yoghurt flavour, low-sugar ketchup or a magazine that doesn’t live up to expectations. By studying the overall buyer decision, marketers may be able to find ways to help consumers move through it. For example, if consumers are not buying a new product because they do not perceive a need for it, marketing might launch advertising messages that trigger the need and show how the product solves customers’ problems. If customers know about the product but are not buying because they hold unfavourable attitudes toward it, the marketer must find ways to change either the product or consumer perceptions. Much depends on the nature of the buyer, the product and the buying situation, and the approach used will depend on the extent to which it is possible to treat different customer groups differently – for low-involvement products like groceries, it is often not done. Mass market approaches are likely to be applied instead, e.g. television commercials, campaigns with Coop and ICA, outdoor advertising etc.

Post-purchase ­ behaviour – The stage of the buyer decision process in which consumers take further action after purchase, based on their satisfaction or ­dissatisfaction. Cognitive dissonance – Buyer discomfort caused by post-purchase conflict.

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For expensive, high-involvement products, marketers spend a lot of time, money and energy to help the customer move through the purchase process and, here, approaches targeted towards particular consumer groups and profiles are used. When BMW launches a new 3 Series model, personal invitations for a test-drive to owners of Audi A4, Mercedes-Benz C Class, and Volvo S60 cars will be expensive on a pure cost-per-contact basis, but very effective in terms of ­finding customers who are likely to buy the car and also the customers they want.

The buyer decision process for new products Adoption process – The mental process through which an individual passes from first learning about an innovation to final ­adoption.

We will now look briefly at how buyers approach the purchase of new products. A new ­product is a good, service or idea that is perceived by many potential customers as new. It may have been around for a while, but our interest is in how consumers learn about products for the first time and make decisions on whether to adopt them. We define the adoption process as ‘the mental process through which an individual passes from first learning about an innovation to final adoption’, and adoption as the decision by an individual to become a regular user of the product.27

Stages in the adoption process Consumers go through five stages in the process of adopting a new product: ●●

Awareness: the consumer becomes aware of the new product, but lacks information about it.

●●

Interest: the consumer seeks information about the new product.

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Evaluation: the consumer considers whether trying the new product makes sense.

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Trial: the consumer tries the new product on a small scale to improve his or her estimate of its value.

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Adoption: the consumer decides to make full and regular use of the new product.

This model suggests that the new-product marketer should think about how to help consumers move through these stages. For example, coupons that offer substantial savings may be used to encourage consumers to try a product. A premium car producer might find that many potential customers know about and are interested in its new model but aren’t buying because of uncertainty about the model’s benefits and the high price. The producer could launch a ‘take one home for the weekend’ promotion to high-value prospects to move them into the trial process and lead them to purchase.

Individual differences in innovativeness People differ greatly in their readiness to try new products. In each product area, there are ‘consumption pioneers’ and early adopters. Other individuals adopt new products much later. People can be classified into the adopter categories shown in Figure 5.6. After a slow start, an increasing number of people adopt the new product. The number of adopters reaches a peak and then drops off as fewer non-adopters remain. Innovators are defined as the first 2.5 per cent of the buyers to adopt a new idea (those beyond two standard deviations from mean adoption time); the early adopters are the next 13.5 per cent (between one and two standard deviations); and so forth. The five adopter groups have differing values. Innovators are venturesome – they try new ideas at some risk. Early adopters are guided by respect – they are opinion leaders in their communities and adopt new ideas early but carefully. The early majority are d ­ eliberate – although they are rarely leaders, they adopt new ideas before the average person. The late majority are sceptical – they adopt an innovation only after a majority of people have tried it. 146

The buyer decision process for new products

Figure 5.6  Adopter categorisation on the basis of relative time of adoption of innovations Source: From Everett M. Rogers, Diffusion of Innovations, 4th edn (New York: The Free Press). Copyright © 1962, 1971, 1983, by the Free Press. Copyright © 1995 by Everett M. Rogers, a Division of Simon & Schuster Adult Publishing Group.

Some consumers are ­laggards and don’t change their ­behaviour patterns until they have to. Source: Leif Jansson/Scanpix/ Press Association Images

Finally, laggards are tradition-bound – they are suspicious of changes and adopt the innovation only when it has become something of a tradition itself. From a marketing perspective, laggards are not very interesting since their spending is comparatively small, and laggards may be dangerous to the brand for a company that wants to attract dynamic and progressive people. This adopter classification suggests that an innovating firm should research the characteristics of innovators and early adopters and should direct marketing efforts toward them. In general, innovators tend to be relatively younger, better educated and higher earners than later adopters and non-adopters. They are more receptive to unfamiliar things, rely more on their own values and judgment, and are more willing to take risks. They are less brand-loyal and more likely to take advantage of special promotions such as discounts, coupons and samples. 147

Chapter 5 Consumer markets and consumer buyer behaviour

Influence of product characteristics on rate of adoption The characteristics of the new product affect its rate of adoption. Some products catch on almost overnight, as has been the case with several new iPhones, while others take a longer time to gain acceptance. For example, digital SLR cameras, blu-ray players, and LED headlights for cars have shown very slow adoption. The same holds for cloud storage and cloud technology, and 3D printing. The Internet of Things – slow adoption Adoption of new technology is often slow, but there are reasons that explain why whole industries are reluctant to take on new technologies. Durability, safety, regulation, and high R&D costs might explain the slow adoption. The Internet of Things (IoT), i.e. the network of physical objects embedded with software, sensors and connectivity to enable the exchange of data with the manufacturer, operator and/or other connected devices, could provide significant advantages to a car manufacturer. Through using this technology, it would be possible to track where and how the user is driving, get feedback useful for improving safety, and generate service advantages to buyers. Volvo On Call is a system that entails the introduction of advanced digital technology into ordinary cars. The system was launched in the United States and Sweden in the Volvo S80 in 2001. Volvo On Call was introduced as a panic button to be used in the case of emergency. The S80 was the first car to have an expanded Multiplex electrical system with computer networks that replaced the traditional electrical system. Volvo On Call is based upon communication between the car’s Multiplex system, which has been replaced by more developed systems, and an integrated SIM card, i.e. a mobile phone, which enables contact with the world at large. In the first development stage, Volvo On Call was a safety and security system. If the car is involved in an accident in which one or more airbags have been deployed, the Multiplex system registers this information and forwards it to the car’s SIM card, which sends a signal to the Volvo On Call system. The phone is in constant contact with a GPS unit in the car. Continuous information is received from this unit on the whereabouts of the car. When an accident has occurred, the phone automatically sends a text message of the exact location to a Volvo On Call alarm centre. At the same time, a voice line is opened between the car and the alarm centre. The operator at the alarm centre can learn about the situation over this line. In the event that nobody in the car is able to answer, the operator can call an ambulance, which can be directed to the scene of the accident. More services were soon made available, e.g. tracking of a stolen car – the alarm centre communicates with the car and obtains its position even if the phone is not switched on. Remote opening of the car doors if the keys have been locked inside or have been lost. It was not until 2011 and model year 2012 that an app was developed that made it possible to start the heater, track the position, and lock/unlock doors through the Volvo On Call app. Four years later, main competitors are still not offering such elementary features. Services offered through BMW Connected Drive and Audi Connect are not offering much more than an ordinary smartphone. The potential of the Internet of Cars is far from reached, and it will take until the early 2020s until the Internet is really integrated in cars, more than two decades after Volvo introduced the first connected car.

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The Volvo On Call system, controlled through an app, is an early example of the internet in cars – the industry has been slow to adapt to the opportunities that connected cars offer. However, it is not as easy as it seems – new technology in cars must last longer than in handheld devices and also sustain the enormous differences in temperature and weather conditions of car use in various countries and continents. Source: Volvo Group

Five characteristics are especially important in influencing an innovation’s rate of adoption. For example, consider the characteristics of HDTV in relation to the rate of adoption: ●●

Relative advantage: the degree to which the innovation appears superior to existing products. HDTV offers substantially improved picture quality. This will speed its rate of adoption.

●●

Compatibility: the degree to which the innovation fits the values and experiences of potential consumers. HDTV, for example, is highly compatible with the lifestyles of the TV-watching public. However, many programmes and channels are still not yet available in HD, and this has slowed HDTV adoption. We will never see Seinfeld or Cosby in true HDTV, and the same holds for many more recent productions.

●●

Complexity: the degree to which the innovation is difficult to understand or use. HDTVs are not very complex and, therefore, once more programming is available and prices come down, they will take less time to penetrate homes than more complex innovations.

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Divisibility: the degree to which the innovation may be tried on a limited basis. Early HDTVs and HD cable and satellite systems were very expensive, slowing the rate of adoption. As prices fall, adoption rates will increase.

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Communicability: the degree to which the results of using the innovation can be observed or described to others. Because HDTV lends itself to demonstration and description, its use will spread faster among consumers.

Other characteristics influence the rate of adoption, such as initial and ongoing costs, risk and uncertainty, and social approval. For video-on-demand services, with a surprisingly low penetration of 20 to 30 per cent in major countries, a general reluctance to take on new technology slows down penetration just like today’s busy consumers’ reluctance to install new hardware and software. The new-product marketer must research all these factors when developing the new product and its marketing programme.

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Summary The world consumer market consists of more than seven billion people, and they vary greatly in age, income, education level and tastes. Understanding how these differences affect consumer buying behaviour is one of the biggest challenges marketers face. The consumer market consists of all the individuals and households who buy or acquire goods and services for personal consumption. The simplest model of consumer buyer ­behaviour is the stimulus–response model. According to this model, marketing stimuli (the four Ps) and other major forces (economic, technological, political, cultural) enter the consumer’s ‘black box’ and produce certain responses. Once in the black box, these inputs produce observable buyer responses, such as product choice, brand choice, purchase timing and purchase amount. Consumer buyer behaviour is influenced by four key sets of buyer characteristics: cultural, social, personal and psychological. Although many of these factors cannot be influenced by the marketer, they can be useful in identifying interested buyers and in shaping products and appeals to serve consumer needs better. Culture is the most basic determinant of a person’s wants and behaviour. It includes the basic values, perceptions, preferences and behaviours that a person learns from family and other important institutions. Subcultures are ‘cultures within cultures’ that have distinct values and lifestyles and can be based on anything from age to ethnicity. People with different cultural and subcultural characteristics have different product and brand preferences. Social factors, e.g. a person’s reference groups – family, friends, social networks, professional associations – strongly affect product and brand choices. The buyer’s age, life-cycle stage, occupation, economic circumstances, lifestyle, personality and other personal characteristics influence his or her buying decisions. Consumer lifestyles – the whole pattern of acting and interacting in the world – are also an important influence on purchase decisions. Finally, consumer buying behaviour is influenced by psychological factors – motivation, perception, learning, and beliefs and attitudes. Buying behaviour may vary greatly across different types of products and buying decisions. Consumers undertake complex buying behaviour when they are highly involved in a purchase and perceive significant differences among brands. Dissonance-reducing behaviour occurs when consumers are highly involved but see little difference among brands. Habitual buying behaviour occurs under conditions of low involvement and little significant brand difference. In situations characterised by low involvement but significant perceived brand differences, consumers engage in variety-seeking buying behaviour. When making a purchase, the buyer goes through a decision process. During need ­recognition, the consumer recognises a problem or need that could be satisfied by a product or service in the market. Once the need is recognised, the consumer is aroused to seek more information and moves into the information search stage. With information in hand, the consumer proceeds to alternative evaluation, during which the information is used to evaluate brands in the choice set. From there, the consumer makes a purchase decision and actually buys the product. In the final stage of the buyer decision process, post-purchase behaviour, the consumer takes action based on satisfaction or dissatisfaction. However, not all purchase decisions follow this order.

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Discussing the concepts

The product adoption process comprises five stages: awareness, interest, evaluation, trial and adoption. Initially, the consumer must become aware of the new product. Awareness leads to interest, and the consumer seeks information about the new product. Once information has been gathered, the consumer enters the evaluation stage and considers buying the new product. Next, in the trial stage, the consumer tries the product on a small scale to improve his or her estimate of its value. If the consumer is satisfied with the product, he or she enters the adoption stage, deciding to use the new product fully and regularly. With regard to diffusion of new products, consumers respond at different rates, depending on their characteristics and the product’s characteristics. Innovators are willing to try risky new ideas; early adopters – often community opinion leaders – accept new ideas early but carefully; the early majority – rarely leaders – decide deliberately to try new ideas, doing so before the average person does; the late majority try an innovation only after a majority of people have adopted it; whereas laggards adopt an innovation only after it has become a tradition itself. Manufacturers try to bring their new products to the attention of potential early adopters, especially those who are opinion leaders.

Key terms Consumer buyer behaviour

128

Belief 140

Consumer market

128

Attitude 140

Culture 129

Complex buying behaviour

141

Subculture 130

Dissonance-reducing buying behaviour

141

Social grade

Habitual buying behaviour

141

Group 131

Variety-seeking buying behaviour

142

Opinion leader

131

Need recognition

143

Online social networks

132

Information search

143

Lifestyle 135

Alternative evaluation

144

Personality 136

Purchase decision

144

Brand personality

136

Post-purchase behaviour

145

Motive (drive)

136

Cognitive dissonance

145

Perception 138

New product

146

Learning 140

Adoption process

146

130

Discussing the concepts 1. How do consumers respond to various ­marketing efforts the company might use? Think about one very emotional product and one very functional. List the buyer characteristics that affect buyer behaviour

and discuss which one(s) influence you most when making a new car purchase decision. 2. Name and describe the types of consumer buying behaviour. Which one would you most likely use if deciding on a laptop

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computer purchase and which for picking a restaurant for dinner? 3. Explain the stages of the consumer buyer decision process and describe how you or your family went through this process to make a recent purchase. 4. How might a marketer influence a ­consumer’s information search through each of the four information sources ­discussed in the chapter?

5. What is a ‘new’ product and how do consumers go about deciding whether to adopt a new product? 6. What product characteristics influence an innovation’s rate of adoption? Discuss the characteristics of smartphones, other ­electronic devices, and recent fashion trends.

Applying the concepts 1. Marketers often target consumers before, during or after a trigger event, an event in one’s life that triggers change. For example, after having a child, new parents have an increased need for baby ­furniture, clothes, nappies, car seats and lots of other baby-related goods. Consumers who never paid any attention to marketing efforts for certain products may now be focused on ones related to their life change. In a small group, discuss other trigger events that may provide opportunities to target the right buyer at the right time. 2. You are the vice-president of marketing for a small software company that has developed new and novel spam-blocking software. You are charged with selecting the target market for the product launch. Discuss the adopter groups shown in Figure 5.6 and explain how this knowledge can help you with your targeting decision. 3. How did you decide on the university programme or course you are currently attending? Describe the factors that influenced your decision and the decision-making process you followed.

Focus on technology With so many choices available, the decision process for consumers can be daunting, especially for high-risk purchases. Looking for a new camera, computer, sunscreen or coffee maker? Product reviews abound that provide information on products in just about every category. In Australia, ProductReview. com.au pays visitors for reviewing everyday products from cars to TVs. Reviewers select products that they have bought and then review them and receive reward points. The reviewers also get paid for referring buyers to a website. The result is an extremely popular and successful site with tens of thousands of unique visitors every day. 1. Visit ProductReview.com.au and search for a product you plan to buy in the near future. How useful is this website? Are there any risks involved in paying for user feedback, and linking potential buyers to the sellers’ sites – the latter being very common as opposed to the former? Do you think this type of website will get more common in other countries and industries? Hitherto, there has been a slower diffusion of such sites than expected one or two decades ago. Write a brief report explaining your answers to these questions. 2. Many websites provide consumer reviews. The sites usually feature a rating system and actual written reviews. How influential are these types of reviews to you when you’re deciding on a purchase?

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References

Marketing by the numbers Consumers may often evaluate products and services by making comparisons between the attributes of competing brands. Added to this is a weighting for each of the attributes, which aims to reflect the ­relative importance of each of the attributes. For a particular brand, the key attributes and their weighting were as follows: style (0.4); cost (0.3); delivery time (0.2); and warranty (0.1). The consumers were asked to rate each of the brands on a sliding scale of 1–7 with 1 rating the ­product ‘low’ and 7 ‘extremely high’. For brand A the scores were respectively 6, 6, 7 and 2. For brand B they were 5, 3, 4 and 4. For brand C the results were 6, 5, 5 and 5 and for brand D they were 4, 7, 6 and 3. The score for each brand can be calculated by multiplying the importance weight for each attribute by the brand’s score on that attribute. These weighted scores are then summed to determine the score for that brand. The scores given are meant to suggest, as far as the consumer is concerned, that the particular brand performs better in this aspect than the other competing brands. A tied score simply suggests that there is no discernible difference in performance between two or more of the brands in that category. 1. Determine the scores for brands A, B, C and D. Which brand would this consumer likely choose? 2. Why might the results be somewhat misleading?

References 1 Quotes and other information from Vito J. Racanelli, ‘Bound for Hog heaven’, Barron’s (26 November 2007, pp. 20–2); Greg Schneider, ‘Rebels with disposable income; aging baby boomers line up to buy high-end versions of youthful indulgences’, Washington Post (27 April 2003, p. F1); Ted Bolton, ‘Tattooed call letters: the ultimate test of brand loyalty’, accessed online at www.boltonresearch.com, April 2003, Harley-Davidson reports fourth quarter and full year results for 2007’, PR Newswire (25 January 2008); and the HarleyDavidson website at www.Harley-Davidson.com, October 2008. 2 Don E. Schultz, ‘Lines or circles’, Marketing News (5 November 2007, p. 21). 3 Cf. Anders Parment, ‘Consumer behaviour in metro, city and rural areas’. Research paper (Stockholm University School of Business, 2010). 4 ‘Boom time: America’s new retirees feel entitled to relax – and intend to spend’, Financial Times (6 December 2007, p. 9). 5 Alisa Higgins, A Review of Social Grade, Marketing Communications Research Centre, Cranfield School of Management Working and Occasional Papers (1980). 6 See Ipsos MediaCT, Social Grade. A Classification Tool. Bite Sized Thought Piece (2009). 7 Jim Blythe, Consumer Behaviour (Thompson Learning, 2007). 8 Michael R. Salomon, Gary Bamossy, Soren Askegaard and Margaret K. Hogg, Consumer Behaviour: A European Perspective, 4th edn (Financial Times Press/Pearson Education, 2009). 9 For a discussion of influencers, see Clive Thompson, ‘Is the tipping point toast?’, Fast Company (February 2008, pp. 75–105); Edward Keller and Jonathan Berry, The Influential (New York: The Free Press, 2003); and Daniel B. Honigman, ‘Who’s on first?’, Marketing News (1 November 2007, pp. 14–17). The study results and quotes are from Kenneth Hein, ‘Report explores what influences the influencers’, Brandweek (5 February 2007, p. 13); Ryan Mcconnell, ‘Spread the news: word-of-mouth worth $1 billion’, Advertising Age (15 November 2007, p. 4); and Megan Mcilroy, ‘Family, friends most influential on shoppers’, Advertising Age (9 April 2008), accessed at www.adage.com. 10 See Anders Parment, Generation Y in Consumer and Labour Markets (Routledge, 2011). 11 Christofer Laurell and Anders Parment, Marketing Beyond the Textbook: Emerging Perspectives in Marketing Theory and Practice (Lund: Studentlitteratur, 2015).

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12 Anders Parment, Generation Y. Framtidens Konsumenter och Medarbetare Gor Entre (Liber, 2008). 13 Jennifer Aaker, ‘Dimensions of measuring brand personality’, Journal of Marketing Research (August 1997, pp. 347–56). Also see Aaker, ‘The malleable self: the role of self-expression in persuasion’, Journal of Marketing Research (May 1999, pp. 45–57); and Audrey Azoulay and Jean-Noel Kapferer, ‘Do brand ­personality scales really measure brand personality?’, Journal of Brand Management (November 2003, p. 143). 14 Nancy F. Koehn, ‘Building a powerful prestige brand’, Harvard Business School Working Knowledge (30 October 2000). 15 See Mark Tadajewski, ‘Remembering motivation research: toward an alternative genealogy of interpretive consumer research’, Marketing Theory (December 2006, pp. 429–66); and Leon G. Schiffman and Leslie L. Kanuk, Consumer Behaviour, 9th edn (Upper Saddle River, NJ: Prentice Hall, 2007), Chapter 4. 16 See Abraham. H. Maslow, ‘A theory of human motivation’, Psychological Review, 50, 370–96 (1943). Also see Maslow, Motivation and Personality, 3rd edn (New York: HarperCollins Publishers, 1987); and Barbara Marx Hubbard, ‘Seeking our future potentials’, Futurist (May 1998, pp. 29–32). 17 See, e.g., Mahmoud A. Wahba and Lawrence G. Bridwell, ‘Maslow reconsidered: a review of research on the need hierarchy theory’, Organizational Behaviour and Human Performance, 15(2), 212–40 (1976); Stephen Brown, ‘Postmodern marketing?’, European Journal of Marketing, 27(4), 19–34 (1993); Douglas T. Hall and Khalil E. Nougaim, ‘An examination of Maslow’s need hierarchy in an organizational setting’, Organizational Behaviour and Human Performance, 3(1), 12–35 (1968). 18 Bob Garfield, ‘“Subliminal” seduction and other urban myths’, Advertising Age (18 September 2000, pp. 4, 105); and Lewis Smith, ‘Subliminal advertising may work, but only if you’re paying attention’, Times (9 March 2007). For more on subliminal advertising, see Alastair Goode, ‘The implicit and explicit role of ad memory in ad persuasion: rethinking the hidden persuaders’, International Journal of Marketing Research, 49(2), 95–116 (2007); Don E. Shultz, ‘Subliminal ad notions still resonate today’, Marketing News (15 March 2007, p. 5); Cynthia Crossen, ‘For a time in the 50s, a huckster fanned fears of an ad “hypnosis”’, Wall Street Journal (5 November 2007, p. B1); and Beth Snyder Bulik, ‘This brand makes you more creative’, Advertising Age (24 March 2008, p. 4). 19 Anders Parment, ‘Generation Y vs Baby Boomers: shopping behavior, buyer involvement and implications for retailing’, Journal of Retailing and Consumer Services, 20(2), 189–99 (2013). 20 Anders Parment, Marketing to the 90s Generation. Global Data on Society, Consumption, and Identity (New York: Kogan Page, 2014) and Die Generation Y: Mitarbeiter der Zukunft motivieren, integrieren, führen (Wiesbaden, Springer, 2013). 21 See David Dunning, ‘Self-image motives and consumer behaviour: how sacrosanct self-beliefs sway preferences in the marketplace’, Journal of Consumer Psychology, 17(4), 237–49 (2007). Dunning suggests that consumer decision-making strives to harmonise preferences with positive self-views, thus shaping preferences to maintain sacrosanct beliefs of the self as a capable, lovable and moral individual. For instance, in cases of high-involvement products, consumers may have already made the decision but nonetheless run through a process of confirmation. Arguments in favour of the purchase decision are likely to overshadow those against the decision if the purchase will contribute to belief-harmonisation. Dunning also makes a qualified literature review of research on consumer buying processes. 22 Christofer Laurell and Anders Parment, Marketing Beyond the Textbook: Emerging Perspectives in Marketing Theory and Practice (Lund: Studentlitteratur, 2015). 23 Anders Parment, Generation Y in Consumer and Labour Markets (London: Routledge, 2011). 24 Quotes and information from ‘Ogilvy Public Relations Worldwide and BzzAgent forge strategic alliance to offer clients more word-of-mouth communications solutions’, PR Newswire (10 January 2008); Douglas Pruden and Terry G. Vavra, ‘Controlling the grapevine’, Marketing Management ( July–August 2004, pp. 25–30); and Yubo Chen and Jinhong Xie, ‘Online consumer review: word-of-mouth as a new element of ­marketing communication mix’, Management Science (March 2008, pp. 477–91). 25 See David Dunning, ‘Self-image motives and consumer behaviour: how sacrosanct self-beliefs sway ­preferences in the marketplace’, Journal of Consumer Psychology, 17(4), 237–49 (2007).

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26 See Leon Festinger, A Theory of Cognitive Dissonance (Stanford, CA: Stanford University Press, 1957); L. Schiffman and L. Kanuk, Consumer Behaviour (Prentice Hall, 2006, pp. 219–20); M. O’Neill and A. Palmer, ‘Cognitive dissonance and the stability of service quality perceptions’, Journal of Services Marketing, 18(6), 433–49 (2004); Cynthia Crossen, ‘“Cognitive dissonance” became a milestone in the 1950s psychology ’, Wall Street Journal (12 December 2006, p. B1); and Mohammed N. Nadeem, ‘­Post-purchased dissonance: the wisdom of the repeat purchases’, Journal of Global Business Issues (Summer 2007, pp. 183–94). 27 The following discussion draws from the work of Everett M. Rogers. See his Diffusion of Innovations, 5th edn (New York: Free Press, 2003).

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Company case – Stiga: marketing in industrial markets

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Business markets

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Best practice – IKEA: involving suppliers from start to finish

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Business buyer behaviour

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Institutional and government markets

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Legislation issues

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Mini contents

Source: Johner Images/Alamy

Chapter preview In the previous chapter, you studied final consumer buying behaviour and factors that influence it. In this chapter, we’ll do the same for business customers – those that buy goods and services for use in producing their own products and services or for resale to others. As when selling to final buyers, firms marketing to business customers must build profitable relationships with business customers by creating superior customer value. The chapter will start with a story about something that often happens in business markets – a Swedish company, Stiga, in Tranås in northern Småland, merged into a big international company group, Italian Global Garden Products. This change meant the Swedish company got access to a much broader market, with an opportunity to build a strong reputation in other markets. But being part of a company group’s portfolio also means that priorities are different, resulting in different decisions from the ones Stiga might have taken had it remained on its own.

Learning objectives After reading this chapter, you should be able to: 1 Define the business market and explain how business markets differ from consumer markets. 2 Identify the major factors that influence business buyer behaviour. 3 List and define the steps in the business buying decision process. 4 Compare the institutional and government markets and explain how institutional and ­government buyers make their buying decisions.

 

Company case Stiga: marketing in industrial markets Marketing and selling are crucial to the final outcome of the efforts being made by a company, but to be successful with marketing activities, one must understand the complexity involved in setting up a system and method for marketing and selling to many types of customers through distributors operating in many types of markets. Thinking of the business model as a process from product development to after-sales reveals some important insights. While the product development and manufacturing side may be centralised and run by professionals, with relatively few contacts with customers, marketing and selling require an understanding of local markets and a flexible approach to deal with all the people who make the strategies come alive. Few manufacturers make all or even a majority of their sales through direct channels – in most cases indirect channels, i.e. locally operated and owned dealers, are used to gain the desired market coverage. The company’s overall strategy must thus be adapted to local circumstances. For premium brands, in particular, the manufacturer needs to have some control over how the products are marketed and sold. So even though it’s easy in conceptual terms to argue that the company’s overall strategies and targets have to be implemented at every stage in marketing and selling, research suggests that it is difficult to keep control of the brand and values the company wants to project. On the one hand, the distribution system is a strategic tool that helps companies obtain the market position they want. On the other hand, a company without the resources necessary to set up its own distribution is left to use existing sales channels, and they may not always have the desired characteristics. Many criteria are important here. Market coverage secures customers anywhere in a market where there is access to the products and necessary after-sales services. The retailer’s profile and quality determine whether the manufacturer’s ambitions in terms of product and brand are fulfilled at the retail level. The retailer’s brand portfolio eventually has a strong influence on the brand experience. An exclusive retail environment with other premium brands available makes the retail experience more premium. On the other hand, in such an environment, it is unlikely that customers looking for a volume brand will appear, so the best thing from a sales point of view may be to sell through multi-franchised dealers that offer a broad range of products in different price categories. In designing a system and policies for marketing and sales in different markets, one first needs to understand the type of market at hand. What’s the profile of our company compared with our competitors? How are local customers perceiving our brand? In what respects are competitors superior to us and how important are these characteristics for the customers? What about price sensitivity? Are customers appreciating locally manufactured products or are domestic products seen as budget choices, while foreign premium brands are the preferred choice for customers prioritising quality and design? What does the customer structure look like? What’s the mix of consumers, industrial buyers and public sector buyers? Their purchase criteria may vary significantly. Are there many customers purchasing limited quantities, meaning high administrative costs, or are there only a few customers buying the majority of the volume produced? At the end of the day, having many dealers taxes administrative resources. Let’s look at a domestic Swedish manufacturer of a variety of consumer and industrial products, which underwent a transition and became part of a multinational company, and what the interplay between the global strategies and operative marketing and sales decisions may look like.

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The Stiga brand is well known among Swedes and has appeared on numerous quality products, e.g. lawn mowers and other powered garden equipment, table tennis equipment, table hockey games and children’s helmets. Since 2002 the company has been part of the Italy-based Global Garden Products (GGP) Group, and now operates as GGP Sweden AB, although locals may continue to call the factory Stiga in the future. To them, GGP Group is an anonymous global owner, while the trademark Stiga, which still appears on lawn mowers, snow blowers, chainsaws and other lawn machinery, is the name they’ll use. The ownership of the formerly locally owned and operated Stiga product portfolio has gradually moved away from Tranås, starting in the 1980s with the Stiga trademark for table tennis supplies being sold to Sweden Table Tennis AB, well known for their table hockey games manufactured in Lithuania. In 2006, they also bought the Games division – which makes snow racers in Estonia – from the GGP Group. GGP is the largest European manufacturer of powered garden equipment. The headquarters is situated in Castelfranco Veneto, Italy, a city near Venice with 15 subsidiaries in Europe and Asia. GGP is the result of a merger of four important players in the garden equipment industry: Castelgarden and Alpina from Italy, Stiga and Belos from Sweden, and Mountfield from the UK. GGP specialises in the development, manufacture and distribution of ride-on and walk-behind lawn mowers, hand-held garden equipment and winter products, e.g. snow blowers. Among the GGP Group’s brands, which are distributed in around 100 countries, Stiga is the flagship and premium brand; so its history and tradition are part of the brand heritage. Like many other Swedish manufacturers with a long heritage (cf. the Electrolux case in Chapter 2) Stiga has a long tradition of innovative solutions, pioneering advanced engineering in consumer products ever since Stig Hjelmquist founded the company in Tranås in 1934. Among numerous significant innovations, some have been particularly important in Stiga’s history, e.g. the table tennis tables (1945), steam engines (1947), the scooter (1950), lawn mowers (1956), ride-on lawn mowers (1958), life jackets (1961), the air pump Stiga Quicker (1967) (many Swedes have blown up their airbeds and gum boats with a Quicker!), the snow thrower (1969), brushcutters (1977), a foIdable transport sled (1981), summer skates (1982), an electric snow thrower (1992) and the automatic lawn mower Robo-clip (2001 – the same year that Electrolux started selling its Trilobite, the world’s first commercially available autonomous vacuum cleaner). Stiga has also been the national sales company for Zanussi washing machines, Rieker Orbis slalom ski boots and many other products. The Swedish environment has been a great place to develop the products that define Stiga – for instance, Stellan Bengtsson won the World Table Tennis Championships in 1971, and he, like many other Swedes at the time, grew up with Stiga table tennis tables. And apparently, many of the garden products improve the quality of life of people living in the Nordic climate. Stiga’s products are produced in Sweden, Italy, Slovakia and China, but the brand image is Swedish, reflecting Swedish design and quality. Stiga’s sales take place through three business units, one dealing with independent dealers in major markets, one dealing with subsidiaries, and one dealing with distant markets where Stiga has a small market share. Stiga’s strong market position in the European markets is a consequence of its brand heritage and great products; however, running a distributor organisation requires constant attention and there may be significant conflicts at times. Karin Sjögren is Marketing Manager for the business unit that deals with European retailers, and she is responsible for developing the brands. ‘Stiga is our premium brand, and we also sell Castelgarden, which is more of an opportunistic brand, slightly less premium and more focused on tractors and walk-behind mowers. While the Stiga brand is based on its Swedish brand heritage and great history, Castelgarden is more of a bottom-up initiative. Distributors and retailers started selling it and have been running the marketing with little support from us as manufacturers.’ The Stiga brand is a great advantage in marketing and selling, since its qualities are well known among buyers. ‘From a branding perspective, it’s very important to protect and develop the qualities of the Stiga brand, our flagship brand, and that’s not always easy since we do not have full control of

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what is happening at the retail level,’ says Sjögren, who sometimes has to worry about how the brand is perceived at the end of the value chain. ‘It is difficult to keep control of the brand, particularly when there are many steps and people involved on the way from us to the end customer. On the other hand, we decide whom we are selling to and, by choosing the right channel, we can also largely decide which customers we’ll get.’ Like many other brands, Stiga is not perceived as exclusive in the domestic Swedish market as in other markets. ‘In Sweden, it’s a high-quality mass-market product, so the history of the brand, one of our most important assets, actually creates some problems for us in Sweden. Just about everybody has an old hockey game or table tennis table from Stiga they haven’t used for decades. But we try to make Stiga premium throughout the Nordic countries. The products are premium so we have a great chance of improving the image too,’ Sjögren says. The industry through which Stiga is selling is undergoing a restructuring process. ‘Small independent dealers have a tougher time now, since the international retail chains – ByggMax, Bauhaus and others – are increasing their market shares day by day. It’s a challenge for us; we can say Stiga is a premium brand and should thus not be sold through the mass-market channels, but that would hurt our sales. So we sell some products this way, but the full range is only available through dealers specialising in garden products,’ says Sjögren. ‘For the entire buying experience, speciality stores are a lot better, they’ll run product demonstrations, they’ll deliver the product to the customer’s home, they are likely to have good product knowledge and, which is very important, they are not selling on price but on competence, and that is good for the customer and good for us and our brand image,’ says Markus Weinhofer, Product Manager for the Stiga and Castelgarden brands. The international mass market chains haven’t won the battle yet. ‘There are signs now that independent dealers are creating buying syndicates and other types of allies to win the fight against the international chains. This is happening now in France, for instance,’ says Sjögren. ‘The traditional independent speciality stores, that’s our main focus within the business unit, and I hope it will be also in the future,’ Weinhofer says. ‘And of course, it’s a threat to us if the retail chains take over. They are very powerful and know they can use their power in dealing with us.’ But a strong product portfolio and a strong brand will compensate for this to an extent. A premium brand like Stiga adds to the retailer’s image, and expands the customer profile, albeit in a mass-market direction. ‘If you look at Germany, one of our most important markets and certainly a good predictor of the future since they have had discount retailers in many industries for decades, they have Hornbauch, Praktiker, Bauhaus and other budget suppliers, but dealers are still very strong, and they deserve to be strong since they are adding so much value to the customer experience: they bring products to customers for demonstration, they have great product knowledge and, overall, they are very customer-oriented,’ Weinhofer says. Internet sales are slowly taking off in this industry, many years later than for other major consumer and industrial products. ‘Products at the bottom of the range are increasingly sold on the internet: bottom-end snow throwers, hand-held lawn products like garden trimmers and bruschcutters. And obviously, it’s the same products as those being sold by the discount retail chains. For our more expensive products, they will most likely be sold by speciality stores in the future as well,’ says Weinhofer. And internet sales may still mean the dealer is getting the sale, and prices are the same online and offline in Poland and the UK, where internet selling has been successfully introduced. ‘The local dealer is managing the internet deal, and we provide the infrastructure. So when the customer orders a product, the nearest dealer gets the order and, if he confirms the order, he’ll do the pre-delivery check, fill it with petrol if it’s a fossil fuel product, and offer product demonstration within 72 hours. If he doesn’t confirm, the second nearest dealer will get the order,’ says Weinhofer. Through the multitude of channels offering their products, Stiga has a portfolio of customers, which means a certain degree of diversification. And different customer groups are doing well in different economic climates. ‘The customer group that represents the highest sales improvement at

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Lawn mowers, garden trimmers and other garden products at the lower end are increasingly sold on the internet or through discount retail chains. However, many customers still appreciate the high service level and good product knowledge provided by specialised dealers. Source: Anders Wiklund/Scanpix/Press Association Images

the moment is machine shops, and they are buying Stiga’s multi-purpose implement carriers and other high-end products,’ says Sjögren. Although industrial buyers are buying the majority of the products for SEK 100,000 and more, 80 per cent of the turnover comes from consumers. But these two inherently different groups, which have different purchase criteria, are not the only targets of Stiga’s marketing; so, too, are the dealers who often have the final say in buyers’ purchase decisions. So the purchase situation is very much an industrial buying situation, and that’s the focus of Stiga, although many end customers and users are consumers. ‘If the products are adequately exposed at the right dealers, and if the personnel working there like our products and know they’ll earn some money, we have done what we can to increase our sales. But the basis of this marketing and sales strategy is great products of high quality. That also means more satisfied customers and less problems for the dealers, which is an important explanation of why they like selling our products,’ says Weinhofer. ‘Without doubt, the most important thing is that our dealers like our products, and what we do for them. They make the decisions, they are multi-franchised, and customers are very well informed these days, so we must supply great products, great support and good margins for dealers. If we do that, they will focus on selling our products,’ says Sjögren. ‘They are all multi-franchised and many of our competitors are strong, so we really need to have good relations with them. And we need to be flexible in dealing with different market areas, since the character of the local competition is unique in each market.’ One thing that characterises the industries in which Stiga operates is fluctuating demand, so tools to forecast sales are very valuable. Businesses with little information about future demand – a typical example is ice-cream manufacturers during a Swedish summer with its fluctuating climate – may be very troublesome. If the production volume is too high, heavy discounts might be necessary to sell the overproduction, which in turn creates a very dangerous situation for a premium brand: customers get used to substantial discounts and there is a risk they won’t buy the product at the full retail price. Too low production volumes, on the other hand, are likely to result in extensive delivery times and lower sales. Stiga has a clever system to create sales forecasts and also to get commitment from dealers to sell. ‘We have an incentive programme for the dealers; however, that’s nothing unique. But we also have a web-based competition where they make forecasts about future sales, linked to last year’s sales, and it’s combined with a discount if they sell more. So they really have incentives to make a good forecast, and they are committed to reaching the goals they set,’ Weinhofer says.

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Market research in combination with experience dealing with people at all stages in the distribution system lays the foundation for the strategies applied by Stiga: ‘We are doing a lot of market research. A few years ago we went through a crisis – we were actually one of the companies that suffered substantially at the time of the financial crisis, and we had other problems too, related to a lack of strategic direction in what we were doing. So we carried out an extensive market analysis in five countries. We were running in-depth interviews with users and dealers and, based on that, we created new product, brand and sales strategies,’ Sjögren says. And finally, what are the trends in this industry? ‘More electrical products, less fossil fuel, smaller gardens, but well-maintained gardens, which is a business opportunity for us. But we need to keep in mind that Sweden is different from southern Europe. Most of us take care of our own gardens – in southern Europe, the gardener does it, so the client structure is really different,’ says Sjögren. Source: Interview with Karin Sjögren, Business Unit 1 Global Marketing Manager, and Markus Weinhofer, Global Product Manager; press releases, ‘Stiga 75 year’; other material from Stiga; www.stiga.se, www.ggp-group.com, accessed April 2015.

Business markets In one way or another, most large companies sell to other organisations. Companies such as Aria, Atlas Copco, Google and KPMG sell most of their products and services to other businesses. The public sector is a significant player in business markets – just think of infrastructure projects such as the City Tunnel in Stockholm (SEK 9 billion) or Ostlänken Järna-Linköping (SEK 24 billion), the amount of public money transferred to public and private kindergartens, schools and universities in a year, and public investment in roads (e.g. Kungens Kurva-Akalla at a cost of SEK 27 billion), healthcare and environmental protection. These are a few among many examples. The business market is huge. In fact, business markets involve far more money and items than do consumer markets. Business buyer behaviour refers to the buying behaviour of the organisations that buy goods and services for use in the production of other products and services that are sold, rented or supplied to others. It also includes the behaviour of retailing and wholesaling firms that acquire goods to resell or rent to others at a profit. In the business buying process, business buyers determine which products and services their organisations need to purchase and then find, evaluate and choose among alternative suppliers and brands. Business-to-business (B-to-B) marketers must do their best to understand business markets and business buyer behaviour. Then, like businesses that sell to final buyers, they must build profitable relationships with business customers by creating superior customer value. Business markets operate ‘behind the scenes’ to most consumers. Most of the things you buy involve many sets of business purchases before you ever see them. Think about the large number of business transactions involved in the production and sale of a single set of Nokian tyres. Various suppliers sell Nokian the rubber, steel, equipment and other goods that it needs to produce tyres. Nokian then sells the finished tyres to retailers, who in turn sell them to consumers. Thus, many sets of business purchases were made for only one set of consumer purchases. In addition, Nokian sells tyres as original equipment to manufacturers who install them on new vehicles, and as replacement tyres to companies that maintain their own fleets of company cars, trucks, buses or other vehicles. In some ways, business markets are similar to consumer markets. Both involve people who assume buying roles and make purchase decisions to satisfy needs. However, business markets differ in many ways from consumer markets. The main differences, shown in Table 6.1, are in market structure and demand, the nature of the buying unit, and the types of decisions and the decision process involved.

Business buyer behaviour – The buying behaviour of the organisations that buy goods and services for use in the production of other products and services or to resell or rent them to others at a profit. Business buying process – The decision process by which business buyers determine which products and services their organisations need to purchase.

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Table 6.1  Characteristics of business markets

Market structure and demand Business markets contain fewer but larger buyers Business buyer demand is derived from final consumer demand Demand in many business markets is more inelastic – not affected as much in the short run by price changes Demand in business markets fluctuates more, and more quickly Nature of the buying unit Business purchases involve more buyers Business buying involves a more professional purchasing effort Types of decisions and the decision process Business buyers usually face more complex buying decisions The business buying process is more formalised In business buying, buyers and sellers work more closely together and build close long-term relationships

Market structure and demand

Derived demand – Business demand that ultimately comes from (derives from) the demand for consumer goods.

The business marketer normally deals with far fewer but far larger buyers than the consumer marketer does. Even in large business markets, a few buyers often account for most of the purchasing. For example, when Nokian sells replacement tyres to final consumers, its potential market includes the owners of the millions of cars currently in use in Sweden, Scandinavia, Europe and around the world. But Nokian’s fate in the business market depends on getting orders from one of only a handful of large car makers. Similarly, GGP Group – see the company case at the start of the ­chapter – with Swedish Stiga its flagship brand, sells its lawn tractors, snow throwers and other garden equipment to about 100 countries worldwide.1 To cover all these countries, GGP Group must sell these products through retail customers that include a broad range of channels. Further, business demand is derived demand – it ultimately derives from the demand for consumer goods. Acne and Fillipa K buy fabric because consumers buy their items of clothing. And there is a high correlation between computer sales and computer screen sales – thus, the most efficient way of boosting screen sales is to increase the demand for computers (most people buy laptops but companies and institutions buy a certain amount of desktop computers). If consumer demand for shoes drops, so will the demand for shoe soles. Therefore, B-to-B marketers sometimes promote their products directly to final consumers to increase B-to-B demand. Many business markets have inelastic demand; that is, total demand for many business products is not affected much by price changes, especially in the short run. A drop in the price of leather will not cause shoe manufacturers to buy much more leather unless it results in lower shoe prices, which, in turn, will increase consumer demand for shoes. Just as a 50 per cent discount on spare parts would hardly boost sales of shock absorbers or exhaust pipes for cars, since demand is almost perfectly derived from the old shock absorbers or exhaust pipe wearing out – regardless of whether the buyer is a consumer or a business. Finally, business markets have more fluctuating demand. The demand for many business goods and services tends to change more – and more quickly – than the demand for consumer goods and services. A small percentage increase in consumer demand can cause large increases in business demand.

Nature of the buying unit Compared with consumer purchases, a business purchase usually involves more decision participants and a more professional purchasing effort. Often, business buying is done by 164

Business markets

The demand for fabric is derived from the demand for clothing – and the same holds for many other products: much of the demand in industrial markets is derived from ­consumer demand. Source: Johner Images/Alamy

trained purchasing agents who spend their working lives learning how to buy better. The more complex the purchase, the more likely it is that several people will participate in the ­decision-making process. Buying committees made up of technical experts and top management are common in the buying of major goods. Beyond this, B-to-B marketers now face a new breed of higher-level, better-trained supply managers. Therefore, companies must have welltrained marketers and salespeople to deal with these well-trained buyers.

Types of decisions and the decision process Business buyers usually face more complex buying decisions than do consumer buyers. Business purchases often involve large sums of money, complex technical and economic considerations, and interactions among many people at many levels of the buyer’s organisation. The business buying process also tends to be more formalised than the consumer buying process. Large business purchases usually call for detailed product specifications, written purchase orders, careful supplier searches and formal approval. Finally, in the business buying process, the buyer and seller are often much more dependent on each other. B-to-B marketers may roll up their sleeves and work closely with their customers during all stages of the buying process – from helping customers define problems, to finding solutions, to supporting after-sales operation. They often customise their offerings to individual customer needs. In the short run, sales go to suppliers who meet buyers’ immediate product and service needs. In the long run, however, B-to-B marketers keep a customer’s sales and create customer value by meeting current needs and by partnering with customers to help them solve their problems. 165

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In recent years, relationships between customers and suppliers have been changing from downright adversarial to close and chummy. In fact, many customer companies are now practising supplier development, systematically developing networks of supplier-partners to ensure an appropriate and dependable supply of products and materials that they will use in making their own products or will resell to others. IKEA doesn’t just buy from its suppliers, it involves them deeply in the process of delivering a stylish and affordable lifestyle to IKEA’s customers.

Best practice IKEA: involving suppliers from start to finish IKEA, the world’s largest furniture retailer, is the quintessential global cult brand. Customers from Beijing to Moscow to Middletown, Ohio, flock to the €29 billion Scandinavian retailer’s more than 360 huge stores in almost 50 countries, drawn by IKEA’s trendy but simple and practical furniture at affordable prices. But IKEA’s biggest obstacle to growth isn’t opening new stores and attracting customers. Rather, it’s finding enough of the right kinds of suppliers to help design and produce the billions of SEK of affordable goods that those customers will carry out of its stores. IKEA doesn’t just rely on spot suppliers who might be available when needed. Instead, it has systematically developed a robust network of supplier-partners that reliably provide the more than 10,000 items it stocks. IKEA’s designers start with a basic customer value proposition. Then, they find and work closely with key suppliers to bring that proposition to market. And IKEA does more than just buy from suppliers; it also involves them deeply in the process of designing and making stylish but affordable products to keep IKEA’s customers coming back.2

Business buyer behaviour At the most basic level, marketers want to know how business buyers will respond to various marketing stimuli. Business buying decisions can range from routine to incredibly complex, involving only a few or very many decision-makers and buying influences. Figure 6.1 shows a model of business buyer behaviour. In this model, marketing and other stimuli affect the buying organisation and produce certain buyer responses. These stimuli enter the organisation and are turned into buyer responses. In order to design good marketing strategies, the marketer must understand what happens within the organisation to turn stimuli into purchase responses. Within the organisation, buying activity consists of two major parts: the buying centre, made up of all the people involved in the buying decision, and the buying decision process. The model shows that the buying centre and the buying decision process are influenced by ­internal organisational, interpersonal and individual factors as well as by external environmental factors. The model in Figure 6.1 suggests four questions about business buyer behaviour: what buying decisions do business buyers make; who participates in the buying process; what are the major influences on buyers; and how do business buyers make their buying decisions? 166

Business buyer behaviour

The environment Marketing stimuli

Other stimuli

Product

Economic

Price

Technological

Place

Political

Promotion

Cultural Competitive

The buying organisation

Buyer responses

The buying centre

Product or service choice

Buying decision process (Interpersonal and individual influences) (Organisational influences)

Figure 6.1 A model of business buyer behaviour

Supplier choice Order quantities Delivery terms and times Service terms Payment

Major types of buying situations Business buying situations may be conceptualised on a continuum.3 At one extreme is the straight rebuy, which is a fairly routine decision. At the other extreme is the new task, which may call for thorough research. In the middle is the modified rebuy, which requires some research. In a straight rebuy, the buyer reorders something without any modifications. It is usually handled on a routine basis by the purchasing department. Based on past buying satisfaction, the buyer simply chooses from the various suppliers on its list. ‘In’ suppliers try to maintain product and service quality. They often propose automatic reordering systems so that the purchasing agent will save reordering time. ‘Out’ suppliers try to find new ways to add value or exploit dissatisfaction so that the buyer will consider them. The rebuy may represent significant sums of money, e.g. fuel for a petrol station or frozen food, fruit and vegetables for a major ICA Maxi store, but the purchase decision doesn’t need an overly qualified decision-maker – product specifications, prices, terms of delivery etc. have already been negotiated. In a modified rebuy, the buyer wants to modify product specifications, prices, terms or suppliers. The modified rebuy usually involves more decision participants than does the straight rebuy. The in suppliers may become nervous and feel pressured to put their best foot forward to protect an account. Out suppliers may see the modified rebuy situation as an opportunity to make a better offer and gain new business. Switching costs may give in suppliers an advantage, e.g., when buying an enterprise system for a subsidiary. A company buying a product or service for the first time faces a new-task situation. In such cases, the greater the cost or risk, the larger the number of decision participants and the greater their efforts to collect information. The new-task situation is the marketer’s greatest opportunity and challenge. The marketer not only tries to reach as many key buying influences as possible but also provides help and information.

Straight rebuy – A business buying situation in which the buyer routinely reorders something without any modifications.

Modified rebuy – A business buying situation in which the buyer wants to modify product specifications, prices, terms or suppliers. New-task – A business buying situation in which the buyer purchases a product or service for the first time.

Many business buyers prefer to buy a complete solution to a problem from a single seller instead of buying separate products and services from several suppliers and putting them together. New suppliers may have advantages but there are also risks. Think of Scania, who have a long track record of superior product quality. Procurement costs could be reduced significantly by always choosing the cheapest offer – however, Scania’s reputation and business model would be at stake. The sale often goes to the firm that provides the most complete system for meeting the customer’s needs and solving its problems. Such systems selling (or solutions selling) is often a key business marketing strategy for winning and holding accounts. It helps customers to solve problems and focus on the core business. For instance, transportation and logistics giant UPS does more than just ship packages for its business customers. It develops entire solutions to customers’ transportation and logistics problems.

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Participants in the business buying process

Users – Members of the buying organisation who will use the product or service. Influencers – People in an organisation’s buying centre who affect the buying decision; they often help define specifications and also provide information for evaluating alternatives. Buyers – Members of the buying organisation who make a purchase. Deciders – People in an organisation’s buying centre who have formal or informal power to select or approve the final suppliers. Gatekeepers – People in an organisation’s buying centre who control the flow of information to others.

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Who does the buying of the trillions of dollars’ worth of goods and services needed by business organisations? The decision-making unit of a buying organisation is called its buying centre – all the individuals and units that play a role in the business purchase ­decision-making process. The buying centre includes all members of the organisation who play any of five roles in the purchase decision process:4 ●●

Users are members of the organisation who will use the product or service. In many cases, users initiate the buying proposal and help define product specifications. Approaching users instead of the formal buying unit may be a smart selling strategy: the user might then help the seller put pressure on managers to buy a product or service.

●●

Influencers often help define specifications and also provide information for evaluating alternatives. Technical personnel are particularly important influencers, but so are other employees with a lot of knowledge about the product in question and who are keen to solve the issue at hand, e.g. a passionate Apple user who attempts to change the company policy towards accepting Apple computers.

●●

Buyers have formal authority to select the supplier and arrange terms of purchase. Buyers may help to shape product specifications, but their major role is in selecting vendors and negotiating. In more complex purchases, buyers might include high-level officers participating in the negotiations.

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Deciders have formal or informal power to select or approve the final suppliers. In routine buying, the buyers are often the deciders, or at least the approvers.

●●

Gatekeepers control the flow of information to others. For example, purchasing agents often have authority to prevent salespeople from seeing users or deciders. Other gatekeepers include technical personnel and even personal secretaries.

The buying centre is not a fixed and formally identified unit within the buying organisation. It is a set of buying roles assumed by different people for different purchases. Within the organisation, the size and make-up of the buying centre will vary for different products and for different buying situations. For some routine purchases, one person may assume all the buying centre roles and serve as the only person involved in the buying decision (cf straight rebuy). For more complex purchases, the buying centre may include 20 or 30 people from different levels and departments in the organisation. Consider the case of selling JAS aircraft to Norway or South Africa; 20–30 people may be involved in a selling process that lasts for years, and still the result may be zero sales. The buying centre concept presents a major marketing challenge. The business marketer must learn who participates in the decision, each participant’s relative influence, and what evaluation criteria each decision participant uses. This can be difficult. The buying centre usually includes some obvious participants who are involved formally in the buying decision. For example, the decision to buy a corporate jet will probably involve the company’s CEO, chief pilot, a purchasing agent, some legal staff, a member of top management and others formally charged with the buying decision. It may also involve less obvious, informal participants, some of whom may actually make or strongly affect the buying decision. Sometimes, even the people in the buying centre are not aware of all the buying participants. For example, the decision about which corporate jet to buy may actually be made by a corporate board member who has an interest in flying and who knows a lot about airplanes – a situation similar to that of a wealthy person buying a SEK 700,000 car who makes the decision by asking a knowledgeable friend. The board member who is interested in flying may work hard behind the scenes to sway the decision. Many business buying decisions result from the complex interactions of ever-changing buying centre participants. And one should be aware of the tendency among experts to suggest products that are more pricy than the user actually needs.

Business buyer behaviour

Major influences on business buyers Business buyers are subject to many influences when they make their buying decisions. Some marketers assume that the major influences are economic. They think buyers will favour the supplier who offers the lowest price or the best product or the most service, so marketers are expected to concentrate on offering strong economic benefits to buyers. This view reflects a belief that business buying is a rational process with every decision based on reason. However, business buyers actually respond to both economic and personal factors. Far from being cold, calculating and impersonal, business buyers are human and social as well. They react to both reason and emotion. For instance, it has been suggested that Pehr G. Gyllenhammar, CEO of Volvo Cars in the 1970s and 1980s, chose French Renault instead of German Audi as a partner, partly because he enjoyed the French culture, climate and food more than the German equivalent. Today, most B-to-B marketers recognise that emotion plays an important role in business buying decisions. All types of companies – whether they sell medical equipment to primary healthcare, books to secondary schools, air conditioners to public museums or car fleet finance – share the experience that great sales people have a substantial influence on sales volume and customer satisfaction. A great sales force may result in higher prices and margins, and an increased sales volume. When suppliers’ offers are very similar, business buyers have little basis for a strictly rational choice. Because they can meet organisational goals with any supplier, buyers can allow personal factors to play a larger role in their decisions. However, when competing products differ greatly, business buyers are more accountable for their choices and tend to pay more attention to economic factors. Figure 6.2 lists various groups of influences on business buyers – environmental, organisational, interpersonal and individual.5

Environmental factors Business buyers are heavily influenced by factors in the current and expected economic ­environment, such as the level of primary demand, the economic outlook and the cost of money. Another environmental factor is shortages in key materials. Many companies are now more willing to buy and hold larger inventories of scarce materials to ensure adequate supply. Today’s just-in-time orientation makes businesses very sensitive to supply shortages. Business buyers also are affected by technological, political and competitive developments in the environment, just like consumers. Finally, culture and customs can strongly influence business buyer reactions to the marketer’s behaviour and strategies. The business buyer must watch these factors, determine how they will affect the buyer, and try to turn these challenges into opportunities.

Environmental Economic developments

Organisational Objectives

Interpersonal

Technological change

Policies

Authority

Procedures

Status

Political and regulatory developments

Organisational structure

Empathy

Competitive developments

Systems

Supply conditions

Persuasiveness

Individual Age Income Education Job position Personality Risk attitudes

Buyers

Culture and customs Figure 6.2  Major influences on business buyer behaviour

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Organisational factors Each buying organisation has its own objectives, policies, procedures, structure and systems, and the business marketer must understand these factors well. Questions such as the following arise. How many people are involved in the buying decision? Who are they? What are their evaluative criteria? What are the company’s policies and limits on its buyers?

Interpersonal factors The buying centre usually includes many participants who influence each other, so interpersonal factors also influence the business buying process. However, it is often difficult to assess such interpersonal factors and group dynamics without knowledge from inside the company. Buying centre participants do not wear tags that label them as ‘key decision-maker’ or ‘not influential’. Nor do buying centre participants with the highest rank always have the most influence. Participants may influence the buying decision because they control rewards and punishments, are well liked, have special expertise or have a special relationship with other important participants. Interpersonal factors are often very subtle. Formal and informal structures and decision-makers must be understood. The formal ­decision-maker may well be fed up with letters, phone calls and other attempts to sell to them and may throw any advertising material in the bin. The informal decision-maker may not be identifiable without some inside information on how the organisation ‘really works’. For example, the person making the buying decisions about PCs in a major Swedish university could formally be employed as a secretary, which is the information you will get from the organisation chart. Meanwhile the formal decision-maker, as identified on the organisation chart, may know very little at all about computers. Business marketers must try to understand these factors and design strategies that take them into account.

Individual factors Each participant in the business buying decision process brings in personal motives, ­perceptions and preferences. These individual factors are affected by personal characteristics such as age, income, education, professional identification, personality and attitudes towards risk. Also, buyers have different buying styles. Some may be technical types who make in-depth analyses of competitive proposals before choosing a supplier. Other buyers may be intuitive negotiators who are adept at pitting the sellers against one another for the best deal. Like in consumer markets – buyers are inherently different and marketers need to make use of that.

The business buying process Figure 6.3 lists the eight stages of the business buying process.6 Buyers who face a new-task buying situation usually go through all stages of the buying process. Buyers making modified or straight rebuys may skip some of the stages. We will examine these steps for the typical new-task buying situation. Problem recognition – The first stage of the business buying process in which someone in the company recognises a problem or need that can be met by acquiring a good or a service.

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Problem recognition The buying process begins when someone in the company recognises a problem or need that can be met by acquiring a specific product or service. Problem recognition can result from internal or external stimuli. Internally, the company may decide to launch a new product that requires new production equipment and materials. Or a machine may break down and need new parts. Perhaps a purchasing manager is unhappy with a current supplier’s product quality, service or prices. Externally, the buyer may get some new ideas at a trade show or from an

Business buyer behaviour

Problem recognition

General need description

Product specification

Supplier search

Proposal solicitation

Supplier selection

Order-routine specification

Performance review

Figure 6.3  Stages of the business buying process

appointment with former student mates, see an advert or receive a call from a salesperson who offers a better product or a lower price. In fact, in their advertising, business marketers often alert customers to potential problems and then show how their products provide solutions. For example, a Sharp advert notes that a multifunction printer can present data security problems and asks ‘Is your MFP a portal for identity theft?’ The solution? Sharp’s data security kits ‘help prevent sensitive information from falling into the wrong hands’.

General need description Having recognised a need, the buyer next prepares a general need description that describes the characteristics and quantity of the needed item. For standard items, this process presents few problems. For complex items, however, the buyer may need to work with others – engineers, users, consultants – to define the item. The team may want to rank the importance of reliability, durability, price and other attributes desired in the item. In this phase, the alert business marketer can help the buyers define their needs and provide information about the value of different product characteristics.

General need d ­ escription – The stage in the business buying process in which the company describes the characteristics and quantity of the needed item.

Product specification The buying organisation next develops the item’s technical product specifications, often with the help of a value analysis engineering team. Product value analysis is an approach to cost reduction in which components are studied carefully to determine if they can be redesigned, standardised or made by less costly methods of production. The team decides on the best product characteristics and specifies them accordingly. Sellers, too, can use value analysis as a tool to help secure a new account. By showing buyers a better way to make an object, outside sellers can turn straight rebuy situations into new-task situations that give them a chance to obtain new business. Organisations that are new players in competitive markets, e.g. municipalities outsourcing public transport or the health administration in a country outsourcing primary healthcare, may lack experience and make costly mistakes in this phase. It is very important that the general need description and product specification are written with care, particularly for those organisations not used to doing it, and that agreements are written in the interest of suppliers only.

Supplier search The buyer now conducts a supplier search to find the best vendor, by reviewing trade ­directories, doing computer searches, phoning other companies for recommendations or using internet services that connect buyers and suppliers. The newer the buying task, and the more complex and costly the item, the greater the amount of time the buyer will spend searching for suppliers. The supplier’s task is to build a good reputation in the marketplace, get listed in major offline and online directories, and make sure they feature prominently in any Google search. 171

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Proposal solicitation In the proposal solicitation stage of the business buying process, the buyer invites qualified suppliers to submit proposals. In response, some suppliers will send only a catalogue or a salesperson. However, when the item is complex or expensive, the buyer will usually require detailed written proposals or formal presentations from each potential supplier. Business marketers must be skilled in researching, writing and presenting proposals in response to buyer proposal solicitations. Proposals should be marketing documents, not just technical documents. Presentations should inspire confidence and should make the marketer’s company stand out from the competition. Fast delivery may be critical – increasingly, consumers and business buyers are frustrated when they have to wait too long for a response.

Supplier selection The members of the buying centre now review the proposals and select a supplier or suppliers. During supplier selection, the buying centre will often draw up a list of the desired supplier attributes and their relative importance. Such attributes include product and service quality, reputation, on-time delivery, ethical corporate behaviour, honest communication and competitive prices. The members of the buying centre will rate suppliers against these attributes and identify the best suppliers. Buyers may attempt to negotiate with preferred suppliers for better prices and terms before making the final selections. Many buyers prefer multiple sources of supply to avoid being totally dependent on one supplier and to allow comparisons of prices and performance of several suppliers over time. If a supplier knows their supply is critical to the customer’s production, it puts them in a position of power that may ultimately damage the customer.

Order-routine specification The buyer now prepares an order-routine specification. It includes the final order with the chosen supplier or suppliers and lists items such as technical specifications, quantity needed, expected time of delivery, return policies and warranties. In the case of maintenance, repair and operating items, buyers may use blanket contracts rather than periodic purchase orders. A blanket contract creates a long-term relationship in which the supplier promises to resupply the buyer as needed at agreed prices for a set time period. Many large buyers now practise vendor-managed inventory, in which they turn over ordering and inventory responsibilities to their suppliers. Under such systems, buyers share sales and inventory information directly with key suppliers. The suppliers then monitor inventories and replenish stock automatically as needed.

Performance review In this stage, the buyer reviews supplier performance. The buyer may contact users and ask them to rate their satisfaction. Increasingly, such reviews may be conducted on the internet. The performance review may lead the buyer to continue, modify or drop the arrangement. The seller’s job is to monitor the same factors used by the buyer to make sure that they are giving the expected satisfaction. The eight-stage buying-process model provides a simple view of business buying as it might occur in a new-task buying situation. The actual process is usually much more complex. Emotions can have a substantial influence over some decisions, thus in a sense disturbing the rational buying process. In the modified rebuy or straight rebuy situation, some of these stages would be compressed or bypassed. Each organisation buys in its own way, and each buying situation has unique requirements. Different buying centre participants may be involved at

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Institutional and government markets

different stages of the process. Although certain buying-process steps usually do occur, buyers do not always follow them in the same order, and they may add other steps. Finally, a customer relationship might involve many different types of purchases ongoing at a given time, all in different stages of the buying process. The seller must manage the total customer relationship, not just individual purchases. Like many models, it won’t reflect the unique characteristics of each organisation, but it is a good starting point for understanding the phenomenon and developing your own methods.

E-procurement E-procurement, i.e. electronic purchasing, has grown rapidly in recent years and gives buyers access to new suppliers, lowers purchasing costs, and hastens order processing and delivery. In turn, business marketers can connect with customers online to share marketing information, sell products and services, provide customer support services and maintain ongoing customer relationships. Companies can do e-procurement in any of several ways. They can conduct reverse ­auctions, in which they put their purchasing requests online and invite suppliers to bid for the business. Or they can engage in online trading exchanges, through which companies work collectively to facilitate the trading process. Companies can conduct e-procurement by setting up their own company buying sites. For example, General Electric operates a company trading site on which it posts its buying needs and invites bids, negotiates terms and places orders. Or companies can create extranet links with key suppliers, e.g. by creating direct procurement accounts with suppliers. Business-to-business e-procurement yields many benefits. First, it shaves transaction costs and results in more efficient purchasing for both buyers and suppliers. A web-powered purchasing programme eliminates the paperwork associated with traditional requisition and ordering procedures and helps an organisation keep better track of all purchases. E-­procurement reduces the time between order and delivery. Time savings are particularly dramatic for companies with many overseas suppliers. Finally, e-procurement frees purchasing staff to focus on more strategic issues. For many purchasing professionals, going online means reducing drudgery and paperwork and spending more time managing inventory and working creatively with suppliers. ‘That is the key,’ says an HP purchasing executive. ‘You can now focus people on value-added activities. Procurement professionals can now find different sources and work with suppliers to reduce costs and to develop new products.’7 E-procurement also presents some problems. For example, at the same time that the internet makes it possible for suppliers and customers to share business data and even collaborate on product design, it can also erode decades-old customer–supplier relationships. Many buyers now use the power of the web to pit suppliers against one another and to search out better deals, products, and turnaround times on a purchase-by-purchase basis. Without doubt, e-­procurement contributes to decreasing loyalty: proactive actors are likely to benefit, while reactive actors relying on long-term relationships and success in the past are likely to suffer. As a seller, you may be reluctant to join the e-procurement train since your position will get weaker. E-procurement takes the buyer’s perspective and focuses on price to a sufficient quality rather than giving the seller the opportunity to demonstrate and get paid for features and advantages that a product may have.

E-procurement – Purchasing through ­electronic ­connections between buyers and sellers – usually online.

Institutional and government markets So far, our discussion of organisational buying has focused largely on the buying behaviour of business buyers. Much of this discussion also applies to the buying practices of institutional and government organisations, but they have additional characteristics and needs.

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Many marketers set up separate divisions to meet the special characteristics and needs of institutional and governmental buyers.

Institutional markets Institutional market – Schools, hospitals, nursing homes, prisons and other institutions that provide goods and services to people in their care.

The institutional market consists of schools, hospitals, nursing homes, prisons and other institutions that provide goods and services to people in their care. Institutional markets can be huge, but many of them are characterised by low budgets and captive patrons. For example, hospital patients have little choice but to eat whatever food the hospital supplies. A hospital purchasing agent has to decide on the quality of food to buy for patients. Because the food is provided as a part of a total service package, the buying objective is not profit. Nor is strict cost minimisation the goal – patients receiving poor-quality food will complain to others and damage the hospital’s reputation. Thus, the hospital purchasing agent must seek out ­institutional-food vendors whose quality meets or exceeds a certain minimum standard and whose prices are low. In this sector, it is often difficult to offer higher quality through higher prices. Swedish public transport is provided by a number of companies, e.g. Nobina/Swebus, Connex and BussLink. To keep their contracts, these transport companies need to adhere to certain quality standards. However, there are no financial incentives to improve quality. Says the CFO of a Swedish public transportation provider: ‘Cost-effectiveness is the only strategy that works, since cost is the overriding criterion when we get a contract, quality is only a subcriterion.’

Government markets Government market – Government units – national, regional and local – that purchase or rent goods and services for carrying out the main ­functions of ­government.

The government market offers large opportunities for many companies, both big and small. In most countries, government organisations are major buyers of goods and services. Government buying and business buying are similar in many ways. But there are also differences. To succeed in the government market, sellers must understand the political decision process which is linked to the buying decision process in government markets. Consider the legislation on public procurement, supervised by the Swedish Competition Authority.

Legislation issues Government organisations – more so than major companies – tend to favour domestic suppliers over foreign suppliers. A major complaint of multinationals operating in Europe has been that each country shows favouritism towards its nationals in spite of superior offers from foreign firms. The European Economic Commission is gradually removing this bias by imposing the legislation described here. For several years, legislation that regulates public spending has been in place. Based on European Commission competition legislation, the Swedish Public Procurement Act translates the ideas into Swedish Law. The Act regulates almost all public procurement, which means that contracting entities, such as local government agencies, county councils, government agencies and publicly owned companies must comply with the Act when they purchase, lease, rent or hire-purchase supplies, services and public works. This piece of legislation places many restrictions on public buying: five principles of European Union law apply. The principle of non-discrimination prohibits all discrimination based on nationality. No contracting entity may, for example, give preference to a local company simply because it is located in the municipality.

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Legislation issues

New Karolinska Solna (http:// www.nyakarolinskasolna.se/ sv/Aktuellt/Nyheter/Kostnader-for-Nya-Karolinska-Solna-/), established in 2016, is a large undertaking. The cost of the building is estimated to be 14.5 billion SEK, and 22.8 billion SEK will be the total project establishment cost. Illustration: White Tengbom Team. Source: Karolinska University Hospital

According to the principle of equal treatment all suppliers must be treated equally. All s­ uppliers involved in a procurement procedure must, for example, be given the same information at the same time. Even informal phone calls and e-mail correspondence that go beyond answering basic questions may be harmful to this principle. According to the principle of transparency the procurement process must be characterised by predictability and openness. In order to ensure equal conditions for tenderers, the contract document has to be clear and unambiguous and contain all the requirements concerning the items to be procured. The principle of proportionality states that qualification requirements must have a natural relation to the supplies, services or works procured and not be disproportionate. Thus, qualifications that can only be fulfilled by local suppliers, e.g. ‘the supplier must contribute to the growth of the Nyköping municipality’, are not allowed. The principle of mutual recognition means, among other things, that documents and certificates issued by the appropriate authorities in an EU Member State must be accepted in the other Member States. Thus, a local government can’t use the following line of argument: ‘The products we procure must pass tests conducted by the FOI (Swedish Defence Research Agency)’, implying that tests conducted by the Spanish agency are worthless. All these principles must be considered by governmental buyers, and although not every purchase transaction will take these principles completely into account, they still have a strong impact on government buying in the European Union. Like consumer and business buyers, government buyers are affected by environmental, organisational, interpersonal and individual factors. One unique thing about government buying is that it is carefully watched by outside publics interested in how the government spends taxpayers’ money. Because their spending decisions are subject to public review, government organisations require considerable paperwork from suppliers, who often complain about excessive paperwork, bureaucracy, regulations, decision-making delays and frequent shifts in procurement personnel. Given all the red tape, why would any firm want to do business with the government? The reasons are quite simple: as we stated at the beginning of the chapter, purchases by ­governments are huge.

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Summary Business markets and consumer markets are alike in some key ways, but business markets also differ in many ways from consumer markets. The business market comprises all organisations that buy goods and services for use in the production of other products and services or for the purpose of reselling or renting them to others at a profit. As compared with consumer markets, business markets usually have fewer, larger buyers who are more geographically concentrated. Business demand is largely derived demand, and the business buying decision usually involves more, and more professional, buyers. Business buyers make decisions that vary with the three types of buying situations – straight rebuys, modified rebuys and new tasks. The decision-making unit of a buying organisation – the buying centre – can consist of many different people playing many different roles. The business marketer needs to know the following. Who are the major buying centre participants? In what decisions do they exercise influence and to what degree? What evaluation criteria does each decision participant use? The business marketer also needs to understand the major environmental, organisational, interpersonal and individual influences on the buying process. The business buying decision process itself can be quite involved, with eight basic stages: problem recognition, general need description, product specification, supplier search, proposal solicitation, supplier selection, order-routine specification and review. Buyers who face a new-task buying situation usually go through all stages of the buying process. Buyers making modified or straight rebuys may skip some of the stages. However, decision-makers are not always as rational and sequential as the model suggests. The institutional market comprises schools, hospitals, prisons and other institutions that provide goods and services to people in their care. These markets are characterised by low budgets and captive patrons. The government market, which is vast, consists of government units – national, regional and local – that purchase or rent goods and services for carrying out the main functions of government. Government buyers purchase products and services for defence, education, public welfare and other public needs. Government buyers operate under the watchful eye of voters, politicians, media and private watchdog groups. Hence, they tend to require more forms and signatures, and to respond more slowly and deliberately when placing orders.

Key terms Business buyer behaviour

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Gatekeepers 168

Business buying process

163

Problem recognition

170

Derived demand

164

General need description

171

Supplier development

166

Product specifications

171

Straight rebuy

167

Supplier search

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Modified rebuy

167

Proposal solicitation

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New-task 167

Supplier selection

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Systems selling (solutions selling)

167

Order-routine specification

172

Buying centre

168

Performance review

172

Users 168

E-procurement 173

Influencers 168

Institutional market

174

Buyers 168

Government market

174

Deciders 168

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Focus on technology

Discussing the concepts 1. Compare and contrast business and consumer markets. 2. Discuss several ways in which a straight rebuy differs from a new-task situation. 3. In a buying centre purchasing process, which buying centre participant is most likely to make each of the following statements? ●●

‘This bonding agent better be good, because I have to put this product together.’

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‘I specified this bonding agent on another job, and it worked for them.’

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‘Without an appointment, no sales rep gets in to see Ms Svensson.’

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‘Okay, it’s a deal – we’ll buy it.’

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‘I’ll place the order first thing tomorrow.’

4. List the major influences on business buyer behaviour. Why is it important for the ­business-to-business marketer to ­understand these major influences? 5. Name and briefly describe the stages of the business buying process. 6. Suggest a few problems that may arise when using business buying process approaches. 7. How do the institutional and government markets differ from business markets?

Applying the concepts 1. Interview a businessperson to learn how purchases are made in his or her organisation. Ask this person to describe a straight rebuy, a modified rebuy and a new-task buying situation that took place recently or of which he or she is aware (define them if necessary). Did the buying process differ based on the type of product or purchase situation? Ask the businessperson to explain the role he or she played in a recent purchase and to discuss the factors that influenced the decision. Write a brief report of your interview by applying the concepts you learned in this chapter regarding business buyer behaviour. 2. Government procurement (buying goods and services for the government) is big business. It is a massive part of international trade, given the considerable size of the procurement market (often 10–15 per cent of the GDP of countries), and the process benefits domestic and foreign stakeholders in terms of increased competition. The process is also prone to corruption, however. The efforts of the World Trade Organization (WTO) to create transparent and non-discriminatory procurement ­procedures are generally considered to be the best tool to achieve ‘value for money’ because they optimise competition among suppliers. To an extent, the European Union efforts and legislation contribute to competition. Go to the WTO’s website (http://www.wto.org) and read about government procurement. Then write a brief report on three major areas of the WTO’s work in relation to this issue.

Focus on technology In today’s competitive marketplace, many businesses strive to cut costs. One solution is for business buyers to drive down supplier prices. Online reverse auctions allow businesses to do this more efficiently and effectively. Reverse auctions, often called e-auctions, are conducted online with the buyer and seller roles reversed. Buyers announce auctions months in advance and vendors qualify to participate. During the live online auction, suppliers have a short time in which to bid down their prices anonymously. Such auctions started in the aerospace and automotive industries to reduce costs on commodity parts but

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have now spread to other industries. Buyers don’t always go with the lowest bidder, but the process puts pressure on suppliers to reduce prices and, in turn, reduce their own costs to maintain profitability. Although heralded as a ‘best practices’ tool by some, reverse auctions are loathed by others. Some suppliers, bitten by the reverse auctions bug of their customers, turn around and reduce costs by requiring such auctions for their own suppliers. 1. Discuss at least three pros and cons of reverse auctions for buyers. Do the same for suppliers. Are reverse auctions used by businesses you know of? Ask a few companies to find out! 2. How can a supplier succeed in reverse auctions? How can it avoid them altogether?

Focus on ethics China is an emerging economic giant with almost endless potential for business opportunities. G ­ uan xi – meaning ‘connections’ or ‘relationships’ – is a Chinese way of doing business and is practically considered an art form there. It involves exchanging ‘favours’ when you need something done. Many Chinese businesspeople see it as a way to solidify relationships, get things done and cultivate well-being. To Westerners, however, it often looks more like graft in the form of bribery, nepotism, gift-giving and kickbacks. Transparency International, a German-based corruption watchdog, ranks China along with India, Russia, Taiwan, Turkey, Malaysia and South Africa as the countries with the most rampant corruption. However, China is cracking down by enacting stricter anti-corruption laws and prosecuting violators. Several Chinese public sector employees have been executed for taking bribes. Middle managers and local governments, in particular, may be involved in corruption and similar in the likes of China, but it’s difficult to control because the country is vast and consists of many subcultures. 1. Discuss the ethical standards, in general terms, of Denmark, Germany, Italy, Russia, China and New Zealand. You are likely to come up with some interesting ideas. 2. Is it right for countries to impose their ethical views and behaviour on other cultures, such as China? Give your reasons. 3. What are the consequences for overseas companies that refuse to engage in less-than-ethical practices that foreign businesses or governments expect or that competitors use in foreign markets?

References 1 Stiga’s and GGP Group’s homepage (April 2015). Various press releases from the GGP Group. 2 IKEA Press releases, 2014 and 2015. 3 Patrick J. Robinson, Charles W. Faris and Yoram Wind, Industrial Buying Behavior and Creative Marketing (Boston: Allyn & Bacon, 1967). Also see James C. Anderson and James A. Narus, Business Market Management, 2nd edn (Upper Saddle River, NJ: Prentice Hall, 2004, Ch. 3); and James C. Anderson, James A. Narus and Wouter van Rossum, ‘Customer value propositions in business markets’, Harvard Business Review (March 2006, pp. 91–9); and Philip Kotlerand Kevin Lane Keller, Marketing Management, 13th edn (Upper Saddle River, NJ: Prentice Hall, 2009, Ch. 7). 4 See Frederick E. Webster Jr. and Yoram Wind, Organizational Buying Behavior (Upper Saddle River, NJ: Prentice Hall, 1972, pp. 78–80). Also see James C. Anderson and James A. Narus, Business Market Management: Understanding, Creating and Delivering Value (Upper Saddle River, NJ: Prentice Hall, 2004, Ch. 3); Jorg Brinkman and Markus Voeth, ‘An analysis of buying center decisions through the sales force’, Industrial Marketing Management (October 2007, p. 998); and Philip Kotler and Kevin Lane Keller, Marketing Management, 13th edn (Upper Saddle River, NJ: Prentice Hall, 2009, pp. 188–91). 5 See Frederick E. Webster, Jr. and Yoram Wind, Organizational Buying Behavior (Upper Saddle River, N J: Prentice Hall, 1972, pp. 33–7).

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6 Patrick J. Robinson, Charles W. Faris and Yoram Wind, Industrial Buying Behavior and Creative Marketing [Boston: Allyn & Bacon,1967, p. 14). 7 Michael A. Verespej, ‘E-Procurement explosion’, Industry Week (March 2002, pp. 25–8). For more information on e-procurement, see Amit Gupta, ‘E-procurement trials and triumphs’, Contract Management ( January 2008, pp. 28–35); and Christian Tanner et al., ‘Current trends and challenges in electronic procurement: an empirical study’, Electronic Markets (February 2008, pp. 6–18).

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Chapter

seven

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Segmentation in contemporary markets

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Company case – Spendrups: segmentation and customer orientation that drive the market

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Market segmentation

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Best practice – Baby boomer marketing – not a hot topic for managers?

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Best practice – Targeting the affluent – your wish is their command

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Market targeting

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Best practice – Fast fashion: combining logistics with differentiated marketing

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Differentiation and positioning

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Company case – Staples: smart positioning?

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Mini contents

Source: Lphoto/Alamy

Chapter preview So far, you’ve learned what marketing is and about the importance of understanding consumers and the marketplace environment. With that as background, you’re now ready to delve deeper into marketing strategy and tactics. This chapter looks further into key customer-driven marketing strategy decisions – how to divide up markets into meaningful customer groups (segmentation), choose which customer groups to serve (targeting), create market offerings that best serve targeted customers (differentiation), and position the offerings in the minds of consumers (positioning). The chapters that follow explore the tactical marketing tools – the four Ps – by which marketers bring these strategies to life.

Learning objectives After reading this chapter, you should be able to: 1 Define the major steps in designing a customer-driven marketing strategy: market ­segmentation, targeting, differentiation and positioning. 2 List and discuss the major bases for segmenting consumer and business markets. 3 Explain how companies identify attractive market segments and choose a market-targeting strategy. 4 Discuss how companies differentiate and position their products for maximum competitive advantage in the marketplace.

Segmentation in contemporary markets

Segmentation in contemporary markets Segmentation has always been a crucial aspect of marketing theory and practice. It has even been argued that segmentation is the core idea of marketing: by dividing consumers into different subgroups, the company might create customer offers that serve individual needs and wants, thus serving each subgroup better. The benefits are obvious: the company can reach more customers, since a broader range of offers are developed; it can get more satisfied customers, since offers are developed in accordance with the preferences and desires of a particular segment and; it can be more profitable, since customers are, in general terms, willing to pay higher prices for products that fit with their needs and wants. However, segmentation has changed over time: in conceptual terms, the focus has shifted from structural variables towards behavioural and psychographic variables. And consumers’ purchase criteria have undergone a transition from a rational focus to a broader base of criteria that include emotional factors such as self-realisation, social profiling, and sustainability issues. These changes are reflected in segmentation practice, and they are an unavoidable implication of the changes in the marketplace discussed in earlier chapters: mass marketing is losing its effectiveness, appeal and impact. But many companies have masses of customers to deal with, and an undifferentiated product, so how may a company, under these circumstances, deal with the changes? We start this chapter with a case study on Spendrups, a small family-owned brewery that grew into a leading beverage company. When it comes to targeting and positioning, Spendrups has put many excellent ideas into practice, and the success of the company has been driven not only by applying marketing models but also through entrepreneurship and a great deal of trial and error.

Company case Spendrups: segmentation and customer orientation that drive the market From a small brewery to a beverages company For Spendrups, one of many small actors in the Swedish brewing industry, the future wasn’t really promising back in the 1970s. Main competitor Pripps was owned by the government, with a 70 per cent market share, while Spendrups, in those days called Grängesbergs Bryggeri AB, had a small market share of 2 per cent. Spendrups had limited resources, and industry wisdom suggested it would merge with a bigger brewery or become a supplier to a bigger company. A small player like Spendrups did not, it was argued, have the resources to run its own marketing. But Spendrups didn’t follow the rules of the game. As we will see, the Spendrups brothers, Ulf and Jens, made a number of decisions that actually challenged the received wisdom and made Spendrups successful, although the road to success was characterised by a series of ups and downs and lots of fresh problems. Ever since Mads Pedersen left the village of Spentrup and moved to Copenhagen in 1735, to make a career as a brandy (Brännvin) maker, the history of the Spendrups family has been characterised by courage, challenging the established wisdom and risk-taking, if necessary – in most cases rewarded with success. In 1923, the great-great-grandson of Mads Pedersen, Louis Spendrup, bought the Grängesberg Brewery, which is still the company’s main plant. Louis’ son, Jens Fredrik, enjoyed a period of enormous growth – during the 1950s,

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Spendrups almost doubled its turnover for every year of the decade. However, soon after Louis’ sons, Jens (CEO) and Ulf (vice-CEO and Marketing Manager), took over the Grängesberg facilities in 1976, they faced a serious threat. A year later, the Swedish government decided that the popular mellanol (3.5 per cent alcohol; 4.3 per cent with today’s methods for measuring alcohol percentage in beverages) could not be sold in food stores, a decision that contributed to a 25 per cent loss in beer sales in the Swedish market and which brought another Swedish industry to crisis point. Under these circumstances, Spendrups took the opportunity to drive the market instead of just being market-driven.1 As young and dynamic leaders in an industry with a few big, dominant players, both Jens and Ulf Spendrup were motivated by a desire to take any opportunity to grow and make a profit. Spendrups signed a manufacturing licence agreement with the German firm Löwenbräu, which immediately became the leading premium beer in Sweden, heavily supported by the numerous Löwenbräu references in Ulf Lundell’s very popular first novel, Jack. Although few marketers thought about it at the time, popular culture had a strong impact on the demand for many products. Says Ulf Spendrup, ‘Fortunately, Löwenbräu were not smart enough to check our financial status. Spendrups wasn’t far from bankruptcy.’ Soon, Spendrups had established salespeople and distribution channels that covered the whole of Sweden. In 1979, Spendrup’s Premium II was introduced and the Grängesberg Brewery increased its output by more than 100 per cent in a year. In 1980, Spendrups – which was now also the name of the Grängesberg plant – was Sweden’s third largest brewery. Spendrups continued to grow during the 1980s. In 1989, Warby Brewery outside Stockholm was for sale and Spendrups bought the plant from the Swedish co-operative society Coop. Unfortunately, Coop store managers didn’t stock the products produced in Warby, so Spendrups had to build tighter relations with privately owned retailers such as ICA. Market shares grew, supported by nonalcoholic products – e.g. Loka and Linné – that were introduced and were an immediate success. Spendrup’s market share rose from 16 per cent in 1992 to 23 per cent in 1996. In 1995, Sweden became a member of the EU and there were suddenly fewer restrictions on the sale and marketing of alcoholic beverages. Spendrups started a subsidiary to import wine and spirits, thus making use of its distribution and sales network. Spendrups underwent a transition from a brewery to a company producing all kinds of beverages. ‘You need to identify threats from just about anybody. Pripps had 70 per cent market share back in the 1970s, we had less than 2 per cent. And they said, “Nobody can beat us, we are state-owned and have economies-of-scale advantages.” But the market changed, and we took advantage of that when we launched the premium beer, while they were comfortable with their leading position.’ Although the beer market has become fragmented in terms of the product ranges offered, the industry has been concentrated at the ownership level, through growth and mergers and acquisitions where leading actors have won a stronger position. So how can Spendrups compete under these conditions? ‘Two decades ago, the big four had 19 per cent of the market, now they have 49 per cent. It’s a dramatic change. But I’m not afraid of this development – we use the same manufacturing technology and our Grängesberg operation is of a similar size, but we have one plant and they have 15 or 20. And like them, we make use of global brands and the marketing advantages they entail, through licence manufacturing.’ In recent years, Spendrups has continued to grow into new industries while still serving its core customers and making use of its distribution and sales network. In 2008, Spendrups acquired Hellefors Brewery and took a stake in Bergstrand’s coffee-roasting house, thus being able to offer an overall solution for the restaurant market’s coffee business. In 2009, Spendrups took over sales and distribution of Schweppes.

Market fragmentation and the emergence of lifestyle beer Spendrups has done several things to adapt to the development of a more fragmented, customerdriven and emotional market. Inspired by the great success of Löwenbräu, an early step was taken in 1979 when Spendrups launched a premium beer for Operakällaren – a place frequented by

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celebrities, journalists and others with a significant impact on the consumption culture. The beer had an exclusive label and cork and looked very much like a bottle of champagne. It was slightly more expensive to produce but both Spendrups and Operakällaren enjoyed substantially higher margins. ‘It was very successful, and we earned huge amounts of money,’ says Ulf Spendrup. ‘And competitors understood that the willingness to pay for a premium product was here to stay – we had created a new segment of lifestyle premium beer.’ Spendrups wanted to keep its competitive advantage so it created the Old Gold beer. ‘A super premium beer, with a golden label and a unique, octagonal bottle. From a logistics point of view, not very clever, and it was expensive to produce. But it was perceived to be very exclusive and it was a great sales success.’ Ulf Spendrup gives an example of the trial-and-error strategy: ‘We launched Tingsryd, Mariestad and Ringsbo in 1988. Two of them flopped but Mariestad has been one of our greatest successes.’ And there is a strong reason why the trial-and-error culture has survived. ‘One of our greatest advantages has been our ownership structure – we were on the stock market for a few years but then we left. As we, the Spendrups family, own the company, our employees know that we’ll still be there even though mistakes are being made. In a public company, managers are stressed by shareholders, analysts and journalists – they are afraid of making mistakes and, therefore, they won’t do their best to develop their business. Jens has been CEO here since 1976; during the same period, Pripps have had 17 CEOs and six owners. That’s a big difference.’ Creating a new product means taking risks, and to do that one needs financial resources. Spendrups applied a portfolio perspective. ‘Löwenbräu was the cash cow with high and stable sales volumes through restaurants and Systembolaget.’ Spendrups learned one thing through entering the premium segment. ‘We understood that by creating our own brands, it added image to the breweries that produced the beer, and we as a company enjoyed enormous image advantages. This compensated for our cost disadvantages.’ In 1980, Spendrups decided to try and become Sweden’s leading premium brewery. A SWOT analysis suggested that Spendups couldn’t compete with major competitor Pripps on price, not even with licence-produced Löwenbräu. So there was a need to create more high-margin premium beers in the product portfolio. ‘At the end of the 1980s, young people were drinking Corona, Avesta, NilsOscar, odd Belgium brands; they didn’t want Spendrups, Falken and Pripps. I understood the market was undergoing a process of fragmentation.’ The individualistic consumption culture became much stronger, not least in Sweden, during the 1980s, so why would the beer market be an exception to the development of more fragmented and individualistic tastes? The 1980s was the decade of yuppies and trendsetters who gave image and lifestyle a high priority in their purchase behaviour. ‘Trends started around Stureplan, and I noticed the change early, and I was right. Trends start somewhere and you need to know where to be on track,’ says Ulf Spendrup. Spendrups launched a product offensive, starting with Tingsryd, Risingsbo and Mariestad and later Visby, Visby Pils, Sol from Mexico and many others. Today there are 1,000 products in the portfolio, compared with 150 in the 1970s. Thus, Spendrups is able to offer many more customers with different preferences products they like. ‘At the time, I understood the customer. Now I don’t. Our marketers showed me a beer with a skull recently. It’s very successful and my 20-year-old son loves it! I can’t make these types of judgments any more.’ When a young employee in a red Porsche shows up in the HQ’s car park, Ulf Spendrup says, ‘This marketing guy knows what is happening, and he is very important to us. You need people who are part of the Stureplan culture, where consumption patterns are created.’ This insight is crucial – you need education and marketing concepts on the one hand, but also knowledge of where consumers are, and how consumption cultures are created. That combination explains Spendrup’s success in marketing terms. ‘Like it or not, but the fact is that the consumption culture is driven by musicians and other cultural personalities, who influence young consumers in particular,’ Ulf Spendrup says. ‘You

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need somebody in the company who understands what is happening and the mechanisms that create a successful product that appeals to trendsetters and influential people, those people who really have an influence on how young people buy. And they don’t live in small places like Grängesberg where our main plant is located.’ However, a big marketing department runs the risk of relying more on statistics and aggregated market analysis than on the information that comes from being close to the customer. ‘When you grow bigger as a company you always run the risk of losing the flexibility to adapt to what is going on in the marketplace. It’s more complex today because we are bigger and the product base is more fragmented. Today, 30 brands represent 70 per cent of our sales; a few decades ago 10 brands represented 70 per cent of the sales volume.’ Wine has always been a competitor but not as strong as it is today. ‘Back in the 1980s, drinks became very popular so our beer has since competed with spirits. Whereas I was drinking beer when I was 18 in the 1960s, people around 18 or 20 now drink beer, cider, wine, a mixture. So competition is very much across categories and also according to what is seen as cool at the moment. But we still have to consider the market outside the bigger cities – boys, and girls, who are still buying packs of six or 24 beer cans, Norrlands Guld, Spendrups or Pripps.’ The challenge for the future is to understand what is happening in the market while still watching the cost structures. ‘We need to consolidate our businesses and become more efficient in manufacturing while at the same time being very flexible and alert on the market side.’ As an example of profitability potential, Ulf Spendrup mentions the wine business, which represents only 2 per cent of the beverage volume but 10 per cent of the sales volume and about a quarter of the gross profits. ‘Why should we let somebody else earn this money? We have an infrastructure with logistics, delivery and a salesforce with good relationships with our customers.’ It’s important to focus on the part of the value chain you know, and where you have an advantage. ‘We know the Swedish market, and we know beer brewing, but we would never consider investing in a vineyard. We are in the beverage business, but we will never do everything in that industry. Stay with, and expand, those businesses where you have an advantage over your competitors!’ Ulf Spendrup continues: ‘Much has happened and more is to come. Spendrups is always looking for opportunities and challenges. You can’t have too many options when we talk about beverages, and consumers are likely to be even more fragmented in their tastes in the future.’ To conclude, Spendrups has grown very successful and profitable and its success might be explained by a culture and owner structure that has made room for trial and error; by tough times with scarce financial resources and no choice but to find new solutions; and by an understanding of consumers and how their preferences develop. ‘I’m a person just like anybody, and with a business degree from Lund I was confident to trust my gut feelings. I didn’t see the need for marketing research, and we didn’t have the resources. I trusted my intuition and it proved successful in many cases.’ The Spendrup case generates some valuable insights into how a business can grow in a healthy and viable way over time: 1. Always watch your costs, in every aspect. 2. Know your customers – and those who aren’t but might be – and how their tastes develop. And also know the origin and hub of these changes, to make sure you are ahead of your competitors. 3. Don’t be too afraid of making mistakes, and take chances. But to engage in trial and error, you need to have stable businesses that generate money. Thus, portfolio management is a key aspect of a sound business strategy. Source: Interview with Ulf Spendrup, www.spendrups.se.

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Select customers to serve

Decide on a value proposition

Segmentation Divide the total market into smaller segments

Differentiation Differentiate the market offering to create superior customer value

Targeting Select the segment or segments to enter

Create value for targeted customers

Positioning Position the market offering in the minds of target customers

Figure 7.1  Steps in market segmentation, targeting and positioning

Companies today recognise that they cannot appeal to all buyers in the marketplace, or at least not to all buyers in the same way. Buyers are too numerous, too widely scattered and too varied in their needs and buying practices. Moreover, the companies themselves vary widely in their abilities to serve different segments of the market. A company must identify the parts of the market that it can serve best and most profitably. It must design customer-driven marketing strategies that build the right relationships with the right customers. Thus, most companies have moved away from mass marketing and towards target marketing – identifying market segments, selecting one or more of them, and developing products and marketing programmes tailored to each. Figure 7.1 shows the four major steps in designing a customer-driven marketing strategy. In the first two steps, the company selects the customers that it will serve. Market segmentation involves dividing a market into smaller groups of buyers with distinct needs, characteristics or behaviours that might require separate marketing strategies or mixes. The company identifies different ways to segment the market and develops profiles of the resulting market segments. Market targeting consists of evaluating each market segment’s attractiveness and selecting one or more market segments to enter. In the final two steps, the company decides on a value proposition – how it will create value for target customers. Differentiation involves actually differentiating the firm’s market offering to create superior customer value. Positioning consists of arranging for a market offering to occupy a clear, distinctive and desirable place relative to competing products in the minds of target consumers. We discuss each of these steps in turn.

Market segmentation Market segmentation addresses the first, simple-sounding marketing question: what customers will we serve? The answer will be different for each company. For example, Grand Hotel, Sheraton and Ritz-Carlton target the top 5 per cent of corporate and leisure travellers; Elite and Choice target middle-class business travellers; and Hotel Formulel targets leisure travellers on a limited budget. Buyers in any market differ in their wants, resources, locations, buying attitudes and buying practices. Through market segmentation, companies divide large, heterogeneous markets into smaller segments that can be reached more efficiently and effectively with products and services that match their unique needs. In this section, we discuss four important segmentation topics: segmenting consumer markets, segmenting business markets, segmenting international markets, and requirements for effective segmentation.

Market segmentation – Dividing a market into smaller groups with distinct needs, characteristics, or behaviours that might require separate marketing strategies or mixes. Market targeting – The process of evaluating each market segment’s ­attractiveness and selecting one or more segments to enter. Differentiation – Actually differentiating the market offering to create superior customer value. Positioning – Arranging for a market offering to occupy a clear, distinctive and desirable place relative to competing products in the minds of target consumers.

Segmenting consumer markets There is no single way to segment a market. A marketer has to try different segmentation variables, alone and in combination, to find the best way to view the market structure. Table 7.1 187

Chapter 7  Customer-driven marketing strategy: creating value for target customers

Table 7.1  Major segmentation variables for consumer markets

Variable

Typical breakdowns

Geographic World region or country Country region

Western Europe, Middle East, Pacific Rim, China, India, Canada, Mexico, North America Scandinavia, Sweden, Norway, Finland, BeNeLux, Iberian peninsula (Spain and Portugal), Australia and New Zealand

Size of city or metropolitan area

Metropolitan area (over 1,000,000) Intermediate city area (120,000–1,000,000) – hospital, university, public authorities, company head offices, a reasonable supply of cultural activities etc. Rural area (10,000–100,000), including rural hubs with fewer than 100,000 residents Remote area, at least a 45-minute drive by automobile to the next town

Density

Urban, suburban, exurban, rural

Climate

Northern, southern etc.

Demographic Age (years)

Under 6, 6–11, 12–19, 20–34, 35–49, 50–64, 65+

Generation

Baby boomer including sub-categories, Generation X, Generation Y, the 90s Generation etc.

Gender

Male, female

Family size

1–2, 3–4, 5+

Family life cycle

Young, single; married, no children; married with children; single parents; unmarried with children, no children under 18; etc.

Income

Under SEK 200,000; SEK 200,001–300,000; SEK 300,001–1,000,000; SEK 1,000,001–2,000,000; SEK 2,000,001 and above, etc., per person or per household

Occupation

Professional and technical; managers, officials and proprietors; clerical; sales; craftspeople; supervisors; farmers; public and private sectors; retired; students; homemakers; unemployed

Education

Primary school or less; some secondary school; secondary school graduate; tertiary/post-­ secondary education (KY/KomVux); higher education at university colleges and universities or other; basic, advanced and graduate level

Religion

Christian, Jewish, Muslim, Hindu, Buddhist, other, none

Nationality

South American, British, French, Norwegian, Italian, Japanese

Psychographic Social grade

A; B; C1; C2; D; E (NRS social grades used in the UK – in Sweden social grades are hardly used explicitly)

Lifestyle

Achievers, strivers, survivors

Personality

Compulsive, gregarious, authoritarian, ambitious

Behavioural Occasions

Regular occasion; special occasion; holiday; seasonal

Benefits

Quality, service, economy, convenience, speed

User status

Non-user, ex-user, potential user, first-time user, regular user

User rates

Light user, medium user, heavy user

Loyalty status

None, medium, strong, absolute

Readiness stage

Unaware, aware, informed, interested, desirous, intending to buy

Attitude towards product

Enthusiastic, positive, indifferent, negative, hostile

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outlines the major variables that might be used in segmenting consumer markets. Here we look at the major geographic, demographic, psychographic and behavioural variables.

Geographic segmentation Geographic segmentation calls for dividing the market into different geographical units such as nations, regions, provinces, parishes, cities or even neighbourhoods. A company may decide to operate in one or a few geographical areas, or to operate in all areas but pay attention to geographical differences in needs and wants. Many companies today are localising their products, advertising, promotion and sales efforts to fit the needs of individual regions, cities and even neighbourhoods. Fashion m ­ agazines, e.g. Cosmopolitan, appear in different versions derived from the US and UK editions, and the S­ wedish, German and Italian editions are not just language adaptations, but also c­ ontent, emphasis and style differ. Evening newspapers – Aftonbladet and Expressen – appear in ­different editions across Sweden to emphasise the local content and thus boost sales. If the news bill says ‘Teacher from Gävle won five million’ – you’re quite likely to be in the Gävle area. Products may be adapted to local conditions and customer preferences. Volvo cars were equipped with air conditioners as standard equipment in Australia and the US in the 1970s – in Europe, this did not become standard until this century (different models in different years). US Volvo cars have softer suspension to adapt to the more relaxed driving style compared to Northern Europe. Tyres are softer and have a rubber mixture (M + S tyres, meaning mud and snow) that makes it possible to drive (carefully!) during the few days a year they have snow – however, these tyres would not work in a severe northen European winter climate so European Volvo cars come with high-performance summer tyres and the driver changes to winter tyres in the autumn. Occasionally, cars sold in Sweden have a high-power battery and improved rust protection to survive many Scandinavian winters. With few exceptions, cars sold in Sweden have been equipped with heated front seats since the 1980s – but in other countries buyers have to pay extra for this.

Geographic ­ segmentation – Dividing a market into different geographical units such as nations, provinces, regions, cities or neighbourhoods.

Demographic segmentation Demographic segmentation divides the market into groups based on variables such as age, gender, family size, family life cycle, income, occupation, market area (metro, city, rural), education, generation and nationality. Demographic factors are the most popular bases for segmenting customer groups. One reason is that consumer needs, wants and usage rates often vary closely with demographic variables. Another is that demographic variables are easier to measure than most other types of variables. Even when marketers first define segments using other bases, such as benefits sought or behaviour, they must know segment demographic characteristics in order to assess the size of the target market and to reach it efficiently.

Age and life-cycle stage  Consumer needs and wants change with age. Some companies use age and life-cycle segmentation, offering different products or using different ­marketing approaches for different age and life-cycle groups. Food retailers, e.g. ICA, offer different c­ oncepts depending on the market areas in question: ICA Nära, ICA Supermarket, ICA ­Kvantum and ICA Maxi. The product mix, package sizes, offers and prices are adapted not only to cost structures (the rent is higher in a city centre!) but also to local demographic c­ ircumstances. This means two ICA Supermarkets may have different product mixes depending on their location, and the age, family structures and socioeconomic standards of people living in the local market area. Marketers must be careful to guard against stereotypes when using age and life-cycle segmentation. Although some 80-year-olds fit the doddering stereotypes, others play tennis. Similarly, whereas some 40-year-old couples are sending their children off to college, others are just beginning new families. Thus, age is often a poor predictor of a person’s life cycle, health, work or family status, needs and buying power. Companies’ marketing to mature consumers usually employ positive images and appeals. Income and socioeconomic profile must also be used with prudence. Although Volvo is more targeted towards the higher end of the market,

Demographic ­segmentation – Dividing the market into groups based on variables such as age, gender, family size, family life cycle, income, occupation, market area, education, generation and nationality. Age and life-cycle ­segmentation – Dividing a market into different age and life-cycle groups.

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although less so in Sweden compared to international markets, and Ford is a value-for-money volume brand, it’s dangerous to see the Ford customer as inherently different from the Volvo customer. A high-income urban customer may have a Volvo XC90 T6 as the family car and a Ford Fiesta as a second car – to approach this customer as an economic person looking for budget products (as the Ford Fiesta suggests) would be a great mistake.2

Best practice Baby boomer marketing – not a hot topic for managers? Baby boomers were born between the end of the Second World War and the early 1960s, and they are now gradually leaving the labour market. They have enjoyed several periods of great economic growth and have earned a lot of money. Now reaching the end of their careers, or entering retirement, boomers constitute a lucrative market for financial services, new housing and home renovation, travel and entertainment, eating out, health and fitness products, and just about everything else. However, although boomers clearly show a number of characteristics that should be very appealing to marketers, ‘boomer marketing’ has not really taken off. In Sweden, in particular, the interest from companies has been very limited. Anders Parment, at Stockholm Business School, knows the lack of interest very well: ‘Since publishing books and research articles on Generation Y and baby boomers in 2008, I have run more than 200 seminars on Generation Y with an emphasis on marketing, marketing communications, employer branding, and the changing labour market, but very few seminars so far on baby boomer marketing. In fact, seven years later I have only run two seminars on baby boomer marketing, one for a Finnish bank and one for the Swedish Marketing Association. ‘I told many of my students, university partners and clients about the baby boomer project, and I always integrated a comparison with baby boomers into Generation Y presentations,’ says Parment, ‘and I certainly got some media exposure with articles in newspapers and magazines. But nobody really showed any interest in boomer marketing. ‘The greatest surprise came in autumn 2009. I won a prize for Marketing Book of the Year with the boomer marketing book [Marknadsfor till 55 plus/55 plus Marketing], awarded by the ­Swedish Marketing Association. Despite this, nobody contacted me, neither research ­colleagues nor any consultancies. It is by far, I guess, the least successful Marketing Book of the Year ever with very low sales volumes,’ says Parment. Selling figures were at less than a tenth of the Generation Y book when the book was withdrawn from the market in 2014. A demographic segment that provides high purchase power and a more positive attitude towards consumption than earlier generations at the same age – it seems like a marketer’s dream. But despite the fact that baby boomers are, in general terms, comparatively wealthy, healthy, have more time than other generations and plan to spend a lot of money on experiences in coming years, companies are reluctant to emphasise baby boomers in their marketing. There may be several reasons for this, and the most important one, according to Parment, is ‘that companies are afraid that their brands may be perceived as a brand for elderly people. Very few companies want that image, and taking the risk of being perceived as a brand for seniors might lead to serious troubles in relation to younger customers.’3

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Consumer behaviour research suggests that customers want to be about ten years younger than they are – and perceive themselves accordingly.4 Thus, 60+ marketing might have limited appeal to people under the age of 70, and 50+ marketing to people under the age of 60. Many companies spend hundreds of millions of SEK a year to make their brand more dynamic, challenging and appealing to the younger audience. There is little doubt that a clear emphasis on older consumers may reduce the brand value among the younger audience. This argument is not necessarily valid in all cultures – in the Western world there is a strong focus on young people. In other cultures with stronger patriarchal structures, older people are more likely to be seen as authorities. Thus, a tendency to avoid emphasis on older people in marketing may not be appreciated. The age dimension has developed into being an inherent segmentation variable in some industries: cosmetics as well as financial services offers are designed for age cohorts: 20–30, 30–40, 40–50, 50–60 years, etc. Baby boomers spend a lot more money than previous generations on cosmetics. ‘Boomers are saying, “I’m ageing, but I’m going to do it in a way that’s graceful and still about who I am,” says a marketer for Dutch-based Unilever’s Dove Pro – Age brand. Says another marketer, ‘I don’t think boomers want to be young again – I don’t think they feel old in the first place.’5 Likewise, based on age cohorts, the financial services industry offers packages of financial instruments to provide the desired balance between risk and return based on individuals’ age and life expectancy.

Generation and age – the danger of mixing them up With a generational cohorts perspective, age and generation cannot be mixed since they provide different results and are built on different logics. Age defined as chronological age, i.e. date of birth, and generational cohorts hence diverge over time. From a marketing perspective, a crucial question is whether individuals will stay more or less with the same consumption patterns as they get older (indicating that generational cohort explains spending) or will they drink more whisky and less beer and wine when they get older (indicating that age explains spending)? Figure 7.2 shows preferences for alcoholic beverages for different age categories in the UK. The key question here is whether consumers will stay with the same consumption patterns as they get older – indicating that generational cohorts explain preferences) – or if they will drink more whisky and less beer and wine when they get older, hence suggesting that age explains spending.

Age 18–24 25–34 35–49 50+ Social Grade AB C1 C2 D, E Gender Male Female

Beer (%)

Wine (%)

Whisky (%)

58 50 45 30

23 29 28 15

7 8 14 17

39 40 48 38

40 30 20 9

17 14 13 10

65 21

22 22

19 8

Figure 7.2 Typical demographic profile of the UK drinks market (Evans, 2006)

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Gender segmentation – ­ Dividing a market into different groups based on gender.

Gender  Gender segmentation has long been used in clothing, cosmetics, toiletries and magazines. More recently, many women’s cosmetics makers have begun marketing men’s lines, reflecting men’s increasing interest in cosmetics. All leading cosmetics brands, including Anthony, the Body Shop, Garnier, L’Oréal, Nivea, and Neuotrogena, offer products designed for ‘the active, healthy men’s lifestyle’. Cosmetics chains like Kicks and Sephora offer shelves with cosmetics designed for males. A neglected gender segment can offer new opportunities in markets ranging from ­motorcycles to guitars. For example, in the late 1990s, 96 per cent of guitars were purchased by and for men. Daisy Rock Guitars, The Girl Guitar Company that launched guitars shaped for girls in 2000, is changing that statistic one guitar at a time. Daisy Rocks has sold more than 200,000 guitars. Starting with a daisy-shaped guitar with a leafy headstock, Daisy Rock now offers a complete line of smaller, lighter, professional-quality guitars with fun shapes and glossy finishes geared towards women. Guitars range from girly butterfly, heart and daisy shapes for younger girls to glossy red, black, purple and pink guitars for women. The guitars are available in 25 countries including 23 dealers in Sweden.6

Best practice Targeting the affluent – your wish is their command At the Four Seasons Hotel Chicago, guests can buy the Kids in the City package for $520 a night and, among other things, enjoy a visit in their room from the Ice Cream Man, who arrives with all the fixings to make any concoction they desire. At one spa in Scottsdale, in the US state of Arizona, expectant parents can purchase the ‘Bundle of Joy’ Babymoon package, which includes a 24-hour Cravings-Chef service, a couples massage and breakfast in bed. The Benjamin Hotel in New York City provides dog beds in a variety of styles and doggie bathrobes, as well as canine room service and DVDs for dogs. At The Ritz-Carlton, Lake Las Vegas in Henderson, in Nevada, the Love at Lake Las Vegas weekend package includes two nights in the 2,400 square foot presidential suite, helicopter and gondola rides, a champagne-tasting party on a yacht complete with rose petals strewn about and a string trio, use of a luxury car throughout the stay, in-room couples spa treatment, a $5,000 casino line of credit, a $50,000 shopping spree at Neiman Marcus, 14 dozen roses, and a butler-drawn Cristal champagne bath. And if that isn’t decadent enough, how about dropping $100,000 for an extravagant weekend in Vegas?

Income segmentation – ­ Dividing a market into different income groups.

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Income  The marketers of products and services such as cars, clothing, cosmetics, financial services and travel have long used income segmentation. Many companies target affluent consumers with luxury goods and convenience services. For example, for a price, luxury hotels provide amenities to attract specific groups of affluent travellers, such as families, expectant mothers and even pet owners.7 Compared with other countries and regions, Europe in general, and Scandinavia in particular, is less keen to use income segmentation explicitly. In the US, income segmentation is a more integrated part of marketing practice, and there would be few complaints over its use.

Market segmentation

Not all companies that use income segmentation target the affluent. For example, many retailers – such as Lidl, PrisXtra and Willys – successfully target low- and middle-income groups. Here, an interesting dynamic effect appears. Traditional wisdom suggests that the core market for stores like PrisXtra is families with low incomes – say under SEK 400,000 a household. Thus, you would expect planners and real-estate experts to look for locations in lower-middle-class neighbourhoods where people wear less expensive shoes and drive old cars that drip a lot of oil. However, PrisXtra and Willys, in particular, have opened numerous retail operations in upmarket areas with great success, e.g. in Kungsholmen, Vasastan and Östermalm in Stockholm. First, the perceived product and service quality have been better than expected. Second, the assumption that high earners wouldn’t buy food in budget stores proved to be false. This experience shows many similarities to H&M’s approach – to sell attractive clothing at budget prices in attractive locations, thus challenging the traditional industry wisdom (see the company case at the start of Chapter 1).

Psychographic segmentation Psychographic segmentation divides buyers into different groups based on social grade, lifestyle or personality characteristics. People in the same demographic group can have very different psychographic make-ups. In Chapter 5, we discussed how the products people buy reflect their lifestyles. As a result, marketers often segment their markets by consumer lifestyles and base their marketing strategies on lifestyle appeals. Marketers also use personality variables to segment markets. For example, Fritidsresor targets different customer segments by offering a large variety of travel profiles; City Breaks appeals to couples or families wanting to take a few days off in a metropolitan area; Blue represents premier collections and targets high-income families who don’t see themselves as charter travellers; while Blue Village offers the best family facilities with at least four Fs (Fritidsresor’s quality standard ranking, which is different from the hotel star-­ rating), all-inclusive family activities (e.g. Bamse Club, Super Kids, Swimming School and Show School), and locations close to the waterfront.8

Behavioural segmentation Behavioural segmentation divides buyers into groups based on their knowledge, attitudes, uses or responses to a product. Many marketers believe that behaviour variables are the best ­starting point for building market segments and they have become more important over time,

Psychographic ­segmentation – Dividing a market into different groups based on social grade, lifestyle or ­personality characteristics.

Behavioural ­ segmentation – Dividing a market into groups based on consumer knowledge, attitudes, uses or responses to a product.

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while the predictive power of demographic variables has been questioned, since people may share a demographic profile but be very different in terms of values, lifestyle, preferences and spending patterns.

Occasions  Buyers can be grouped according to occasions when they get the idea to buy, actually make their purchase, or use the purchased item. Occasion segmentation can help firms build up product usage. For example, most consumers drink orange juice in the morning but orange growers have promoted drinking orange juice as a cool, healthy refresher at other times of the day. By contrast, Coca-Cola’s ‘Good Morning’ campaign run in the US attempts to increase Diet Coke consumption by promoting the soft drink as an early-morning pick-me-up. There is little doubt that such a campaign would be criticised in Europe. Some holidays, such as Mother’s Day and Father’s Day, were originally promoted partly to increase the sale of sweets, flowers, cards and other gifts, and many marketers prepare special offers and adverts for occasions like these. Benefits sought  A powerful form of segmentation is to group buyers according to the different benefits that they seek from the product. Benefit segmentation requires finding the major ­benefits people look for in the product class, the kinds of people who look for each benefit, and the major brands that deliver each benefit. For instance, people buying upmarket furniture or audio equipment may do it for different reasons. If they buy the item to show off, one set of arguments and marketing approaches might be applied, but if they buy the item because they are interested in the inherent product qualities, another set of arguments apply. Think of people who say they are interested in fashion clothing or indoor design. Some of them buy all the available magazines, watch tele­ vision programmes on the subject and visit fairs, just to make sure they are up to date. But they are followers, not the people who set the tone for others to follow. Others will socialise with designers, visit fairs, come up with their own ideas, and may even be written about by journalists. The people in this latter category may be called innovators. In the former case, the benefit sought is acceptance and strengthening of one’s image as a person ‘in the know’. Marketers may use a broad set of arguments that appeal to this person’s vanity. In the latter case, the person is one or a few steps ahead of the market and may even be ahead of a company’s marketing department; thus, the company may use a person like this in marketing campaigns and to create a buzz around a new product. That being said, the benefit sought approach applies more to dividing the mass market into different behavioural profiles than to understanding the person leading the changes. The fashion or interior design innovator isn’t really seeking a benefit – leading the field is an inherent and defining characteristic of that person. User status  Markets can be segmented into non-users, ex-users, potential users, first-time users and regular users of a product. Marketers want to reinforce and retain regular users, attract targeted non-users and reinvigorate relationships with ex-users. Included in the potential user group are consumers facing life-stage changes – such as newly-weds and new parents – who can be turned into heavy users, e.g. a cookware retailer targeting newly engaged couples. Inserts in bridal magazines showing a young couple strolling through a park or talking intimately in the kitchen over a glass of wine are likely to appeal to this target group. Usage rate  Markets can also be segmented into light, medium and heavy product users. Heavy users are often a small percentage of the market but account for a high percentage of total consumption. For example, Burger King targets what it calls ‘Super Fans’, young (aged 18–34) burger-eating males who make up 18 per cent of the chain’s customers but account for almost half of all customer visits. They eat at Burger King an average of 16 times a month.9 Burger King targets these Super Fans openly with adverts that exalt huge burgers containing meat, cheese, and more meat and cheese. 194

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Loyalty status  A market can also be segmented by consumer loyalty. Consumers can be loyal to brands (Cacharel), stores (NK) and companies (L’Oréal). Buyers can be divided into groups according to their degree of loyalty. Some consumers are completely loyal – they buy one brand all the time. Other consumers are only partially loyal – they are loyal to two or three brands of a given product or favour one brand while sometimes buying others. Still other buyers show no loyalty to any brand at all. They either want something different each time they buy or they buy whatever is on sale. A company can learn a lot by analysing loyalty patterns in its market. It should start by studying its own loyal customers. By studying its less loyal buyers, the company can detect which brands are most competitive with its own. By looking at customers who are shifting away from its brand, the company can learn about its marketing weaknesses. Segmentation has many advantages and is often a very good way of addressing customers effectively. However, it might be dangerous to rely too much on data in addressing customers, as the real customer’s profile and purchase situation may differ from how they appear from the data. Skobes, a Swedish Volvo, Renault and Ford dealership, has experience of segmentation in a multi-franchise environment. Renault and Ford, for example, provide models which are almost exactly the same, taking into account size, price, safety, fuel economy and so on. But despite this, the two brands are different in terms of design and customer profile – and there is another aspect that a segmentation system based on data may not identify. Niklas Johansson, manager at Skobes, explains: ‘A Ford customer in most cases has one car while the Renault customer normally has the Renault as a second or even third car in the household. It’s a huge difference. The latter is a more demanding and informed customer, with perhaps a Volvo SUV as their first car, and may be very interested in the car. The Ford customer, on the other hand, has a more practical view on cars and is not really interested in cars.’ Assuming a particular age of a customer may also be dangerous, for similar reasons. ‘The person paying for the car is not necessarily the main driver,’ Johansson continues. ‘A 58-year-old father or mother may buy the car for a 23-year-old daughter or son. What you need is relationships with your customers rather than systems. If we only rely on information in the system, we run the risk of approaching many customers in the wrong way. What is the point of inviting the wrong people to an event? If we know a person’s individual characteristics, we’ll manage this,’ he says.

Using multiple segmentation bases Marketers rarely limit their segmentation analysis to only one or a few variables. Rather, they often use multiple segmentation bases in an effort to identify smaller, better-defined target groups. Thus, a bank may not only identify a group of wealthy retired adults but also, within that group, distinguish several segments based on their current income, assets, savings and risk preferences, housing and lifestyles. Such segmentation provides a powerful tool for marketers of all kinds. It can help companies to identify and better understand key customer segments, target them more efficiently, and tailor market offerings and messages to their specific needs.

Segmenting business markets Consumer and business marketers use many of the same variables to segment their markets. Business buyers can be segmented geographically, demographically (industry, company size) or by benefits sought, user status, usage rate and loyalty status. Yet business marketers also use some additional variables, such as customer operating characteristics, purchasing approaches, situational factors and personal characteristics. By going after segments instead of the whole market, companies can deliver just the right value proposition to each segment served and capture more value in return. Almost every company serves at least some business markets. For example, the credit-card company American Express targets businesses in three segments – merchants, corporations 195

Chapter 7  Customer-driven marketing strategy: creating value for target customers

and small businesses. It has developed distinct marketing programmes for each segment. In the merchants segment, American Express focuses on convincing new merchants to accept the card and on managing relationships with those that already do – without undermining the margins. For larger corporate customers, the company offers a corporate card programme, which includes extensive employee expense and travel management services. It also offers this segment a wide range of asset management, retirement planning and financial education services. For small business customers, American Express offers a system of small business cards and financial services. It includes credit cards and lines of credit, special usage rewards, financial monitoring and spending report features, and 24/7 customised financial support services. ‘OPEN is how we serve small business,’ says American Express.10 The SAS American Express Corporate Card is a great example of co-branding: the cardholder collects frequent flyer points with any purchase transaction, and the co-operation with SAS makes it easy to target SAS travellers and offer the card. The card holder has the opportunity to pay SEK 4,000 a year and get an Elite Card – which gives more frequent flyer points for purchase transactions and the opportunity to reach a higher frequent flyer status among other benefits. Within a given target industry and customer size, the company can segment by purchase approaches and criteria. As in consumer segmentation, many marketers believe that buying behaviour and benefits provide the best basis for segmenting business markets.11

Segmenting international markets Few companies have either the resources or the will to operate in all, or even most, of the countries that dot the globe. Although some large companies, such as Coca-Cola or Sony, sell products in more than 200 countries, most international firms focus on a smaller set. Operating in many countries presents new challenges. Different countries, even those that are close together, can vary greatly in their economic, cultural and political make-up. Thus, just as they do within their domestic markets, international firms need to group their world markets into segments with distinct buying needs and behaviours. Companies can segment international markets using one or a combination of several variables. They can segment by geographic location, grouping countries by regions such as Western Europe, the Pacific Rim, the Middle East or Africa. Geographic segmentation assumes that

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Marketers working and living in metropolitan areas with corporate HQs may lump together customers in smaller places, expecting them to be less different than they are. Source: Lphoto/Alamy

nations close to one another will have many common traits and behaviours. Although this is often the case, there are many exceptions. For example, although the United Kingdom and Scotland have much in common, both differ culturally and economically from neighbouring Ireland. Even within a small country like Sweden (at least by population measures), consumers can differ widely. Northern Sweden, the Stockholm area, the Gothenburg area, the Oresund Region and other city, rural and remote areas manifest vast differences in values and consumption style. Some marketers lump all northern Sweden consumers together. Substantial differences may be identified but, based on the idea of being effective and efficient in segmentation, it is in most cases not possible to consider all individual variations and differences in designing marketing strategies. World markets can also be segmented on the basis of economic factors. For example, countries might be grouped by population income levels or by their overall level of economic development. A country’s economic structure shapes its population’s product and service needs and, therefore, the marketing opportunities it offers. Countries can be segmented by political and legal factors such as the type and stability of government, receptivity to foreign firms, monetary regulations and amount of bureaucracy. Cultural factors can also be used, 197

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grouping markets according to common languages, religions, values and attitudes, customs and ­behavioural patterns. Segmenting international markets based on geographic, economic, political, cultural and other factors assumes that segments should consist of clusters of countries. However, as consumers in many cases are now connected around the world, marketers can define and reach segments of like-minded consumers no matter where in the world they are. Using intermarket segmentation (also called cross-market segmentation), they form segments of consumers who have similar needs and buying behaviours even though they are located in different countries.

Requirements for effective segmentation Clearly, there are many ways to segment a market, but not all segmentations are effective. For example, buyers of table salt could be divided into blond and brunette customers. But hair colour obviously does not affect the purchase of salt. Furthermore, if all salt buyers bought the same amount of salt each month, believed that all salt is the same, and wanted to pay the same price, the company would not benefit from segmenting this market. To be useful, market segments must be ●●

Measurable: the size, purchasing power and profiles of the segments can be measured. Certain segmentation variables are difficult to measure. For example, there are many lefthanded people in the world. Yet few products are targeted toward this left-handed segment. The major problem may be that the segment is hard to identify and measure. There is little data on the demographics of left-handers. Private data companies keep reams of statistics on other demographic segments but not on left-handers.

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Accessible: the market segments can be effectively reached and served. Suppose a fragrance company finds that heavy users of its brand are single men and women who stay out late and socialise a lot. Unless this group lives or shops at certain places and is exposed to certain media, its members will be difficult to reach.

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Substantial: the market segments are large or profitable enough to serve. A segment should be the largest possible homogeneous group worth pursuing with a tailored marketing programme. It would not pay, for example, for a car manufacturer to develop cars especially for people who are taller than two metres.

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Differentiable: the segments are conceptually distinguishable and respond differently to different marketing mix elements and programmes. If married and unmarried women respond similarly to a sale on perfume, they do not constitute separate segments.

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Actionable: effective programmes can be designed for attracting and serving the segments. For example, although one small airline identified seven market segments, its staff was too small to develop separate marketing programmes for each segment.

Market targeting Now that we’ve divided the market into segments, it’s time to answer that first seemingly simple marketing strategy question we raised in Figure 7.1: which customers will the company serve? The firm now has to evaluate the various segments and decide how many and which segments it can serve best.

Evaluating market segments In evaluating different market segments, a firm must look at three factors: segment size and growth, segment structural attractiveness, and company objectives and resources. The company 198

Market targeting

must first collect and analyse data on current segment sales, growth rates and expected profitability for various segments. ‘Right size and growth’ is a relative matter. The largest, fastest-growing segments are not always the most attractive ones for every company. Smaller companies may lack the skills and resources needed to serve the larger segments. Or they may find these segments too competitive. Such companies may target segments that are smaller and less attractive, in an absolute sense, but that are potentially more profitable for them. But customers with low purchase volumes may be more demanding as they are less professional. So it’s a balancing act. Car finance is a very competitive market in many countries. In Sweden, the large urban areas represent the overwhelming market for expensive company cars and thus the market for car finance is huge – but very competitive. As a manager of one of the leading car finance companies says: ‘Competition is fierce. There are several international banks that lose money in the short run to buy market share. We can’t really compete on price.’ So small, rural dealers appear to be a viable option. It’s possible to create long-term ­relationships with them and there are no competing international players. But turnover is small, as is the marginal contribution from each customer, and many customers are demanding. ‘They have few administrative resources, they ask about everything and they are very sociable. I’ll never lose them, but the question is whether we should keep them. It costs a lot and generates little money.’ The company also needs to examine major structural factors that affect long-run segment attractiveness.12 As discussed in the last paragraph, a segment is less attractive if it already contains many strong and aggressive competitors. The existence of many actual or potential substitute products may limit prices and the profits that can be earned in a segment. The relative power of buyers also affects segment attractiveness. Buyers with strong bargaining power relative to sellers will try to force prices down, demand more services and set competitors against one another – all at the expense of seller profitability. Finally, a segment may be less attractive if it contains powerful suppliers who can control prices or reduce the quality or quantity of ordered goods and services. Even if a segment has the right size and growth and is structurally attractive, the company must consider its own objectives and resources. Some attractive segments can be dismissed quickly because they do not mesh with the company’s long-term objectives. Or the company

Car finance is a crucial part of automobile retailing and makes it possible for car retailers to target intended market segments. Source: Corbis

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Figure 7.3  Target marketing strategies

Undifferentiated (mass) marketing

Differentiated (segmented) marketing

Targeting broadly

Concentrated (niche) marketing

Micromarketing (local or individual marketing) Targeting narrowly

may lack the skills and resources needed to succeed in an attractive segment. A company should only enter segments in which it can gain advantages over competitors.

Selecting target market segments Target market – A set of buyers sharing common needs or characteristics that the company decides to serve.

After evaluating different segments, the company must decide which and how many ­segments it will target. A target market consists of a set of buyers who share common needs or ­characteristics that the company decides to serve. Market targeting can be carried out at several different levels. Figure 7.3 shows that companies can target very broadly (undifferentiated marketing), very narrowly (micromarketing), or somewhere in between (differentiated or concentrated marketing).

Undifferentiated marketing Undifferentiated (mass) marketing – A market-coverage strategy in which a firm decides to ignore market segment differences and go after the whole market with one offer.

Using an undifferentiated marketing (or mass-marketing) strategy, a firm might decide to ignore market segment differences and target the whole market with one offer. This mass-marketing strategy focuses on what is common in the needs of consumers rather than on what is different. The ­company designs a product and a marketing programme that will appeal to the largest number of buyers. Marketers thus decide on the degree of segmentation. Figure 7.3 shows four typical segmentation strategies, from a pure undifferentiated mass-market approach (targeting broadly) to a narrow one-to-one approach, with every customer treated on an individual basis.13 Most modern marketers have strong doubts about a pure mass-market approach. Difficulties arise in developing a product or brand that will satisfy all consumers. Moreover, mass ­marketers often have trouble competing with more focused firms that do a better job of ­satisfying the needs of specific segments and niches. But it still applies to some generic ­products: public transport, salt and cucumbers.

Differentiated marketing Differentiated (segmented) marketing – A market-­ coverage strategy in which a firm decides to target several market segments and designs separate offers for each.

200

Using a differentiated (segmented) marketing (or segmented marketing) strategy, a firm decides to target several market segments and designs separate offers for each. By o ­ ffering product and marketing variations to segments, companies hope for higher sales and a stronger position within each market segment. Developing a stronger position within s­ everal segments creates more total sales than undifferentiated marketing across all s­ egments. Volkswagen Group’s broad range of brands – Audi, Bugatti, Ducati, Scania, MAN, Volkswagen, Seat, Skoda, Porsche, Bentley and Lamborghini – give it a much greater, more stable market share than any single brand could. But differentiated marketing also increases the costs of doing business. A firm usually finds it more expensive to develop and produce, say, ten units of ten different products than 100 units of one product. Developing separate marketing plans for the separate ­segments requires extra marketing research, forecasting, sales analysis, promotion p ­ lanning and ­channel management. And trying to reach different market segments with d ­ ifferent advertising ­campaigns increases promotion costs. Thus, the company must weigh increased sales against increased costs when deciding on a differentiated marketing strategy.

Market targeting

Best practice Fast fashion: combining logistics with differentiated marketing Spanish fashion retailer Inditex Group – with Zara as the most well-known brand – combines the advantages of a lean and efficient business model with the advantages of differentiated marketing. By operating under a number of brands, Inditex can reach more segments and charge different prices from them. The Inditex Group sells Zara, Pull and Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterque through 6,700 stores in 87 countries.14 An appealing characteristic of the model is the fast-fashion concept (drawing parallels with the fast-food industry) – new designs are dispatched twice a week to Zara stores, which generates floor traffic and sales. Zara sources 50 per cent of its fast-fashion garments from its own, locally situated, manufacturing plants.15 The superior logistics can then be used by other brands in the Inditex Group. H&M also applies fast fashion, using an approach similar to Zara’s. The extensive co-operation with famous designers like Roberto Cavalli, Jimmy Choo, Viktor & Rolf, Marimekko and Alber Elbaz & Lucas Ossendrijver among others is another way of combining fast fashion with differentiation.

Funeral clothing is a typical example of concentrated ­marketing – a company goes after a larger share of a small market.

Concentrated marketing Using a concentrated marketing (or niche marketing) strategy, instead of going after a small share of a large market, the company goes after a large share of one or a few smaller segments or niches. Through concentrated marketing, the company achieves a strong market position because of its greater knowledge of consumer needs in the niches it serves and the special reputation it acquires. It can market more effectively by fine-tuning its products, prices and programmes to the needs of carefully defined segments. It can also market more efficiently, 201

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targeting its products or services, channels and communications programmes towards consumers that it can serve best and most profitably. Concentrated marketing may be applied by small companies as well. For instance, a small IT consultancy in the Västbo/Gnösjo region in Småland cannot compete with Gothenburg or Jönköping in terms of knowledge and competence, but through providing a unique flexibility, presence and customer orientation. Whereas segments are fairly large and normally attract several competitors, niches are smaller and may attract only one or a few competitors. Niching lets smaller companies focus their limited resources on serving niches that may be unimportant to, or overlooked by, larger competitors. Many companies start as nichers to get a foothold against larger, more resourceful competitors and then grow into broader competitors. In contrast, some big corporations develop niche markets to create sales growth, which makes it difficult for small players to get a foothold in the market. Zara and H&M are a few among many companies that do this to defend and develop market share with their growing retailer and brand portfolios (cf. H&M case at the start of Chapter 1). Concentrated marketing can be highly profitable. At the same time, it involves ­higher-than-normal risks. Companies that rely on one or a few segments for all of their business will suffer greatly if the segment turns sour. Or larger competitors may decide to enter the same segment with greater resources. For these reasons, many companies prefer to diversify in several market segments.

One-to-one marketing (micromarketing) Differentiated and concentrated marketers tailor their offers and marketing programmes to meet the needs of various market segments and niches. At the same time, however, they do not customise their offers to each individual customer. One-to-one marketing or micromarketing is the practice of tailoring products and marketing programmes to suit the tastes of specific individuals and locations. Rather than seeing a customer in every individual, micromarketers see the individual in every customer. Micromarketing includes local marketing and individual marketing.

Local marketing  Local marketing involves tailoring brands and promotions to the needs and wants of local customer groups – cities, neighbourhoods and even specific stores. For example, store chains like ICA customise their merchandise store by store to meet the needs of local shoppers. ICA’s store designers create each new store’s format according to a neighbourhood’s characteristics and use the knowledge from earlier openings and the customer relationship management system to tailor individual store merchandise. Planograms (shelf plans) are used to match store assortments to each store’s demand patterns.16 Local marketing has some drawbacks. It can drive up manufacturing and marketing costs by reducing economies of scale. It can also create logistics problems as companies try to meet the varied requirements of different regional and local markets. Further, a brand’s overall image might be diluted if the product and message vary too much in different localities. One example is insurance provider Länsförsäkringar Alliance with its unique position in the Swedish bank and insurance market. The 24 customer-owned regional insurance companies co-operate, thereby combining the ability of a small company to adapt to its customers with the strength of a large company. All of the companies have a strong local base in their individual home markets and have no ownership interests other than those of their own customers.17 The very idea and competitive advantage of Länsförsäkringar is to be better than its competitors in adapting to local circumstances. However, standardisation has many advantages which Länsförsäkringar can’t fully enjoy, and from an image point of view, a company that presents itself as very local maybe inherently unattractive for young people applying for a job.18 Individual marketing  In the extreme, micromarketing becomes individual marketing – t­ ailoring products and marketing programmes to the needs and preferences of individual ­customers. 202

Differentiation and positioning

Individual marketing has also been labelled one-to-one marketing, mass ­customisation and markets-of-one marketing. The widespread use of mass marketing has obscured the fact that for centuries consumers were served as individuals: the bespoke suit, the cobbler-designed shoes for the individual, the cabinetmaker furniture made to order. Today, however, new technologies are permitting many companies to return to customised marketing. More powerful computers, detailed databases, robotic production and flexible manufacturing, and interactive communication media – all have combined to foster ‘mass customisation’. Mass customisation is the process through which firms interact one-to-one with masses of customers to design products and services ­tailor-made to individual needs.19 The move towards individual marketing mirrors the trend in consumer self-marketing. Increasingly, individual customers are taking more responsibility for shaping both the products they buy and the buying experience. Consider two business buyers with two different purchasing styles. The first sees several sales people, each trying to persuade him to buy their product. The second sees no salespeople but instead logs on to the web. She searches for information on available products; interacts online with various suppliers, users and product analysts; and then decides which offer is best. The second purchasing agent has taken more responsibility for the buying process, and the marketer has had less influence over the buying decision. As the trend towards more interactive dialogue and less marketing monologue continues, marketers will need to influence the buying process in new ways. They will need to involve customers more in all phases of the product development and buying processes, increasing opportunities for buyers to practise self-marketing.

Choosing a targeting strategy Companies need to consider many factors when choosing a market-targeting strategy. Which strategy is best depends on company resources. When the firm’s resources are limited, concentrated marketing makes the most sense. The best strategy also depends on the degree of product variability. Undifferentiated marketing is more suited for uniform products such as grapefruit or steel. Products that can vary in design, such as cameras and cars, are more suited to differentiation or concentration. The product’s life-cycle stage must also be considered. When a firm introduces a new product, it may be practical to launch only one version. In the mature stage of the product life cycle, differentiated marketing begins to make more sense. Another factor is market variability. If most buyers have the same tastes, buy the same amounts and react the same way to marketing efforts, undifferentiated marketing is appropriate. Finally, competitors’ marketing strategies are important. When competitors use differentiated or concentrated marketing, undifferentiated marketing can be suicidal. Conversely, when competitors use undifferentiated marketing, a firm can gain an advantage by using differentiated or concentrated marketing, focusing on the needs of buyers in specific segments.

Differentiation and positioning At the same time that it’s answering the first simple-sounding question (which customers will we serve?), the company must be asking the second question (how will we serve them?). Beyond deciding which segments of the market it will target, the company must decide on a value proposition – on how it will create differentiated value for targeted segments and what positions it wants to occupy in those segments. A product’s position is the way the product is defined by consumers on important attributes – the place the product occupies in consumers’ minds relative to competing products. ‘Products are created in the factory, but brands are created in the mind,’ says a positioning expert.20 Cilit Bang is positioned as a powerful, all-purpose family detergent; BodyShop is positioned as the natural way to beauty. In the automobile market, Dacia, Kia and Skoda are positioned

Product position – The way the product is defined by consumers on ­important attributes – the place the product occupies in consumers’ minds relative to competing products.

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Figure 7.4  Positioning map: large luxury sport utility vehicles (SUVs)

Price (thousands of $)

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Escalade

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Escalade ESV Infiniti QX56 Range Rover Lexus LX470 Navigator

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on value-for-money, Mercedes and Jaguar on luxury, and Porsche and BMW on performance. Volvo is powerfully positioned on safety. Consumers position products with or without the help of marketers. Consumers are ­overloaded with information about products and services. They cannot re-evaluate products every time they make a buying decision. To simplify the buying process, consumers organise products, services and companies into categories and ‘position’ them in their minds. A product’s position is the complex set of perceptions, impressions and feelings that consumers have for the product compared with competing products. However, marketers do not want to leave their products’ positions to chance. They must plan positions that will give their products the greatest advantage in selected target markets, and they must design marketing mixes to create these planned positions.

Positioning maps In planning their differentiation and positioning strategies, marketers often prepare perceptual positioning maps, which show consumer perceptions of their brands versus competing products on important buying dimensions. Figure 7.4 shows a positioning map for the US large luxury sport utility vehicle market.21 The position of each circle on the map indicates the brand’s perceived positioning on two dimensions – price and orientation (luxury versus performance). The size of each circle indicates the brand’s relative market share.

Choosing a differentiation and positioning strategy Some firms find it easy to choose a differentiation and positioning strategy. For example, a firm well known for quality in certain segments will go for this position in a new segment if there are enough buyers seeking quality. But in many cases, two or more firms will go after the same position. Then, each will have to find other ways to set itself apart. Each firm must differentiate its offer by building a unique bundle of benefits that appeals to a substantial group within the segment. 204

Differentiation and positioning

Above all else, a brand’s positioning must serve the needs and preferences of well-defined target markets. And brands may appear similar at a first glance, but have different roots and images. For example, both Audi and BMW are dynamic, prestigious premium brands, they are both from south Germany and manufacture cars more or less in the same segments. Yet each succeeds because the competition between the two of them puts pressure on both to improve, thus setting them apart from the mass market, and the design is different – design is a defining factor for cars, and may thus be used for positioning. The differentiation and positioning task consists of three steps: identifying a set of differentiating competitive advantages upon which to build a position, choosing the right competitive advantages, and selecting an overall positioning strategy. The company must then effectively communicate and deliver the chosen position to the market.

Identifying possible value differences and competitive advantages To build profitable relationships with target customers, marketers must understand customer needs better than competitors do and deliver more customer value. To the extent that a company can differentiate and position itself as providing superior customer value, it gains competitive advantage. But solid positions cannot be built on empty promises. If a company positions its product as offering the best quality and service, it must actually differentiate the product so that it delivers the promised quality and service. Companies must live up to their slogans. For example, when the world’s biggest office supply store, Staples, carried out research that revealed it should differentiate itself on the basis of ‘an easier shopping experience’, the office supply retailer held back its ‘Staples: That was easy’ marketing campaign for more than a year. First, it re-designed its stores to actually deliver the promised positioning.22

Competitive advantage – An advantage over competitors gained by offering greater customer value, either through lower prices or by providing more benefits that justify higher prices.

Company case Staples: smart positioning? Staples started out as a brilliant idea in 1986, when founder Tom Sternberg was driving around Boston one July weekend to find colour ribbon for his typewriter. He didn’t find any and came up with the great idea to start a supermarket for office supplies. A few years ago, though, things weren’t going so well for Staples – or for its customers. The ratio of customer complaints to compliments was running at an abysmal eight to one at Staples stores. Weeks of focus groups produced an answer: customers wanted an easier shopping experience. That simple revelation has resulted in one of the most successful marketing campaigns in recent history, built around the now-familiar ‘Staples: That was easy’ tagline. But Staples’ positioning turnaround took a lot more than simply bombarding customers with a new slogan. Before it could promise customers a simplified shopping experience, Staples had to actually deliver one. First, it had to live the slogan. So, for more than a year, Staples worked to revamp the customer experience. It remodelled its stores, streamlined its inventory, retrained employees and even simplified customer communications. Only when all of the customer-experience pieces were in place did Staples begin communicating its new positioning to customers. The ‘Staples: That was easy’ repositioning campaign has met with striking success, helping to make Staples the runaway leader in office retail. And the campaign’s ‘easy’ button (a large red button marked ‘easy’ that later became an actual product) has become a pop culture icon. No doubt about it, clever marketing helped.

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But marketing promises count for little if not backed up by the reality of the customer experience. ‘What has happened at the store has done more to drive the Staples brand than all the marketing in the world,’ says Staples’ vice-president of marketing.

Staples has grown at a fast pace and with $24 billion in sales in 25 countries it’s the world’s biggest office supply chain. Staples was introduced in Sweden in 2008 through the purchase of competitor Corporate Express. Source: Courtesy of Staples Ab/Henric Lind

To find points of differentiation, marketers must think through the customer’s entire experience with the company’s product or service. There are an almost indefinite number of opportunities for a company to differentiate its offer along the lines of product, services, channels, people or image. Through product differentiation, brands can be differentiated on features, performance, or style and design. Bang & Olufsen positions its home entertainment equipment on its striking design and sound characteristics. BoConcept differentiates its furniture on design – competing with IKEA is not easy and design is one of a few options. Beyond differentiating its physical product, a firm can also differentiate the services that accompany the product. Some companies gain services differentiation through speedy, convenient or careful delivery. This is not as easy to create as it may seem. In many city and metropolitan areas, in particular, there are numerous companies offering a similar product – just think about the 15 or so ICA stores in Vasastan, Stockholm, the numerous 7Eleven stores in central Gothenburg or the 16 Ford dealerships in Madrid, a city known for demanding buyers when it comes to price.23 Here, service differentiation may make the difference. High-quality service that creates outstanding ownership experiences is a competitive advantage that is very difficult to copy. Firms that practise channel differentiation gain competitive advantage through the way they design their channel’s coverage expertise and performance. Dell sets itself apart with its smooth-functioning direct channels for computers. Companies can also gain a strong competitive advantage through people differentiation – hiring and training better people than their competitors do. Emirates and Qatar Airways both enjoy an excellent reputation, largely 206

Differentiation and positioning

because of the grace of their flight attendants. People differentiation requires that a company select its customer-contact people carefully and train them well. However, from a s­ ustainability standpoint the practice of employing people and giving them few rights by Scandinavian ­standards might be questioned. Even when competing offers look the same, buyers may perceive a difference based on ­company or brand image differentiation. Again, a person who’ll get a new official car and compares the offers from Audi and BMW will find that technical specifications, fuel economy and safety don’t really differentiate, say, an Audi A4 2.0 TDI from a BMW 320d. But design and image are different! A company or brand image should convey the product’s distinctive benefits and positioning. Developing a strong and distinctive image calls for creativity and hard work. Symbols – such as McDonald’s golden arches, Swedish television channel 4’s red circled 4 or Google’s colourful logo – can provide strong company or brand recognition and image differentiation. Some companies even become associated with colours, such as ABB (red), phone operator 3 (orange) and Coca-Cola (red). The chosen symbols, characters and other image elements must be communicated through advertising that conveys the company’s or the brand’s personality.

Choosing the right competitive advantages Suppose a company is fortunate enough to discover several potential differentiations that provide competitive advantages. It now must choose the ones on which it will build its positioning strategy. It must decide how many differences to promote and which ones.

How many differences to promote  Many marketers think that companies should aggressively promote only one benefit to the target market. Ad man Rosser Reeves said a company should develop a unique selling proposition (USP) for each brand and stick to it. Each brand should pick an attribute and tout itself as ‘number one’ on that attribute. Buyers tend to remember number one better, especially in this over-communicated society. Other marketers think that companies should position themselves on more than one differentiator. This may be necessary if two or more firms are claiming to be best on the same attribute. Today, at a time when the mass market is fragmenting into many small segments, companies are trying to broaden their positioning strategies to appeal to more segments. For more complex products, there are more aspects to differentiate and buyers are likely to require a lot in many respects. Most car manufacturers have a few differentiating aspects that are promoted. Saab suggested its brand reflected its Scandinavian heritage – an area known for its natural beauty, high-quality design, precision engineering and social responsibility. Thus, the cars represented progressive, distinctive design, responsible performance and ­excellent safety ratings.24 However, this set of aspects could represent almost every ambitious producer of dynamic, upmarket cars. It is certainly not as distinct as a one-line USP. As companies increase the number of claims for their brands, they risk loss of credibility and a loss of clear positioning. Which differences to promote  Not all brand differences are meaningful or worthwhile; not every difference makes a good differentiator. Each difference has the potential to create company costs as well as customer benefits. A difference is worth establishing to the extent that it satisfies the following criteria: ●●

Important: the difference delivers a highly valued benefit to target buyers.

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Distinctive: competitors do not offer the difference, or the company can offer it in a more distinctive way.

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Superior: the difference is superior to other ways that customers might obtain the same benefit.

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Communicable: the difference is communicable and visible to buyers.

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Affordable: buyers can afford to pay for the difference.

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Profitable: the company can introduce the difference profitably.

Many companies have introduced differentiations that failed one or more of these tests. When the Westin Stamford Hotel in Singapore once advertised that it was the world’s tallest hotel, it was a distinction that was not important to most tourists – in fact, it turned many off. Polaroid’s Polarvision, which produced instantly developed home movies, bombed too. Although Polarvision was distinctive and even pre-emptive, it was inferior to another way of capturing motion, namely camcorders. Thus, choosing competitive advantages upon which to position a product or service can be difficult, yet such choices may be crucial to success.

Selecting an overall positioning strategy Value proposition – The full positioning of a brand – the full mix of benefits upon which it is positioned.

The full positioning of a brand is called the brand’s value proposition – the full mix of benefits upon which the brand is differentiated and positioned. It is the answer to the customer’s question, ‘Why should I buy your brand?’ Figure 7.5 shows possible value propositions upon which a company might position its products. In the figure, the five green cells represent winning value propositions – differentiation and positioning that give the company competitive advantage. The blue cells, however, represent losing value propositions. The centre yellow cell represents at best a marginal proposition. In the following sections, we discuss the five winning value propositions upon which companies can position their products: more for more, more for the same, the same for less, less for much less, and more for less.

More for more  More-for-more positioning involves providing the most upmarket product or service and charging a higher price to cover the higher costs. Ritz-Carlton Hotels, Mont Blanc writing instruments and Mercedes-Benz cars – each claims superior quality, craftsmanship, durability, performance or style and charges a price to match. Not only is the market offering high quality, it also gives prestige to the buyer. It symbolises status and a loftier lifestyle. Often, the price difference exceeds the actual increment in quality, which results in high profitability. Sellers offering ‘only the best’ can be found in every product and service category, from lunch restaurants and household appliances to fashion and leisure travel. Consumers are sometimes surprised, even delighted, when a new competitor enters a category with an unusually high-priced brand. Starbucks coffee entered as a very expensive brand in a largely commodity category (but later lost some of its premium advantage). When Apple premiered its iPhone, it offered higher-quality features than a traditional mobile phone with a hefty price tag to match. In general, companies should be on the look-out for opportunities to introduce a ‘more-formore’ brand in any underdeveloped product or service category. Yet ‘more-for-more’ brands

Figure 7.5  Possible value propositions

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Differentiation and positioning

can be vulnerable. They often invite imitators who claim the same quality but at a lower price. Luxury goods that sell well during good times may be at risk during economic downturns when buyers become more cautious in their spending.

More for the same  Companies can attack a competitor’s more-for-more positioning by introducing a brand offering comparable quality but at a lower price. In the US, Toyota introduced its Lexus line in 1989 (a few years before it was launched in Sweden) with a ‘more-for-thesame’ value proposition versus Mercedes and BMW. Its first advert headline read: ‘Perhaps the first time in history that trading a $72,000 car for a $36,000 car could be considered trading up.’ It communicated the high quality of its new Lexus through rave reviews in car magazines and through a widely distributed videotape showing side-by-side comparisons of Lexus and Mercedes cars. It published surveys showing that Lexus dealers were providing customers with better sales and service experiences than were Mercedes dealerships. As a new actor in the ­market Lexus hand-picked its dealers and was fortunate to get commitment from very good ones. Many Mercedes owners switched to Lexus, and the Lexus repurchase rate has been 60 per cent, twice the industry average. The same for less  Offering ‘the same for less’ can be a powerful value proposition – everyone likes a good deal. LidL, Holiday Autos and ÖoB use this positioning. They don’t claim to offer different or better products. Instead, they offer many of the same brands as department stores and speciality stores but at deep discounts based on superior purchasing power and lower-cost operations. Other companies develop imitative but lower-priced brands in an effort to lure customers away from the market leader. For example, AMD makes less expensive versions of Intel’s market-leading microprocessor chips. Less for much less  There is almost always a market for products that offer less and therefore cost less. Few people need, want or can afford ‘the very best’ in everything they buy. Over time, spending patterns have become more flexible and modern customers like the opportunity of buying less for much less in some categories.25 For example, many travellers seeking lodgings prefer not to pay for what they consider unnecessary extras, such as a pool, a restaurant on the premises or mints on the pillow. Hotel chains such as Ibis forego some of these amenities and charge less accordingly.

Less for much less ­positioning is very popular in some ­categories, e.g. flying. Ryanair’s no-frills, low-price offer gives more opportunities to travel. And the social acceptance among young people is high. ‘Travelling is cool, through Ryanair I get the opportunity to travel more’ is a typical ­statement among students in their twenties with many travel plans but limited budgets. Source: Stefan Sollfors/Alamy

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‘Less-for-much-less’ positioning involves meeting consumers’ lower performance or quality requirements at a much lower price. Ryanair offers much lower levels of service; as a result, it charges rock-bottom prices. easyJet and Southwest Airlines also practise less-for-much-less positioning.

Positioning statement – A statement that ­summarises company or brand positioning – it takes this form: To (target segment and need) our (brand) is (concept) that (point of difference).

Vapiano, a German fast-food chain established in 2002, has had great international success. It is positioned and perceived as offering more for less. Great locations, opening hours and an open atmosphere ­contribute to making Vapiano a good ­value-for-money experience. Source: Getty Images

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More for less  Of course, the winning value proposition would be to offer ‘more for less’. Many companies claim to do this. And, in the short run, some companies can actually achieve such lofty positions. When it first opened in Sweden, the Vapiano restaurants became very popular: a unique combination of good taste, low prices, great locations and transparent cooking. For about SEK 100 the customer gets a tasty pizza or plate of pasta, and can see the chef cooking it. They all were located in popular destinations for high-end dining and clubbing, and all of the Vapiano restaurants had a bar. However, Vapiano is not really what it seems to be. Without doubt, the concept has many advantages: it’s informal, the food tastes great and there is a great variety of dishes and drinks served. But it’s not Italian as most people think; it’s German, where it is profiled and perceived as a fast-food chain with meal prices ranging from €6 to €10. Yet in the long run, companies will find it very difficult to sustain such best-of-both positioning. Offering more usually costs more, making it difficult to deliver on the ‘for less’ promise. Companies that try to deliver both may lose out to more focused competitors. For example, facing determined competition from Lowe’s stores, Home Depot must now decide whether it wants to compete primarily on superior service or on lower prices. All said, each brand must adopt a positioning strategy designed to serve the needs and wants of its target markets. ‘More for more’ will draw one target market, ‘less for much less’ will draw another, and so on. Thus, in any market, there is usually room for many different companies, each successfully occupying different positions.

Developing and delivering a positioning statement Company and brand positioning should be summed up in a positioning statement. The statement should follow the form: To (target segment and need) our (brand) is (concept) that (point of difference).26 For example: ‘To busy, mobile professionals who need to always be in the loop, BlackBerry is a wireless connectivity solution that gives you an easier, more reliable way to stay connected to data, people and resources while on the go.’27

Summary

Note that the positioning statement first states the product’s membership in a category (wireless connectivity solution) and then shows its point of difference from other members of the category (easier, more reliable connections to data, people and resources). Placing a brand in a specific category suggests similarities that it might share with other products in the ­category. But the case for the brand’s superiority is made on its points of difference. Once it has chosen a position, the company must take strong steps to deliver and communicate the desired position to target consumers. All the company’s marketing mix efforts must support the positioning strategy. Thus, a firm that seizes on a more-for-more position knows that it must produce high-quality products, charge a high price, distribute through high-quality dealers and advertise in high-quality media. It must hire and train more service people, find retailers who have a good reputation for service, and develop sales and advertising messages that broadcast its superior service. This is the only way to build a consistent and believable more-for-more position.

Summary Marketers know that they cannot appeal to all buyers in their markets, or at least not to all buyers in the same way. Buyers are too numerous, too widely scattered and too varied in their needs and buying practices. Therefore, most companies today practise target marketing – identifying market segments, selecting one or more of them, and developing products and marketing mixes tailored to each. Customer-driven marketing strategy consists of four steps. Market segmentation is the act of dividing a market into distinct groups of buyers with different needs, characteristics or behaviours who might require separate products or marketing mixes. Once the groups have been identified, market targeting evaluates each market segment’s attractiveness and selects one or more s­ egments to serve. Market targeting consists of designing strategies to build the right relationships with the right customers. Differentiation involves actually differentiating the market offering to create ­superior customer value. Positioning consists of positioning the market offering in the minds of target customers. For consumer marketing, the major segmentation variables are geographic, demographic, psychographic and behavioural. In geographic segmentation, the market is divided into different geographical units such as nations, regions, provinces, parishes, cities or neighbourhoods. In demographic segmentation, the market is divided into groups based on demographic variables, including age, generation, gender, family size, family life cycle, income, occupation, education and nationality. In psychographic segmentation, the market is divided into different groups based on social grade, lifestyle or personality characteristics. In behavioural segmentation, the market is divided into groups based on consumers’ knowledge, attitudes, uses or responses to a product. Business marketers use many of the same variables to segment their markets. But business markets also can be segmented by business consumer demographics (industry, company size), operating characteristics, purchasing approaches, situational factors and personal characteristics. The effectiveness of segmentation analysis depends on finding segments that are measurable, ­accessible, substantial, differentiable and actionable. To target the best market segments, the company first evaluates each segment’s size and growth characteristics, structural attractiveness and compatibility with company objectives and resources. It then chooses one of four market-targeting strategies – ranging from very broad to very narrow targeting. The seller can ignore segment differences and target broadly using undifferentiated (or mass) marketing. This involves mass producing, mass distributing and mass promoting about the same product in about the same way to all consumers. Or the seller can adopt differentiated 211

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marketing – developing different market offers for several segments. Concentrated marketing (or niche marketing) involves focusing on only one or a few market segments. Finally, micromarketing is the practice of tailoring products and marketing programmes to suit the tastes of specific individuals and locations. Micromarketing includes local marketing and individual marketing. Which targeting strategy is best depends on company resources, product variability, product life-cycle stage, market variability and competitive marketing strategies. Once a company has decided which segments to enter, it must decide on its differentiation and positioning strategy. This task consists of three steps: identifying a set of possible differentiations that create competitive advantage, choosing advantages upon which to build a position, and selecting an overall positioning strategy. The brand’s full positioning is called its value proposition – the full mix of benefits upon which the brand is positioned. In general, companies can choose from one of five winning value propositions upon which to position their products: more for more, more for the same, the same for less, less for much less, or more for less. Company and brand positioning are summarised in positioning statements that state the target segment and need, positioning concept and specific points of difference. The company must then effectively communicate and deliver the chosen position to the market.

Key terms Market segmentation

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Intermarket segmentation

198

Market targeting

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Target market

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Differentiation 187

Undifferentiated (mass) marketing

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Positioning 187

Differentiated (segmented) marketing

200

Geographic segmentation

189

Concentrated (niche) marketing

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Demographic segmentation

189

Micromarketing 202

Age and life-cycle segmentation

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Local marketing

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Gender segmentation

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Individual marketing

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Income segmentation

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Product position

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Psychographic segmentation

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Competitive advantage

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Behavioural segmentation

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Value proposition

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Occasion segmentation

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Positioning statement

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Benefit segmentation

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Discussing the concepts 1. Briefly describe the four major steps in designing a customer-driven marketing strategy. 2. Name and describe the four major sets of variables that might be used in ­segmenting consumer markets. Which segmenting variable(s) do you think ICA is using? Here, you should consider both the segmentation done by ICA’s marketers,

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but also segmentation opportunities of local stores. 3. Name four major study programmes at your university. Describe the segmentation variables you think the study programmes would benefit from using in its marketing, i.e. activities to recruit students. 4. Compare and contrast ­undifferentiated, differentiated, concentrated and

References

­ icromarketing targeting strategies. m Choose a product category for each ­targeting strategy and explain your choice. 5. What is a product’s ‘position’ and how do marketers know what it is?

6. Name and define the five winning value propositions described in the chapter. Which value proposition describes IKEA, ICA and Skandiabanken? Explain your answer.

Applying the concepts 1. Assume you work at a regional university in your country. The traditional market for the university is post-secondary school students in your region who have attained sufficiently high qualifications. However, the university’s target market is shrinking. In addition, it will decrease by around 20 per cent over the course of the next ten years. Recommend other potential market segments the university could pursue, and discuss the criteria it should consider to ensure that the segments you identified are effectively targeted. 2. Form a small group and create an idea for a new reality television show. Using the format provided in the chapter, develop a positioning statement for this television show. What competitive advantage does the show have over existing shows? How many and which differences would you promote?

Focus on ethics KGOY stands for ‘kids getting older younger’, and marketers are getting much of the blame. Kids today see all types of messages, especially on the internet, that children would never have seen in the past. Whereas boys may give up toys at an earlier age to play war games on their Xboxes, the greater controversy seems to surround claims of how girls have changed, or rather how marketers have changed girls. It is clear that adolescence comes earlier than it used to28 – in the last few decades adolescence has come almost a year earlier in accordance with studies, so there is definitely a physical component in this change. But how have marketers contributed to selling to young individuals? Critics describe clothing designed for young girls aged 8–11 as ‘overtly’ sexual, with department stores selling youngsters thongs and T-shirts that say ‘Naughty Girl!’ Although Barbie’s sexuality has never been subtle, she was originally targeted at girls aged 9–12 years. Now, Barbie dolls primarily target girls who are 3–7 years old! 1. Do you think marketers are to blame for kids getting older younger? Give some other examples. 2. Give an example of a company that is countering this trend by offering age-appropriate products for children. 3. How would you describe the practice of marketing to children from a sustainability perspective?

References 1 The distinction between being market-driven – which reflects the traditional wisdom in marketing – and driving the market has been widely discussed among marketing researchers; see, e.g., Bernard Jaworski, Ajay K. Kohli and Arvind Sahay, ‘Market-driven versus driving markets’, Journal of the Academy of Marketing Science’, 28(1) (2000); Nirmalaya Kumar, Lisa Scheer and Philip Kotler, ‘From market driven to market driving’, European Management Journal, 18(2), 129–42 (2000); Anders Parment and Magnus Soderlund, Det har maste du ocksa veta om marknadsforing (Liber, 2000). 2 See Anders Parment, Automobile Marketing. Distribution Strategies for Competitiveness (VDM Verlag, 2009). 3 Anders Parment, Marknadsfbr till 55plus (55 plus Marketing) (Liber, 2008).

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4 Martin M. Evans, Gordon Foxall and Ahmad Jamal, Consumer Behaviour, 2nd edn ( John Wiley & Sons, 2009). 5 Jack Neff, ‘Unilever resuscitates the demo left for dead’, Advertising Age (28 May 2007, pp. 1, 26); and Judann Pollack, ‘Boomers don’t want your pity, but they do demand your respect’, Advertising Age (8 October 2007, p. 24). 6 Solvej Schou, ‘Sisters doing it for themselves’, Associated Press (12 March 2007); and www.daisyrock.com, accessed May 2010. 7 Adapted from information found in Laura Koss-Feder, ‘At your service’, Time (11 June 2007, p. 1). 8 www.fritidsresor.se, May 2010. 9 Kate MacArthur, ‘BK rebels fall in love with King,’ Advertising Age (1 May 2006, pp. 1, 86); Kenneth Hein, ‘BK “lifestyle” goods aim for young males’, Adweek (12 June 2006, p. 8); and Janet Adamy, ‘Man behind the Burger King turnaround: Chidsey says identifying his restaurant’s superfan helped beef up its offerings’, Wall Street Journal (2 April 2008, p. B1). 10 Information from https://home.americanexpress.com/home/open.shtml (August 2008). 11 See Thomas L. Powers and Jay U. Stirling, ‘Segmenting business-to-business markets: a micro-macro linking methodology’, Journal of Business & Industrial Marketing (15 April 2008), pp. 170–7. 12 See Michael Porter, Competitive Advantage (New York: Free Press, 1985, pp. 4–8, 234–6). For more recent discussions, see Stanley Slater and Eric Olson, ‘A fresh look at industry and market analysis’, Business Horizons ( January–February 2002, pp. 15–22); Kenneth Sawka and Bill Fiora, ‘The four analytical techniques every analyst must know: 2. Porter’s five forces analysis’, Competitive Intelligence Magazine (May–June 2003, p. 57); and Philip Kotler and Kevin Lane Keller, Marketing Management, 13th edn (Upper Saddle River, NJ: Prentice Hall, 2009, pp. 342–3). 13 From Anders Parment, Marknadsforing Kort & Gott (Liber, 2008); and Anders Parment and Magnus Soderlund, Det bar borde du ocksa veta om marknadsforing (Liber, 2010). 14 Walter Loeb, ‘Zara leads in fast fashion’, Forbes (30 March 2014). 15 Inditex Group homepage, May 2010. 16 Cf. Darell K. Rigby and Vijay Vishwanath, ‘Localization: the revolution in consumer markets’, Harvard Business Review (April 2006, pp. 82–92). Also see Jenny McTaggart, ‘Wal-Mart unveils new segmentation scheme’, Progressive Grocer (1 October 2006, pp. 10–11). 17 Lansforsakringar homepage, May 2010. 18 Anders Parment and Anna Dyhre, Sustainable Employer Branding (Liber/Samfundsforlaget, 2009). 19 cf. Martin Schreier, ‘The value increment of mass-customized products: an empirical assessment’, Journal of Consumer Behaviour, 5, 317–27 (2006). 20 Jack Trout, ‘Branding can’t exist without positioning’, Advertising Age (14 March 2005, p. 28). 21 Adapted from a positioning map prepared by students Brian May, Josh Payne, Meredith Schakel and Bryana Sterns, University of North Carolina, April 2003. SUV sales data furnished by WardsAuto.com, June 2008. Price data from www.edmunds.com, June 2008. 22 Based on information found in Michael Myser, ‘Marketing made easy’, Business 2.0 ( June 2006, pp. 43–4); Steve Smith, ‘Staples’ sales rise while Office Depot’s drop’, Twice (10 March 2008, p. 62); and ‘Staples, Inc.’ Hoover’s Company Records (1 June 2008, p. 14790). 23 Anders Parment, Automobile Markeeting: Distribution Strategies for Competitiveness. An Analysis of Four Distribution Configurations (Saarbrücken: VDM Verlag, 2009) 24 Saab.com (May 2010). 25 Anders Parment, Generation Y in Consumer and Labour Markets (Routledge, 2011). 26 See Bobby J. Calder and Steven J. Reagan, ‘Brand design’, in Dawn lacobucci, ed., Kellogg on Marketing (New York: John Wiley & Sons, 2001, p. 61). 27 For a fuller discussion, see Philip Kotler and Kevin Lane Keller, Marketing Management, 13th edn (Upper Saddle River, NJ: Prentice Hall, 2009, Ch. 10). 28 Anders Parment, Marketing to the 90s Generation: Global Data on Society, Consumption and Identity (New York: Palgrave Macmillan, 2014)

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Branding: developing strong brands

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Company case – Creating a premium brand: the Audi success story

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A branding perspective

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Company case – Place branding

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Best practice – The employees’ social network: a great marketing opportunity

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Branding strategy: building strong brands

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Company case – Björn Borg: from tennis player and endorser to global brand

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Company case – TRIWA – the conventional rebel watch: success through category repositioning

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Company case – Brand sponsorship: Nordea Scandinavian Masters

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Company case – Chiquita: using the brand as a bridge for broadening the brand width

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Cornerstones of a strong brand

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Chapter preview Now that you’ve had a good look at customer-driven marketing strategy, we’ll take a deeper look at branding. In recent decades, branding has become one of the major concepts in marketing theory and practice. To get it right with the marketing mix it is crucial to understand the brand the organisation represents. Chapters 9–12 will deal with the marketing mix: product, pricing, ­marketing channels and marketing communication tools; the brand will be important for all marketing mix decisions, hence it is introduced here. At the start of the chapter, we take a look at an interesting branding story, that of Audi. Here’s a tale about one strong brand that has made a magnificent transition from being a weak derivative product of a strong and popular volume brand, to being one of the strongest premium brands in its industry.

Learning objectives After reading this chapter, you should be able to: 1 Describe the fundamentals and characteristics of different situations in which a brand perspective may apply. 2 Discuss branding strategy – the decisions companies make in defining and managing their brands. 3 Describe the fundamentals of strong brands – the decisions companies make in building and managing their brands.

 

Company case Creating a premium brand: the audi success story In almost every industry, there are a number of companies that try to create a premium brand. Some claim that they have created one, but unfortunately their customers don’t agree. Why are so many managers so preoccupied with strategies to make their brand into a premium one? And why is it so difficult to create a premium brand? Numerous advantages come with having a premium brand. They are in general terms more profitable and give more prestige to everybody involved, in any area of or related to the business. Selling Miele dishwashers adds prestige to the job compared with selling cheap dishwashers. Having a degree from, or working for, Harvard University is undoubtedly prestigious, just like living in Kensington, London, having a summerhouse in Cannes or staying in five-star Four Season hotels. Not everybody wants the highest degree of technical knowhow and luxury in everything they do, but in general terms, most people would like to work for an attractive employer, live in a nice area and drive a nice car. People like premium brands, and strive to be surrounded by premium brands. Even in counter-cultures – e.g. anti-American or anti-consumerism movements – there are hierarchies and brands that are more desirable and in greater demand. However, many companies engaged in a serious attempt to create a premium brand fail. As there are no exact criteria for defining a premium brand, companies may suggest they have one, but unless the market and the desired consumers agree, the suggestion alone is of little value. It may even be counterproductive when a company overestimates the attractiveness of its brand. Creating a premium brand requires a lot of effort. To ‘live’ the brand and make it consistent all the way from the customer’s first contact to delivery and after-sales, the brand owner must make sure each step in the customer process, and every channel that communicates the brand, sends a consistent brand message. Back in the 1970s, Audi was far from a premium brand. At that time it was slightly more exclusive than Volkswagen with roughly the same product, the same salesmen and shared showrooms where potential customers could compare a Volkswagen Passat with an Audi 80 and see that they were very similar. Audi was the static brand shadowed by Volkswagen. The new, more exclusive five-cylinder Audi 100 launched in 1976 was an excellent car, spacious, quiet and comfortable. But rust and quality problems made owning and driving an Audi an expensive pleasure, and the brand lacked the strength and attractiveness of BMW, Mercedes and other premium brands. The Audi brand was weak and associated with conservative, older people rather than young, dynamic drivers. Mercedes and BMW dominated the premium segment at a time when Audi weren’t selling more cars than Volvo. Nobody knew at the end of the 1970s that 30 years later, Audi would be selling three times as many cars as Volvo. In the late 1970s, an Audi 100 GL 5E was still the choice for those who thought a BMW 528i was too dynamic and expensive, and a Mercedes 230 too expensive. It was positioned between a Volvo 244GL and a Volvo 264GLE. Around 1980, Audi started an offensive to become a leading premium car manufacturer, and it proved more successful than any other attempt in modern automobile marketing history. The transition from a boring

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Audi quattro, 1969. Source: Volkswagen Group Sverige AB

brand of interest to few people to becoming a brand with a very strong appeal to forward-looking car buyers had begun. In 1980, Audi launched the Audi 200 turbo, its first attempt to become a serious premium player. However, it neither matched Mercedes’ new S Class which was introduced in 1979, nor the BMW 7 series as a luxury car. It was still based on the four-year-old Audi 100 platform. More important was the decision to launch the Audi quattro (later called the Ur quattro), the first four-wheel-drive rally car. Initially regarded as too heavy and complex for rally stages, it proved its worth with three wins in its debut season, including a maiden victory for Michele Mouton at the Rallye Sanremo. Audi won two world rally drivers’ and two world rally manufacturers’ championships in the following years. Shortly after the quattro was launched, Audi introduced the Audi Coupe, which used the same body as the quattro, and it became very popular. With a five-cylinder 136 HP engine it was fast enough to become an image-builder for Audi, and the first Audi car that really appealed to trendsetters and yuppies. Remember: this was the decade of overselling, overspending young people, and the car was an important lifestyle gadget. Audi now moved rapidly away from its old conservative image. In 1982, Audi launched the all-new 100 model – known for its extremely good aerodynamics and excellent comfort. But the mechanical quality did not match premium customers’ expectations, something that improved significantly during the life cycle of the

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Audi quattro, 1980. Source: Volkswagen Group Sverige AB

car. The 90 PS Audi 100 became very popular in Sweden due to its design, comfort and excellent fuel economy; however, the standard configuration had no power steering, no central locking, no rear head rests – it was a basic car with a small engine that increased Audi’s market share but didn’t contribute much to its premium brand image. In 1984, the Audi Coupe got a facelift and it became available as quattro – like all other Audi models, including the revamped 90 PS Audi 80 CC, the 133 PS Audi 100 CC and the Audi 200 turbo, quattro became an extremely important profiling factor, although the extra cost was considerable – around SEK 30,000 for a SEK 110,000 Audi 100 CC compared with today’s around SEK 18,000 on a SEK 300,000– 500,000 vehicle. ‘About 45 per cent of our cars delivered are now equipped with quattro,’ says Irene Bernald, Marketing Manager of Audi Sweden. With the new Audi 80 in 1986, soon available as a five-cylinder Audi 90, Audi made car design a top priority. Perhaps inspired by Mercedes – at the time, a five-speed gearbox was still an expensive option in basic Mercedes models – Audi matched the modern and dynamic exterior with a low performance base engine (90 PS in Sweden, 75 PS abroad), and its base package was quite spartan: even the passenger-side mirror was an added option in many markets. For a rising star, mistakes like this don’t help to create a premium profile. In 1990, the new Audi 100 C4 was launched, now a real premium car in every aspect and throughout comparable to Mercedes and BMW. The Audi V8, built between 1988 and 1993, was Audi’s second attempt to compete with the Mercedes S Class and BMW 7 series after the 200 turbo in the early 1980s. In many respects, the Audi was a superior product both to Toyota’s luxury brand Lexus, which was launched at the same time, and to its German competitors. The Audi V8 was the only car in its class to offer four-wheel drive and a fully galvanised body as standard, with a ten-year anti-perforation warranty against corrosion. Although this was a well-built car, it couldn’t match the new Mercedes S Class introduced in 1990 – no surprise, perhaps, since the Audi V8, despite all its qualities, was based on the Audi 100 platform from 1982.

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If the Audi 100 C4 made Audi a real premium competitor in the company car segment, the Audi A8, launched in 1994, made it a serious competitor to Mercedes and BMW in the luxury car segment. The Audi A8 was the first car with an integrated aluminium body, the Audi Space Frame. The Audi A8 was not only seen as more progressive than the Mercedes S Class, it also positioned itself as the most progressive luxury car. BMW and Jaguar finally had a serious competitor! The new A8 that was launched in 2010 further strengthened Audi’s position as a leading premium manufacturer. AutoBild ran a comfort test and the A8 proved to be the quietest car, even quieter than a Mercedes S600, and auto motor & sport was impressed by the A8 being progressive, comfortable and fast, and with better fuel-efficiency than its hybrid-engine competitors. Offering customers a premium car experience may be an expensive venture, unless synergies and economies of scale are considered. Audi does both. Being part of the profitable Volkswagen Group and its market-leading portfolio, with Audi, Volkswagen, Seat, Skoda, Porsche, Bugatti and Lamborghini, means great opportunities in terms of sharing technological solutions and reaching economies of scale in product development and manufacturing. But Audi has also invested in emerging markets at an early stage. An important example is China. Changchun, the Mecca of the Chinese automotive industry, is the home of the oldest and biggest car company in China: First Automobile Works (FAW). In 1986, Audi AG made its first official contact with FAW, and began a joint feasibility study in Changchun. The first Audi product, a modified Audi 100 with V6 engine, went into production in May 1996, making it the first global premium car brand to realise domestic production in China. Badged as the Audi 200, this model remained in production until 1999. Over the following two years, technical development for Audi cars continued in Changchun and, in 1988, FAW was granted a manufacturing licence by Audi. In 2000,

The Audi Q7 is a great example of Audi’s successful product strategy: it’s one of the best SUVs in terms of comfort, safety, road performance and efficiency. Source: Audi

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the first Audi standard dealer’s showroom opened in Beijing, through which Audi introduced the world standard sales and service system into China. Since the mid-1990s, Audi’s model range has undoubtedly been very strong, and it has improved continuously. ‘Die Konkurrenz schläft nicht’ is a German expression that captures the mood of the car industry since then: regardless of how successful you are, competitors will always try to beat you. And Audi is taking the threat of competitors seriously. Many new models have been launched since the 1990s – the TT, the R8, now in its second generation, the A5, the A1 and the A7 to name a few – thus giving Audi a very strong position. Audi’s goal in 2010 was to sell 1.5 million cars in 2015 – already in 2014, more than 1.7 million cars were sold. An expanding model range is necessary to stay ahead of the competition – competitors are launching new products and new subsegments every year. And the marketing approach must address the right customers in the right way. Hence, staff must be knowledgeable and competent, but also understand the target group of the emerging premium brand. ‘In 1993, marketing and sales moved to Audi’s headquarters in Ingolstadt, and they employed many young and dynamic people who strongly contributed to developing marketing strategies and implementation,’ says Irene Bernald, Marketing Manager of Audi Sweden. But in 2000 there was still something missing. Audi’s model range was strong, but the dealerships were not of the same quality as its premium competitors Mercedes and BMW. Regardless of whether one visited a German or a Swedish dealer, in most cases they were also Volkswagen dealers and sometimes Skoda and Seat. And the premium car customer is different from those customers buying Volkswagen, Skoda and Seat. They have other expectations and demands. A Mercedes-Benz dealer in Sydney describes it thus: ‘Our customers are used to a high level of service. They would normally not fly economy class, or stay in motels or caravan parks; they stay in five-star hotels, travel business or first class when they fly, and they get used to a certain level of service. And when you don’t provide that, the environment they expected, it stands out.’ So even though the car market is very product-driven, with strong competitors a manufacturer can’t run the risk of losing customers by providing a lower level of dealer quality than its competitors. So Audi decided to make its dealer network exclusive and separate from the other brands in the Volkswagen Group. In Sweden, the number of dealers selling Audi was reduced from about 150 to 50 by 2003. Those still selling Audis would be exclusive Audi dealers who took the premium brand profile very seriously. ‘At the end of the day, a Volkswagen Polo customer is very different from an Audi A8 customer. I don’t understand why Audi with its strong product range did not do this earlier,’ says a German BMW dealer. ‘Audi had to take the decision to separate the dealer networks to be able to serve the Audi clientele in the way they wanted to be served.’ Despite some dealer complaints, Audi restructured its dealer network to promote the Audi identity and image. And Audi still reached its approximately 6 per cent market share in Sweden with one-third of the number of dealers of it had before. ‘The Audi brand became much more clear and evident. We certainly lost some sales in places where we didn’t have a dealer anymore, but overall we made the Audi brand experience stronger and we kept or even increased our market share,’ says Bernald. A few years later, in 2002 to 2004, Mercedes, BMW and Audi all referred to each other as ‘the premium competitors’. Many others – including Lexus, Jaguar and Volvo, and the more exclusive Citroën, Alfa Romeo and Saab models – wanted to be in this segment, but those who set the tone didn’t mention them. Audi had completed its journey from a boring, conservative brand producing mechanically robust but rust-sensitive cars, to one of the world’s leading premium brands. It might even be possible to say that Audi is the leading premium brand; however, its competitors are strong and should be taken seriously. ‘Competition forces Audi to become even better, and Audi’s position as the most dynamic and progressive premium brand is strong and we hope it will be even stronger in the future,’ says Bernald.

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There are challenges, though. Some of them apply to the industry overall, while others might be particularly strong for Audi and other premium brands. The car has been subject to intense scrutiny in recent years. Urbanisation, traffic congestion, pollution problems, heavy reliance on scarce oil supplies and safety issues have provided challenges for car makers, politicians and urban planners. Prices of new cars are deteriorating, meaning less margins to manufacturers and dealers. Car buyers are strongly influenced by consumption culture with all the choices and opportunities that it offers, and young consumers show a declining interest in cars. The percentage of people with a driving licence is going down. If the car was once the ultimate symbol of freedom, it is now restricting young people’s lifestyles. Public transport is more compatible with a lifestyle based on mobility and peer-to-peer connectivity than driving. Car makers are increasingly aware, thanks to increased transparency and more consumer rights among other things, that young consumers show a higher awareness of their social responsibility and want to organise their lives in a sustainable manner. Even though Audi takes the sustainability issues seriously, the automotive

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industry in general and the premium manufacturers in particular have to worry about this development. Understanding consumer motivation is crucial against this background and car makers have to fundamentally rethink their design and marketing approaches. Given these challenges, Audi appears to be in an excellent position for the future. In 2015, Audi’s brand is stronger than ever before. The model range is broad and strong, sales figures are convincing and the dealers are very much in line with the brand profile. The 2015 study in German car magazine Auto Zeitung on brand image ranks Audi as the number one brands, followed by BMW, Mercedes-Benz, and Porsche. Audi won ten out of twenty categories. That it lost safety and comfort to Mercedes-Benz is hardly surprising given the history of Mercedes-Benz being the hallmark for quality, safety and comfort over at least the last half century. A new S Class introduced in 2014 strengthens this position and perception. More worrying, though, is the fact that BMW, according to the Auto Zeitung study, builds the most innovative and environmentally friendly cars. Buyer values and preferences evolve over time and buyers of different ages may interpret brands differently. A generational cohort perspective suggests that the values and preferences individuals have when they are 16 to 24 years old are largely kept for a lifetime. This would result in old car buyers having a very different

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view on Audi compared to young buyers. Figures 8.1 and 8.2 show the striking differences between 50 plus car buyers, who grew up with the ‘old Audis’, and the young – 20 to 33 years old – car buyers. As a point of reference, a comparison with Citroën is made, a brand that was more exotic and exclusive back in the 1960s, 1970s and 1980s than it is today.

Questions 1 What are the main reasons that Audi succeeded in becoming a premium brand? 2 What are the main building blocks of a premium brand? 3 What are the main threats to a premium brand? 4 What are the main challenges for Audi in the future? 5 How could Audi strengthen its position in relation to young car buyers in particular? 6 What should Audi do to protect and develop its strong position in the future? Sources: Interview with Irene Bernald, Marketing Manager of Audi Sweden; Anders Parment, Auto Brand. Building Successful Car Brands for the Future (New York: Kogan Page, 2014). Anders Parment, Automobile Marketing. Distribution Strategies for Competiveness (VDM Verlag, 2009); interviews with premium car dealers in Germany 2002; various issues of auto motor & sport; Philipp G. Rosengarten and Christoph B. Sturmer, Premium Power: Das Geheimnis des Erfolgs von Mercedes-Benz, BMW, Mercedes und Audi, 2. erweiterte und aktualiserte Aufgabe (London: Wiley & Sons, 2005); AutoBild (2010); Test Audi A8 4.2FSI ‘Limousine mit dezenter Eleganz’, Motorbranschen (various issues, 1998–2002]; ‘Changchun production plant overview’, ‘Audi in China’, from www.audi.com; Auto Zeitung, 2015 Image Report.

a branding perspective Brand – A brand represents everything that a product, service, organisation, employer, region or person means to consumers. For example, when you hear someone say ‘IKEA’, what do you think, feel or remember? What about ‘Hennes & Mauritz’, ‘Helsingborg', ‘Dr Phil’, or ‘Sahlgrenska sjukhuset’? They are also brands!

Brands are more than just names and symbols. They are a key element in the company’s

relationships with consumers. Brands represent consumers’ perceptions and feelings about a product and its performance – everything that the product or service means to consumers. As one well-respected marketer once said, ‘Products are created in the factory, but brands are created in the mind.’1 Some analysts see brands as the major enduring asset of a company, outlasting the company’s specific products and facilities. John Stewart, former CEO of Quaker Oats, once said, ‘If this business were split up, I would give you the land and bricks and mortar, and I would keep the brands and trademarks, and I would fare better than you.’ A former CEO of McDonald’s declared, ‘If every asset we own, every building and every piece of equipment were destroyed in a terrible natural disaster, we would be able to borrow all the money to replace it very quickly because of the value of our brand… The brand is more valuable than the totality of all these assets.’2 Thus, brands are valuable and powerful assets that must be carefully developed and managed. In this section, we examine the key strategies for building and managing brands.

The branded society3 A more globalised economy, faster communication, new vehicles for dispersing knowledge and substantial demographic change make it necessary for every organisation – be they multinational companies, small and medium enterprises, public organisations or NGOs – to focus on branding. With the enormous amount of information and opportunities that are available, modern citizens need effective tools to pick up the important and meaningful messages out of all the commercial noise – that’s why attractive brands have become increasingly important and there are no signs this will change in the future. The more global the markets, the more 226

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opportunities there are, and the faster the pace of change, the more important it will be for companies to have a strong and attractive brand. The branded society refers to societies overcrowded with commercial messages and a never-ending supply of choices and opportunities inspired by the consumption sphere, popular culture and work life to name a few. Its emergence entails changing attitudes and power patterns. Today, not only business consultants and PR agencies but also marketing researchers talk about the branded society. They share the idea that navigating successfully through this constantly developing landscape is difficult. Branding is much more than offering superior services and products within a known framework. The champions of branding – sometimes referred to as ‘icons’ or ‘gurus’ – understand that they are in the ideological business. Thereby, they could be considered to offer people hope, community and extraordinary stories about the near future. In this perspective, branding should no longer be reduced to signs, graphic design and marketing communications.

Where does a branding perspective apply? We all know that companies have brands – but other organisations, e.g. municipalities, churches and unions, also have brands, both in relation to their ‘customers’ and in relation to their employees. The latter is called employer branding. Countries and cities have brands, and many of them also engage actively in brand building – e.g. the municipality of Nyköping, which you read about in Chapter 1. Universities and schools, like any other organisation, have brands and they are extremely important. One can judge the status of a university by getting a list of its co-operation partners. Most universities would love to co-operate with, say, Harvard Business School or London School of Economics – while few would seek to co-operate with unknown schools or those with a poor reputation. Individuals have brands, too – just think of Beyoncé, the Pope, Zlatan or Dr Phil. In the past decade, there has been an increased focus on personal branding, a reflection of our brand-oriented society and individuals’ need to profile themselves.

Company case place branding Sara Brorström, PhD, is a research fellow at the Gothenburg Research Institute. Her research focuses on how areas of different sizes can be presented to different markets. After having met Sara, it's obvious that she has many ideas on how to brand a place, and some of them may even contradict dominant perceptions in the brand management field. What is the most challenging issue in branding a place? I think one great challenge is that striving to become something new and exciting sometimes does not always sit well with the existing identity of the place. New is not always better! The challenge is to keep what is good in place and make it stronger, not simply do something different. The difficulty also lies in describing the identity of a place; sometimes it is just a feeling. Here I think those working with brand-related issues need to take their time and involve others, there is no quick fix. What are the common denominators in successful place branding? A successful place brand in my opinion is a brand where you instantly feel that you like it and agree with what it stands for, that it is genuine but surprising. You should not have the feeling that the brand could be

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anywhere for any place. I think it is important, that the brand tells a story about the place, but it might not be the obvious story. You've dealt with places of various sizes. Are there any clear patterns in this research, apart from the obvious fact that urbanisation contributes to a tougher life for rural places? Sweden is one of the countries where the urbanisation process is fastest. This obviously makes it difficult for rural areas to compete. Intermediate cities and metropolitan areas enjoy ‘automatic growth’, and growth here is the norm, which implies a belief that growing is always good. In my research I have come across challenges with both areas that are growing and those that are losing inhabitants too. What we see is that in any place, regardless of whether it is growing or losing inhabitants, there are many possible innovative solutions to meet the problems that are experienced. I think we can learn a lot by studying the practice of dealing with issues occurring both in places that are in growth and places that are not. What are the main pitfalls in place branding? In my research I have identified two main pitfalls. The first is when a city wants the process to be fast, and is looking for quick fixes, but it is unclear how the new brand will fit with the reality of the existing place. The other problem is when a city does not involve those who are living in the place; in some cases people have objected when they fail to recognise the branding of a place as being the place where they live, and they do not understand who the new brand is actually for. The key is to use the people who live there and make them part of the ‘place making’. This will also mean that they ‘talk the brand’, and visitors will feel it is genuine. You've dealt extensively with the Gothenburg area. Tell us something more about it! Yes, since January 2011 I have worked with Gothenburg creating vision and strategies for the inner city; I've been involved both when the strategies were drafted and at the stage we are at now as those strategies are being realised. In this area there is land on which industries were previously sited but which now is not used, since the industries have moved or closed down. The city approaches this through three aspects of sustainability: environmental, social and economic. There has been much discussion of what Gothenburg will be in the future, who will live here and what people will do. It is however important to respect the things which are already good in the area – people already live here and it attracts visitors - the city needs to look after what is already successful and involve those who already live here. There has also been much discussion about existing landmarks, for instance what should happen to the cranes that are part of the city's sky line but have no practical use anymore? There needs to be a huge communication effort to explain why things need to change. Could your insights in Gothenburg be applied to other areas too? Yes, I think so. Gothenburg has gone through an image shift; the city could no longer rely on the harbour and car industry (Volvo cars are still produced here) as giving them a clear image. There has been discussion as to what should happen next, to resolve the contradiction that while the car has had a strong impact on the city, now there is a need to reduce cars in the inner city. This has led to many discussions on how to make the transition from being a ‘car city’ to something else, but what? Many cities go through this kind of change and I think it is important not to stir it too much, and instead let the people living here be part of the ‘place making’. The people of Gothenburg have lots of ideas on how to do this and it will be interesting to follow how this develops. Thanks, Sara, for your answers!

Employer branding Employer branding is crucial to the success of most organisations. Think of a successful organ-

isation and you will probably arrive at the conclusion that its success is at least partly related to its employees. Successful organisations are likely to understand the mechanisms of employer branding, and because of their resulting appeal will find it easy to hire qualified people. Skilled employees like to work for organisations with strong employer brands, and with successful employer branding, the organisation is likely to benefit from less absenteeism, better retention levels, greater staff satisfaction and engagement, and higher profitability. 228

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The Branded Society means that the number of messages and the commercial intensity are increasing – hence, non-commercial zones, like this, with no brands exposed, are rare.

Harvard Business School, at Harvard University, which is one of the world's leading universities. Its brand immediately gives any person or organisation representing it an advantage. Just about any university in the world would like to have a formal co-operation with Harvard. Source: Andre Jenny/Alamy

People increasingly define their careers by who they would like to work for rather than what they would like to work with. Strong brands have always been a competitive advantage in the labour market, as underlined by a Mercedes-Benz dealership in Sydney: ‘Traditionally, a car salesman was not an occupation that was viewed very highly, but I think there is a difference if you say to someone “I’m a car salesman”, or if you say “I’m a Mercedes-Benz salesperson”. The product brings certain standards to the occupation. So we don’t have much problem with recruiting sales staff.’ Young people appear to be even more sensitive to brand messages than others. First, they have grown up in a heavily branded world. From an early age, they will have started internalising brand messages and thus for them judging brands is a normal thing. They are therefore well aware of the advantages of strong brands in terms of

Employer branding – Branding that builds the appeal of an employer – successfully done, this will lead to employees with better skills, less absenteeism, better retention levels, greater staff satisfaction and engagement, and higher profitability.

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Regardless of whether a ­company wants one or not, it has a brand. This place doesn't seem to care a lot about its brand, at least not in the design of signs. Source: Anders Parment

image, reliability and quality. Second, knowing what a strong brand can achieve, they will use that in planning their careers. They will have a clear idea of which companies look good on the curriculum vitae and which ones don’t. Thus, organisations need more than ever to develop a positive, authentic market image that appeals to young people.

Best practice The employees’ social network: a great marketing opportunity The employees' social network can make all the difference. Let's assume your organisation is launching a new product and wants access to 100 young women interested in fashion. The traditional way of doing this is to contact a media agency which sends out invitations to a few hundred young women chosen according to certain segmentation criteria. But in your organisation, you may have a few young staff members who have (close or peripheral) friends interested in fashion. And these friends may in turn have other fashion-interested friends. Through personal invitations, the percentage of accepted invites is likely to be higher. Any company selling products to consumers can use their employees to market these products. This is what lies at the heart of brand ambassadorship: employees are ambassadors of the employer's brand, and consumers are ambassadors of the consumer brand. Employees socialise, discuss and represent the employer and consumer brand through presenting products, providing solutions and simply by being a person who likes (and lives) the brand. Remember, you employ not only the employee but also his or her social network.4

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Branding strategy: building strong brands Brand equity Brand equity is the differential effect that knowing the brand name has on customer response to the product and its marketing. A powerful brand has high brand equity. It’s a measure of the brand’s ability to capture consumer preference and loyalty. A brand has positive brand equity when consumers react more favourably to it than to a generic or unbranded version of the same product. It has negative brand equity if consumers react less favourably than to an unbranded version. Brands vary in the amount of power and value they hold in the marketplace. Some brands – such as BMW, Coca-Cola and McDonald’s – become larger-than-life icons that maintain their power in the market for years, even generations. ABBA, Ingmar Bergman and Saab may well be around for the next generation and the generation after that. Other brands create fresh consumer excitement and loyalty, brands such as Google, YouTube, Apple and Wikipedia. These brands win in the marketplace not simply because they deliver unique benefits or reliable service; rather, they succeed because they forge deep connections with customers. Advertising agency Young & Rubicam’s Brand Asset Valuator measures brand strength along four consumer perception dimensions: differentiation (what makes the brand stand out), relevance (how consumers feel it meets their needs), knowledge (how much consumers know about the brand) and esteem (how highly consumers regard and respect the brand). Brands with strong brand equity rate highly on all of these dimensions. A brand must be distinct, or consumers will have no reason to choose it over other brands. But the fact that a brand is highly differentiated doesn’t necessarily mean that consumers will buy it. The brand must stand out in ways that are relevant to consumers’ needs. But even a differentiated, relevant brand is far from a shoe-in. Before consumers will respond to the brand, they must first know about and understand it. And that familiarity must lead to a strong, positive consumer-brand connection.5 A brand with high brand equity is a very valuable asset. Brand valuation is the process of estimating the total financial value of a brand. Measuring such value is difficult. According to Millward Brown, the brand value of Google is $158.8 billion, with Apple in second place with $147.9 billion, IBM third at $107.5 billion, Microsoft behind at $90.2 billion and McDonald’s at $85.7 billion.6

Brand equity – The differential effect that knowing the brand name has on customer response to the product or its marketing.

Company case Björn Borg: from tennis player and endorser to global brand Henrik Uggla Björn Borg is one of Sweden's most famous people and global exports in addition to ABBA, Roxette and the movie director Ingmar Bergman; the five-times Wimbledon winner and tennis star still enjoys global brand recognition and iconic status in many countries. For example, Harrods, a luxury department store in London, occasionally shows tennis finals between Björn Borg and Jimmy Connors. Borg started out as an endorser and partner brand to other brands, endorsing them and reinforcing their value propositions (as partner brand)

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and gradually turned into a leader brand with his own brand identity and brand promise. Since 1997 the Björn Borg group has had a licence granting exclusive rights to manufacture, market and sell products under the Björn Borg name. In December 2006 the group acquired the Björn Borg trademark and obtained exclusive global rights to use it for all categories of products and services. Like many other successful brands, Björn Borg has gradually expanded on its brand promise and moved from sport into fashion.

Swedish underwear liberation The Björn Borg brand is recognised for high-quality products and creative and innovative design, influenced by the sporting heritage associated with the Björn Borg name. Borg as a person energises the brand; consider the metaphorical copy and tennis references used in marketing: ‘Björn Borg is an international fashion underwear company with its centre court in Stockholm, Sweden. Influenced by one of the greatest tennis players of our time; the brand is recognised for its high-quality products and innovative designs.’ Importantly, however, the brand represents more and has other associations than the physical person. If this weren't the case, line extension, vertical extensions, brand extensions and potential co-branding ventures would be impossible. In other words, from a long-term integrated business, brand and consumer perspective, it would be optimal to capitalise on Björn Borg the person, yet broaden the brand's associations beyond the tennis legend. This is how Björn Borg brand management describes the process: ‘Continuity has given the brand a clear identity and a strong position in its markets. The legacy of Björn Borg's success during his years as a tennis player and his superstar status around the world still provide the brand with a strong platform for international expansion.’ In much the same way, the tennis player René Lacoste once inspired the building of the Lacoste brand; however, many of its customers today will never have heard of Lacoste the sportsman.

Core versus extended products Underwear is the core and largest business area of Björn Borg and colourful underwear is its flagship product. The offer also includes adjacent products, such as footwear, and, through licensees, bags, fragrances and eyewear as well. Björn Borg products are sold in around 15 markets, the largest of which are Holland and Sweden. The ambition is to become a world leader in underwear and to create brand resonance, an emotional bond with consumers globally. Building global brand equity for the Björn Borg brand involves four important dimensions: brand awareness, increasing the perceived quality, creating strong associations and creating brand loyalty, i.e. assuring that the customer returns.

Mission and brand identity touch points at the point-of-sale The brand mission of Björn Borg is ‘Swedish underwear liberation’ and the core values are vibrant, playful and daring. These represent the foundations of the brand identity, the product range, in-store positioning and store atmospherics. The packaging copy channels the core values and brand identity in a succinct way: ‘This piece defines playful fashion created with a witty mind. Always true to ourselves, we present you the wonders of vivid colours and daring designs.’ Furthermore, customers are encouraged through a postcard in the packaging to send in a photo of themselves in Björn Borg underwear only and to transform themselves into a ‘Swedish Export’. Original photos are rewarded with Björn Borg underwear and used in various marketing communication contexts such as ad campaigns and the Annual Report. The Swedish Exports campaign represents a kind of reciprocal brand leverage with the potential to strengthen the brand consumer relationship. Other marketing efforts include Twitter, Facebook, store brand identity, and communicating on packages.

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Björn Borg from a brand management perspective The Björn Borg case shows that brand management is much more complicated than just adding a name to a product or service. Instead, managing the Björn Borg brand means managing all touch-points in a brand value chain from the corporate branding level to the customer experience in retail contexts, to internet marketing channels and all sorts of communication efforts. By involving the customer through the Swedish Exports campaign, the Björn Borg group encourages customers to become true brand ambassadors. Strategically, one of the most important things is to understand the intersection of Björn Borg in the Björn Borg brand. First, even though Björn Borg the person is an icon and a brand in tennis with global recognition, his role in the Björn Borg Swedish sport brand is to inspire the brand heritage and provide energy for the brand. The Björn Borg brand captures many dimensions of sophisticated brand management such as building the brand's mission, vision, core values and identity, leveraging the mature brand through line extensions (new underwear models and line extensions aimed at new target groups such as Björn Borg Kids), brand extensions (shoes, eyewear and perfumes), licensing decisions and globalising the brand. Now let's consider the brand sponsorship decision discussed in this chapter in relation to the Björn Borg brand and its adjacent categories. In 2010 Björn Borg decided to license its shoe products through a company with expertise in shoes. The ambition is to increase sales from 300,000 pairs of shoes a year, expose the brand to less risk and simultaneously increase the revenue streams and cash flows through royalties. Importantly, from the customer-based brand equity perspective, the Björn Borg shoe brand will still appear as a category extension of Björn Borg; however, the business model underlying the branding decision is different. Brand licensing of shoes, eyewear and perfumes and other potential categories allows for increased cash flow from licensing, building the brand's recognition, enriching its brand associations while simultaneously enabling a focus on the core business: colourful underwear. Sources: D.A. Aaker, Brand Portfolio Strategy (New York: The Free Press, 2004); http://cms.bjornborg.com/en/Company/ About-Bjorn-Borg/The-Brand/; Björn Borg Annual Report (2009); Henrik Uggla, ‘The brand association base: a conceptual model for strategically leveraging partner brand equity’, The Journal of Brand Management, 12(2), 105–23 (2004); Alycia de Mesa, ‘Sport brands play at lifestyle’, http://www.brandchannel.com/features_effect.asp?pf_id=235.

High brand equity provides a company with many competitive advantages. A powerful brand enjoys a high level of consumer brand awareness and loyalty. Because consumers expect stores to carry the brand, the company has more leverage in bargaining with resellers. Because the brand name carries high credibility, the company can more easily launch line and brand extensions. A powerful brand offers the company some defence against fierce price competition.

Brand strategy decisions Branding poses challenging decisions to the marketer. Figure 8.3 shows that the major brand strategy decisions involve brand positioning, brand name selection, brand sponsorship and brand development.

Figure 8.3 Major brand strategy decisions

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Brand positioning Marketers need to position their brands clearly in target customers’ minds. They can position brands at any of three levels.7 At the lowest level, they can position the brand on product attributes. For example, P&G invented the disposable nappy category with its Pampers brand. Early Pampers marketing focused on attributes such as fluid absorption, fit and disposability. In general, however, attributes are the least desirable level for brand positioning. Competitors can easily copy attributes. More importantly, customers are not interested in attributes as such; they are interested in what the attributes will do for them.

Company case trIWa – the conventional rebel watch: success through category repositioning Henrik Uggla We discovered that young people never had a need for wrist watches in a functional sense, since they used their mobile phone to tell the time. Therefore we tried to position the TRIWA brand in a broader sense as a marker of identity and self-expression rather than just function and time. Ludvig Scheja, ITRIWA co-founder

Background In 2006, a young man bought a transparent plastic watch on a trip to Naples, Italy. Back home, his brother Ludvig immediately reacted to the elegant features and design of this watch. It was stylish and bore a resemblance to a Rolex but was much more fashionable. He called some business colleagues and they came to the conclusion that there was a gap in the declining watch market for something more elegant and contemporary than Swatch but cheaper than a Rolex. It was generally believed that the plastic design watch fulfilled a desire for elegance in a society in which the crime rate made a €5,000 Rolex an unnecessary risk.

From Sweden to the world After a first shipment of 300 items, watches were sent out for free to the biggest bloggers in Stockholm, who started to write about it. News of the product spread out from the epicentre of nightlife, Stureplan, in downtown Stockholm, and the watches immediately sold out. By 2010 the TRIWA brand was established in 15 markets outside Sweden, including Holland, Denmark, Norway, Lebanon, Australia, Great Britain, Japan, Chile, France and Germany. The previous year it was considered by a leading European fashion magazine as one of the hottest items in the world.

The brand identity and positioning A postmodern brand with an anti-lifestyle positioning You may describe the TRIWA brand as an alternative open-ended lifestyle brand, as against the conventional lifestyle watch brands that define their user and brand personality beforehand. It may sound paradoxical but it is part of understanding the key to TRIWA's success. Traditionally, watch advertising tends to connect their user with a particular lifestyle. From a brand positioning perspective, the idea is to create a brand personality and user image that resonate with the customers' aspirations. Often, the aspiration is aligned with a celebrity endorser such as a sports star or a movie star.

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Consider the ‘Pierce Brosnan's choice’ adverts for Omega watches, in which a laid-back Pierce Brosnan, dressed in jeans, shows off his Seamaster Aqua Terra Co-Axial Escapement Watch. Although Brosnan may appear as a normal person far removed from James Bond, the whole advert subscribes to the kind of aspirational lifestyle positioning that the TRIWA brand rebels against. In its place TRIWA suggests that just by adding a little bit of colour and design you can create a more expressive self rather than trying to become a movie star or borrowing someone else's personality. TRIWA tries to keep an alternative brand positioning as a watch for the independent person who likes to (re)create their personality depending on context, mood and dress code.

The marketing mix Given its more postmodern and less fixed brand positioning, some of TRIWA's strategic secrets can be revealed through its marketing mix. Product Although TRIWA is based on establishing points of difference from the traditional watch category,

a lot of effort is put into establishing TRIWA within the category in terms of quality. Technical quality, water resistance and details of the metals used are just some of the important characteristics that help to establish product points of parity within the category. Price A TRIWA watch retails for about €110. This is among the highest price points in the marketing segment

of plastic watches, where most copycats can be bought for €50 or even less. However, these other watches do not possess anything like the same quality or product attributes. In comparison, pure fashion watches based on brand extension from signature brands such as Armani and Gant may range between €200 and €500 with the exception of extreme super-premium brands such as Versace, which are much more expensive. At the other end, the price ladder increases from Tissot, Omega, Tag Heuer and Rolex. Promotion/marketing communications Where most watchmakers seek points of parity with their cat-

egory and develop very conventional promotion programmes at both business-to-business and business-tocustomer levels, TRIWA had a much more sophisticated, yet unconventional, strategy. First they exhibited their watches at the biggest fashion fairs in Europe, but not at watch fairs. In these settings they created environments that matched their core values of art, culture and rebellion. Choosing these fairs made an important channel statement for TRIWA that helped to enrich the associations with the brand and to establish it in the fashion-accessory category. In addition, the packaging is very slim and discreet, and in this way is different from traditional watches with packaging that is often big and pretentious. Their ad campaigns never use aspirational lifestyles or tie-in role models but instead adopt free and provocative themes. Place/distribution channels TRIWA have established themselves in the most premium department stores in

Sweden, such as NK and Nordstrom, small fashion stores, and luxury boutique hotels such as the Lydmar Hotel in Stockholm where many of the world's opinion leaders and early adopters stay. The distribution strategy follows a similar pattern to the global expansion. The innovative distribution is an important part of TRIWA's point of difference.

The essence of success: repositioning the watch category Essentially, the TRIWA brand revolved around a repositioning and revitalisation of a tired category that had fallen into stereotypical and very traditional brand positionings. In addition, TRIWA redefined and transcended the category, moving beyond its borders of watch as timekeeper into something entirely different: watch as fashion statement and accessory. Like other brave and irreverent brands such as Virgin, Harley-Davidson and Pepsi-Cola, TRIWA has become a challenger in its category, rebelling and revolting against bargain price/value brands as well as the more traditional and aspirationally driven premium and super-premium brands such as Omega, Tag Heuer and Rolex. The key to TRIWA's success cannot be easily explained but it had a lot to do with timing and the playful yet critical mindset of the postmodern consumer, one less interested in buying into the lifestyle of a Formula One driver or astronaut and more interested in repositioning him/herself with colourful watches according to mood, clothing and situation. In this respect the TRIWA customer is ultimately a rebel, a rebel against the conventions of time.

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Even the smallest thing matters in creating a strong brand ­experience. A person buying a pair of shoes from Steve Madden will get a fabric bag, which contributes to positive after-sales feelings. The bag can be used again and will thus generate further publicity for the Steve Madden brand. Source: Anders Parment

A brand can be better positioned by associating its name with a desirable benefit. Thus, Pampers can go beyond technical product attributes and talk about the resulting containment and skin-health benefits from dryness. ‘There are fewer wet bottoms in the world because of us,’ says Jim Stengel, Procter & Gamble’s (P&G) global marketing officer. Some successful brands positioned on benefits are Volvo (safety), FedEx (guaranteed on-time delivery), Chanel (design) and Lexus (quality). The strongest brands go beyond attribute or benefit positioning. They are positioned on strong beliefs and values. These brands pack an emotional wallop. Brands such as Apple, BMW and Victoria’s Secret rely less on a product’s tangible attributes and more on creating surprise, passion and excitement surrounding a brand. Successful brands engage customers on a deep, emotional level. When positioning a brand, the marketer should establish a mission for the brand and a vision of what the brand must be and do. A brand is the company’s promise to deliver a specific set of features, benefits, services and experiences consistently to the buyers. The brand promise must be simple and honest.

Brand name selection A good name can add greatly to a product’s success. However, finding the best brand name is a difficult task. It begins with a careful review of the product and its benefits, the target market and proposed marketing strategies. After that, naming a brand becomes part science, part art and a measure of instinct. Desirable qualities for a brand name include the following: (1) It should suggest something about the product’s benefits and qualities (e.g. Beautyrest (mattresses), Lagamati (cooking appliances store), Intensive Care (lotion)). (2) It should be easy to pronounce, recognise and remember (e.g. SAS and easyJet). (3) The brand name should be distinctive (Lexus, Zara). (4) It should be extendable: Amazon.com began as an online bookseller but chose a name that would allow expansion into other categories. (5) The name should translate easily into foreign languages. Chevrolet Nova didn’t achieve the desired success in South America since ‘no va’ means ‘doesn’t run’, and Honda had to change name on the 236

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Honda Fitta into Honda Jazz before it was launched in Europe. (6) It should be capable of registration and legal protection. A brand name cannot be registered if it infringes on existing brand names. Choosing a new brand name is hard work. Once chosen, the brand name must be protected. Many firms try to build a brand name that will eventually become identified with the product category. Brand names such as Levi’s and Scotch Tape have succeeded in this way. However, their very success may threaten the company’s rights to the name. Many originally protected brand names – such as cellophane, aspirin, nylon, kerosene, linoleum, yo-yo, trampoline, escalator and thermos – are now generic names that any seller can use. To protect their brands, marketers present them carefully using the word ‘brand’ and the registered trademark symbol.

Brand sponsorship A manufacturer has four sponsorship options. The product maybe launched as a national brand (or manufacturer’s brand), as when Sony and Kellogg sell their output under their own brand names (Sony Bravia HDTV or Weetabix Crunchy Bran Frosted Flakes cereal). Or the manufacturer may sell to resellers who give the product a private brand (also called a store brand or distributor brand). Although most manufacturers create their own brand names, others market licensed brands. Finally, two companies can join forces and co-brand a product.

Company case Brand sponsorship: Nordea Scandinavian Masters As title sponsor of the European Golf Tour Nordea Scandinavian Masters and the Nordic Professional tour Nordea Tour, Nordea makes a significant contribution to helping promising Nordic golfers develop their skills. So when we see Nordic players among the top players in the future, it's partly because of Nordea's and the other sponsors' support. That's the essence of sponsorship. It's commercial in the sense that it's a very conscious marketing activity, aiming at profiling the brand of the sponsors. But it's also done for a good cause. Nordea's three-year agreement as title sponsors costs SEK 65 million – plus some additional costs for running it – but it's worth the money. ‘Yes, the tour will be shown on Swedish television so we'll get a lot of communicative effect that way,’ says Tomas Björklund, Director of Strategic Event & Sponsoring at Nordea. ‘And it's an integrating sport that appeals to all parts of the country, the bigger cities as well as the countryside. Competitions are arranged and played locally. It's in line with our family profile. All generations can play together. And it's a great platform for customer events where we can use our database and invite more or less exactly the people we target,’ says Lotta Annvik-Karlsson, Senior Project Manager for Nordea's Scandinavian Masters Sponsorship. ‘Unfortunately, it's quite expensive to play golf but you learn a lot, you have to deal with people of other generations and it's a team game. You sort of learn a code of conduct so that's a type of personal development – your social skills develop.’ Björklund has seen sponsorship grow in importance in recent years, at least at Nordea: ‘Sponsorship has become so important that it's now not just a part of our marketing activities – it now has its own organisation and we report directly to the Swedish CEO, Hans Jacobson. He and the entire top management see sponsorship as a crucial part of Nordea's development and our client relationships.’ When Nordea started sponsorship of golf activities, there was some doubt as to whether it would be perceived as snobbish or not. ‘But that was very much in the past,’ says Annvik-Karlsson. ‘Today, one million Swedes see themselves as golfers. So all types of people are participating. We invite speakers and see it as a way of profiling and communicating the values we represent. For instance, we invited Par Johansson from the Glada Hudik Theatre.’

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Nordea Scandinavian Masters and the Nordea Tour make a significant contribution to helping promising Nordic golfers develop their skills and also promote the Nordea brand among key stakeholder groups. Source: Courtesy of Nordea

The story of Glada Hudik began back in 1996 when founder Par Johansson was working as a rehabilitation officer at a day-care centre in Hudiksvall, and suggested starting up a theatre group as one of the activities in which people with a learning disability could choose to participate. The group's debut performance was made against a backdrop of protests and questioning from the actors' family members. The response to the show was excellent, though, and the people with a learning disability who took part also showed great enthusiasm for working in theatre, and slowly the project began to gain momentum. Being part a project that aims to support the learning disabled is a great thing for Nordea, but it also raises customers' expectations of Nordea's corporate social responsibility (CSR) efforts. Nordea's strong brand and other CSR or CSR-related activities initiated by the firm make it important to consider the risks involved in sponsorship. One thing is clear: ‘Our strategy is not to support individual golfers. It's always a risk to build it on one person. The activity may get a poor reputation immediately. We prefer to sponsor organisations and not individuals,’ says Bjorklund. ‘We had a situation recently with a famous person who was very drunk at a big event – and it was widely exposed. One week later his agent called me and wanted to establish a sponsorship relationship with Nordea. It's a risk and a problem. Famous people are closely watched at all times and true or untrue stories may destroy our reputation and theirs.’ Sponsorship is always a co-branding activity – you co-brand with the organisation you support, and often there are other brands involved. ‘A great advantage for us as sponsors is that we can make use of each other's brands. This year, we have SAS, Telenor, PayEx and Samsung. Our Nordea customers may fly with SAS, use the Telenor mobile network, and pay with PayEx while using a Samsung screen. It's important for us that the co-sponsors do a good job and, at the end of the day, I'm sure we will recruit some new customers together,’ says Björklund. Like in any co-branding situation, it's important to consider the profile and qualities of other brands involved. SOURCES: Interview with Tomas Björklund, Nordea, and Lotta Annvik-Karlsson, Nordea; press release: ‘Nordea sponsors the largest Nordic golf tournament’.

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National brands versus store brands  National brands (or manufacturers’ brands) have long dominated the retail scene. In recent times, however, an increasing number of retailers and wholesalers have created their own store brands (or private brands). Store brand sales are soaring. In fact, they are growing much faster than national brands. In all, private brands now capture a significant amount of supermarket sales. Private-label apparel brands (EMV: egna märkes-varor) capture 20–30 per cent share of ICA, Hemköp and Coop sales in Sweden. In other countries the share is even higher – in Switzerland and Spain it is more than 50 per cent.8 Store brands now offer much greater selection and higher quality. Rather than simply creating low-end generic brands like Coop’s Blåvitt, which was launched in 1979, ICA now offers ICA I Love Eco, ICA Gott Liv and ICA Selection, all of which represent the higher end in terms of quality and price. As store brand selection and quality have improved, so have consumer confidence and acceptance. In the so-called battle of the brands between national and private brands, retailers have many advantages. They control what products they stock, where they go on the shelf, what prices they charge, and which ones they will feature in local circulars. Retailers often price their store brands lower than comparable national brands, thereby appealing to the budget-­ conscious shopper in all of us. Although store brands can be hard to establish and costly to stock and promote, they yield high profit margins for the reseller. And they give resellers exclusive products that cannot be bought from competitors, resulting in greater store traffic and loyalty. Retailers can use their market power and run reversed auctions where any supplier that fulfils certain quality criteria may get a supplier contract. In the long run, this may undermine the opportunity for small players to maintain their brands. First, they don’t get the product exposition they once got, before private brands got a foothold in the market. Second, prices and margins are lower than they used to be.9 When private brands get stronger, manufacturer brands must invest in R&D to bring out new brands, new features and continuous quality improvements. They must design strong advertising programmes to maintain high awareness and preference, e.g. Felix and Heinz Ketchup with less sugar, or Arla’s broad range of creme fraiche with various flavours.

Store brand (or private brand) – A brand created and owned by a reseller of a product or service.

Licensing  Most manufacturers take years and spend millions to create their own brand names. However, some companies license names or symbols previously created by other manufacturers, names of well-known celebrities, or characters from popular movies and books. For a fee, any of these can provide an instant and proven brand name. Apparel and accessories sellers pay large royalties to adorn their products – from blouses to ties, and linens to luggage – with the names or initials of well-known fashion innovators such as Calvin Klein, Tommy Hilfiger, Gucci or Armani. Sellers of children’s products attach an almost endless list of character names to clothing, toys, school supplies, linens, dolls, lunch boxes, cereals and other items. Licensed character names range from classics such as Disney and Asterix to Hello Kitty and Harry Potter characters. Co-branding  Although companies have been co-branding products for many years, there has been a recent resurgence in co-branding. Co-branding occurs when two established brand names of different companies are used on the same product. For example, financial services firms often partner with other companies to create co-branded credit cards, such as Statoil MasterCard or SJ MasterCard (both issued by SEBanken so there is a third brand involved). Audi – known for its four-wheel drive – teamed up with the Swedish Ski Team, and Nike and Apple co-branded the Nike+iPod Sport Kit, which lets runners link their Nike shoes with their iPod nanos to track and enhance running performance in real time. Co-branding offers many advantages. Because each brand dominates in a different category, the combined brands create broader consumer appeal and greater brand equity. Co-branding also allows a company to expand its existing brand into a category it might otherwise have difficulty entering alone. And sometimes it is difficult to reach a particular target group – say architect students or busy lawyers – but through co-branding it may be easier, because an arrangement can be set up with another company to which the target group has a relationship.

Co-branding – The practice of using the established brand names of two different companies on the same product.

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Co-branding also has limitations. A risk is that one of the companies does something bad, which harms the other brand, and there are often complex legal contracts and licences to consider. Co-branding partners must carefully co-ordinate their advertising, sales promotion and other marketing efforts. And both companies may have a bureaucracy that can slow down great initiatives. Finally, when co-branding, each partner must trust that the other will take good care of its brand.10

Brand development A company has four choices when it comes to developing brands (see Figure 8.4). It can ­introduce line extensions, brand extensions, multibrands or new brands. Figure 8.4  Brand development strategies

Line extensions: Mer was originally available in apple and orange but now offers more than 10 flavours. Source: Erik Cronberg/www.­ erikcronberg.se/Photographers Direct

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Line extensions Line extensions occur when a company extends existing brand names to new forms, colours, sizes, ingredients or flavours of an existing product category. The vast majority of all new-product activity consists of line extensions. Arla has engaged heavily in line extensions, as has Mer, Festis, Coca-Cola and Head & Shoulders. New sizes and flavours are typical line extensions. A company might introduce line extensions as a low-cost, low-risk way to introduce new products. Or it might want to meet consumer desires for variety, to use excess capacity or simply to command more shelf space from resellers. However, line extensions involve some risks. An over-extended brand name might lose its specific meaning. For example, Jeep offers nothing less than seven different Jeep SUV models for model year 2016 – Patriot, Grand Cherokee, Compass, Renegade, Cherokee, Wrangler and Wrangler Unlimited. It’s unlikely that many customers will fully appreciate the differences across the many similar models, and such ‘Jeep creep’ can cause consumer confusion or even frustration. Sales of an extension may come at the expense of other items in the line, and many products in a line increase administrative, logistics and sales costs. It requires more store shelf space and the risk of running out of stock for individual items increases. A line extension works best when it takes sales away from competing brands, not when it ‘cannibalises’ the company’s other items.

Line extension – Extending an existing brand name to new forms, colours, sizes, ingredients or flavours of an existing product category.

Brand extensions A brand extension extends a current brand name to new or modified products in a new category. For example, many clothing brands have extended to perfume and accessories, while Kimberly-Clark extended its market-leading Huggies brand from disposable nappies to a full line of toiletries: from shampoos, lotions and nappy-rash ointments to baby wash, disposable washcloths and disposable changing pads. Victorinox extended its venerable Swiss Army brand from multi-tool knives to products ranging from cutlery and ballpoint pens to watches, briefcases, fragrances and apparel.

Brand extension – Extending an existing brand name to new product categories.

Company case Chiquita: using the brand as a bridge for broadening the brand width Henrik Uggla Chiquita's partnership with Danone leverages both firms complementary strengths and will enable us to expand Just Fruit in a Bottle much faster and efficiently across Europe. Fernando Aguirre, Chairman and Chief Executive Officer of Chiquita

One of the most important considerations with strategic brand identity is the brand scope or the range of categories that the brand spans; think of the contrast between Virgin, covering hundreds of product categories from music to airlines to wine, and Planters peanuts, a brand with a much more narrow positioning covering simply the peanut category. As a rule of thumb, the more focused a brand is on one category the more distinct its position. Conversely, the broader the brand identity with respect to product scope, the less association with a specific category. For example, if we were to ask about the category prerogative of BMW, most people would immediately answer ‘cars’; however, if we were to ask about Virgin, most people would no longer have a

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top-of-mind positioning with a specific product category but would think instead of many distant and remote categories. Sometimes we talk about a brand's territory with respect to different potential extension zones. First, there is an inner core representing line extensions, e.g. Coca Cola Light to Coca-Cola Zero. Second, there is an extension zone involving category extensions from BMW cars to BMW mountain bikes or from Björn Borg underwear to Björn Borg eyewear. In most cases, successful category extensions will involve important bases of fit between the core brand and the new category; complementarily, transfer of manufacturing skills, brand personality, credibility, difficulty and substitutability are just some of these important success factors. A key question to ask in any form of extension is what the brand can give the product and what the product can give back to the brand.

Chiquita: a brand with a strong category positioning One of the strongest global brands with a historically strong category association is Chiquita. In Europe, Chiquita is the market leader in the banana segment, while in North America, the firm holds the secondleading position in the banana market. As noted on the corporate website in 2015 (www.chiquita.com), the top-of-mind brand association with Chiquita revolves primarily around bananas: ‘When someone mentions Chiquita, you probably think just of bananas – but there's a lot more to Chiquita than just bananas! In fact, Chiquita's basket overflows with a huge selection of delicious fruit such as pineapples, grapes, melons and avocados.’ Although the strong association with bananas is good from a segmenting, targeting and positioning perspective, it can potentially lock the brand into an identity trap in other categories. In his book Brand Failures, Matt Haig discussed Chiquita's problems and drawbacks with marketing fresh fruits in the 1990s. Many of the Chiquita brand competitors gradually expanded their value proposition and brand promise from bananas to a broadened association with fruit many years ago and the most successful actor in this broader segment including fruit and vegetables is the Dole brand, with extensions into fruit, fresh vegetables and even salads. In Europe, Chiquita leverages its ‘just fruit in a bottle platform’ through a licensing venture with Danone and has released a full line of smoothies with different flavours, from raspberry to cranberry, all with the common ingredient of banana. The ‘just fruit in a bottle platform’ also provides a venue and an opportunity for Danone to create a strong portfolio of fruit drinks: ‘Danone announced today that it will start a joint venture with Chiquita Brands International, Inc. to market fruit-based drinks, based on Chiquita's Just Fruit in a Bottle platform, in Europe. The joint venture will provide Danone with a platform to explore and develop fruit-based products, adding to its existing portfolio of healthy fresh dairy products and extending its potential for growth in Europe. Under the terms of the joint-venture agreement, Danone will pay an undisclosed amount in cash to Chiquita for a 51% interest in – and management control over – the joint-venture. Chiquita will license its trademark to the new entity.’

In Sweden and larger Scandinavia, Chiquita Smoothies have become a runaway success. With domestic aggressive smoothie brands, such as God Morgon Smoothies, Chiquita is still the market leader in this segment in Sweden. The Chiquita case has several important implications for strategic, tactical and operational marketing. First, all companies must continuously develop their business and brand portfolios and find new ways of leveraging equity into new markets, segments and products and at different stages of the product and brand life cycle. Sometimes the stretch will require a new brand (such as Lexus from Toyota or Lancôme from the L'Oréal Group). Mostly, this will be the case if the brand is to be sold in another channel, if it has a much more premium-oriented positioning, another brand promise, associations with innovation or extreme differentiation. In the Chiquita case, however, the company managed to leverage an established brand and at the same time create a strong bridge towards a broadened business and brand model. Although the ‘just fruit in a bottle’

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segment may not be as broad as the entire banana segment, it is still based on a nutritious value proposition, having associations with fruit and health. In a strategic sense, Chiquita broadened its market segment and strengthened its brand positioning. From a tactical perspective, Chiquita has developed a new and contemporary product that helps to secure shelf space and strengthen brand awareness in the retail channel. The internationally famous logo is easily recognised at the front of the bottle and the many different colours and flavours help to broaden the link with fruits beyond the banana. For example, Chiquita has a range of Nordic fruits, strengthening the heritage with Scandinavia and the region, mixing, for example, blueberry and banana. From a promotional perspective, Chiquita has been active in various media, including a separate website for the smoothies, in-store positioning, and bundling them through ‘internal co-promotion’, boosting brand and product usage with Chiquita Smoothie and Banana for SEK 26 in Pressbyrån, the Swedish convenience retail store. Chiquita has also been involved in sponsorship (e.g. Chiquita girls appeared with smoothies at the Super Brands awards at Berns) and the brand has been well exposed in outdoor media across Scandinavia. From a positioning perspective, Chiquita Smoothies may be ‘just fruit in a bottle’ where the banana creates a foundation and a point of parity and the other fruits help to establish points of difference, but from a strategy perspective, Chiquita Smoothies can also be viewed as a business and brand bridge, towards business development through extensions (new product areas), regional flavours and mixes (Nordic smoothies), combining South American bananas with Nordic blueberries, and expansion into new marketing segments. The Chiquita Smoothie is a bridge towards new segments, products and markets. Sources: D.A. Aaker, Spanning Silos (The Harvard Business School Press, 2007); http://www.nutraceuticalsworld.com/ contents/view/18037; ‘Danone and Chiquita start joint-venture to market fruit-based drinks, Neutraceuticals World (31 March 2010); Matt Haig, ‘Chiquita: is there a life beyond bananas?’, in Brand Failures (Kogan Page, London, 2003, p. 93); www.chiquita.com, April 2015.

A brand extension gives a new product instant recognition and faster acceptance. It also saves the high advertising costs usually required to build a new brand name. At the same time, a brand extension strategy involves some risk. Brand extensions may confuse the image of the main brand. And if a brand extension fails, it may harm consumer attitudes towards the other products carrying the same brand name. As with co-branding, using a brand in a new context always carries a risk.

Multibrands Companies often introduce additional brands in the same category. Thus, Procter & Gamble markets many different brands in each of its product categories. And Volkswagen markets Skoda, Volkswagen and Seat cars in the same size segments, but with different brand profiles. Multibranding offers a way to establish different features and appeal to different buying motives. It also allows a company to lock up more reseller shelf space. A major drawback of multibranding is that each brand might obtain only a small market share, and none may be very profitable. The company may end up spreading its resources over many brands instead of building a few brands to a highly profitable level. These companies should reduce the number of brands they sell in a given category and set up tighter screening procedures for new brands. General Motors has reduced the number of brands and closed down Saturn, Hummer and Pontiac, while Saab has been sold. Electrolux, with 149 brands in the portfolio in 2002, has since focused on the strong brands and now has about 30 brands. New brands A company might believe that the power of its existing brand name is waning and a new brand name is needed. Or it may create a new brand name when it enters a new product 243

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category for which none of the company’s current brand names are appropriate. For example, Toyota created the separate Lexus brand, targeted at the premium car market. As with multibranding, offering too many new brands can result in a company spreading its resources too thin. And in some industries, such as consumer packaged goods, consumers and retailers have become concerned that there are already too many brands, with too few differences between them. Thus, Unilever, Frito-Lay, Nestlé and other large consumer-product marketers are now pursuing megabrand strategies – weeding out weaker or slower-growing brands and focusing their marketing dollars only on brands that can achieve the number-one or number-two market share positions with good growth prospects in their categories.

Managing brands Advertising campaigns can help to create name recognition, brand knowledge and perhaps even some brand preference. However, the fact is that brands are not maintained by advertising but by the brand experience. Today, customers come to know a brand through a wide range of contacts and touch points. These include advertising, but also personal experience with the brand, word of mouth, company web pages and many others. The company must put as much care into managing these touch points as it does into producing its adverts. The brand’s positioning will not take hold fully unless everyone in the company ‘lives’ the brand. Therefore the company needs to train its people to be customer-centred. Even better, the company should carry out internal brand-building to help employees understand and be enthusiastic about the brand promise. Many companies go even further by training and encouraging their distributors and dealers to serve their customers well.

Cornerstones of a strong brand Having read this chapter, you will be well aware of the fundamentals of building a strong brand. Here, we discuss what characterises brands that consistently deliver higher brand equity and higher brand strength than their competitors. A strong brand is likely to be more attractive not only in relation to consumers, but also to employees, suppliers and other stakeholders. A strong brand is more likely to have a choice in terms of distribution channels, employees and co-operation partners. Strong brands are likely to have a higher level of trust and confidence, which makes it easier for others to invest in the brand. If H&M or Zara would hire a downtown retail space, it gives some prestige to the landlord and it is likely they will stay in the location for many years. Strong brands are more profitable and thus more likely to think long-term. They have the money to invest in customer relationships and they don’t become desperate during financial turbulence. Since strong brands have a high and stable demand, they don’t need to discount heavily to win customers. There is a natural demand for the products. In industries with high overcapacity, in particular – e.g. the car industry with estimations of production capacity exceeding actual demand by 60 per cent – this is important. Natural demand makes it possible to adjust prices to get the desired production level. The attractiveness of the brand gives a sense of pride among retailers and others who represent the brand. Relationships among channel members are likely to be better than with a weak brand, and thus competition among retailers will be more constructive, e.g. competing on customer satisfaction and good service rather than on price.11

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Summary In building brands, companies need to make decisions about brand positioning, brand name selection, brand sponsorship, and brand development. The most powerful brand positioning builds around strong consumer beliefs and values. Brand name selection involves finding the best brand name based on a careful review of product benefits, the target market, and proposed marketing strategies. A manufacturer has four brand sponsorship options: it can launch a manufacturer’s brand (or national brand), sell to resellers who use a private brand, market licensed brands, or join forces with another company to co-brand a product. A company also has four choices when it comes to developing brands. It can introduce line extensions, brand extensions, multibrands, or new brands. Companies must build and manage their brands carefully. The brand’s positioning must be ­­continuously communicated to consumers. Advertising can help. However, brands are not ­maintained by advertising but by the brand experience. Customers come to know a brand through a wide range of contacts and interactions. The company must put as much care into managing these touch points as it does into producing its ads. Thus, managing a company’s brand assets can no longer be left only to brand managers. Finally, companies must periodically audit their brands’ strengths and weaknesses. In some cases, brands may need to be repositioned because of ­changing customer preferences or new competitors. Strong brands give enormous benefits to companies in many ways: higher profitability, higher attractiveness in relation to different stakeholders and a greater freedom in terms of strategies and the destiny of the organisation. With a weak brand, the inherent level of attractiveness is low and the company is left to survive on its own.

Key terms Brand 226

Co-branding 239

Employer branding

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Line extension

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Brand equity

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Brand extension

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Store brand (private brand)

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Discussing the concepts 1. Which are the main characteristics of strong brands? 2. What are the main benefits of creating a place brand? Which are the main pitfalls and problems in this context? 3. What are the main similarities and differences between a consumer brand and an employer brand?

4. Define co-branding, and give one good and one poor example of co-branding practice. Explain your thinking. 5. Brand extension is a common practice. Try to identify two good examples of brand extensions and two poor examples. What patterns did you find, and what did you learn about brand extensions?

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Applying the concepts 1. Discuss the implications of the Audi case and suggest brands in two other industries that have ­succeeded – either in general terms or with going upmarket. To what extent do your examples resemble the Audi case? What conclusions might be drawn from comparing the Audi case with the examples you suggest? 2. Discuss employers you/your group members have worked for: (a) how do you perceive their employer brand?; (b) how might they improve their employer brands, given the preferences you have? 3. Multibrands, in a retail context often referred to as multi-franchising, have some conceptual b ­ enefits and problems. Discuss two industries where this practice is common and try to find out more about the benefits and problems than is covered in the text. 4. In the text, you can read about cornerstones of strong brands. What would be the cornerstones of a weak brand?

Marketing by the numbers A business has introduced a new confectionery brand that comes in flavours such as mint chocolate, mocha, chocolate almond and raspberry-almond with white chocolate. The confections are wrapped in iridescent colours and sold in re-closeable cartons. The business also intends to do this with its other, already established brands. The new products carry a higher wholesale price for the company (SEK 4.8 per ounce vs. SEK 3 per ounce for the original product). They also come with higher variable costs (SEK 3.5 per ounce vs. SEK 1.5 per ounce for the original product). 1. What brand development strategy is this business undertaking? 2. Assume the company expects to sell 300 million ounces of the new product within the first year following its introduction. However, half of those sales are expected to come from buyers who would normally purchase the company’s original brand. In other words, the new product will cannibalise some of the old product’s sales. Assume the company normally sells one billion ounces per year of its original product, and it will incur an increase in fixed costs of SEK 50 million during the first year it produces the new brand. Will the new product be profitable for the company?

References 1 See Jack Trout, ‘“Branding” simplified’, Forbes (19 April 2007), accessed at www.forbes.com. 2 See ‘McAtlas shrugged’, Foreign Policy (May–June 2001, pp. 26–37); and Philip Kotler and Kevin Lane Keller, Marketing Management, 13th edn (Upper Saddle River, NJ: Prentice Hall, 2009, p. 254). 3 This section is based on Anders Parment and Anna Dyhre, Sustainable Employer Branding (Liber, 2009); Anders Parment, Automobile Marketing. Distribution Strategies for Competitiveness (VDM Verlag, 2009). 4 Anders Parment and Anna Dyhre, Sustainable Employer Branding (Liber, 2009). 5 For more on Y&R’s Brand Asset Valuator, see ‘Brand Asset Valuator’, Value Based Management.net, www. valuebasedmanagement.net/methods_brand_asset_valuator.html (accessed February 2008); W. Ronald Lane, Karen Whitehill King and J. Thomas Russell, Kleppner’s Advertising Procedure, 17th edn (Upper Saddle River, NJ: Prentice Hall, 2008, p. 105); and Chelsea Greene, ‘Using brands to drive business results’, Landor, accessed at www.wpp.com/WPP/Marketing/ReportsStudies/Usingbrandstodrivebusinessresults.htm (March 2008). 6 See Millward Brown Optimor, ‘BrandZTop 100 Most Valuable Global Brands 2014 ranking’, http://www. millwardbrown.com/docs/default-source/global-brandz-downloads/global/2014_BrandZ_Top100_Chart.pdf (accessed April 2015).

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7 See Scott Davis, Brand Asset Management, 2nd edn (San Francisco: Jossey-Bass, 2002). For more on brand positioning, see Philip Kotler and Kevin Lane Keller, Marketing Management, 13th edn (Upper Saddle River, NJ: Prentice Hall, 2009, Ch. 10). 8 DLF News 2-14: ‘EMV ökar och erbjuder fler och tydligare alternativ’. 9 See Anders Parment, Distributionsstrategier. Kritiska Valpa Konkurrensintensiva Marknader (Liber, 2006). 10 Gabrielle Solomon, ‘Cobranding alliances: arranged marriages made by marketers’, Fortune (12 October 1998, p. 188); ‘Martha Stewart upgrading from Kmart to Macys’, FinancialWire (26 April 2006, p. 1); and James Mammerella, ‘Martha Stewart narrows loss’, Home Textiles Today (7 November 2007, p. 28). 11 This section was based on Anders Parment, ‘Distribution strategies for premium and volume brands in highly competitive consumer markets’, Journal of Retailing and Consumer Services, 15(4), 250–65 (2008); Anders Parment, Automobile Marketing. Distribution Strategies for Competitiveness (VDM Verlag, 2009).

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What is a product?

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Company case – Financial services: Max Matthiessen

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Product and service decisions

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Services marketing

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Mini contents

Source: Ronny Karlsson/Scanpix/ Press Association Images

Chapter preview Now that you’ve had a good look at customer-driven marketing strategy and the thinking underlying a brand perspective, we’ll take a deeper look at the marketing mix – the tactical tools that marketers use to implement their strategies and deliver superior customer value. In this chapter, we’ll study how companies develop and manage products. Then, in the chapters that follow, we’ll look at pricing, distribution and marketing communication tools. But we’ll first look at the product, which is usually the first and most basic marketing consideration.

Learning objectives After reading this chapter, you should be able to: 1 Define product and the major classifications of products and services. 2 Describe the decisions companies make regarding their individual products and services, product lines and product mixes. 3 Identify the four characteristics that affect the marketing of a service and the additional marketing considerations that services require.

What is a product?

What is a product? In their quest to create customer relationships, marketers must build and manage products and brands that connect with customers. We begin with a deceptively simple question: what is a product? After addressing this question, we will look at ways to classify products in consumer and business markets. Then we discuss the important decisions that marketers make regarding individual products, product lines and product mixes. Finally, we examine the characteristics and marketing requirements of services, and how the services approach has become a generic way of describing products, be they goods or services or, as in most cases, a mixture. We define a product as anything that can be offered to a market for attention, acquisition, use or consumption that might satisfy a want or need. Products include more than just tangible objects and intangible services, such as cars, computers or mobile phones. Broadly defined, ‘products’ also include places, events, peoples, organisations, employers, ideas or combinations of these. Throughout this text, we use the term product broadly to include any or all of these entities. Thus, Cacharel shoes, earrings from Tiffany’s or a home cleaning service are products. But so are a hotel stay in Barcelona, Avanza online investment services, Max Matthiessen financial services, Spotify music streaming and advice from your doctor. Services are a form of product that consists of activities, benefits or satisfactions offered for sale that are essentially intangible and do not result in the ownership of anything. Examples are banking, hotel, airline, retail, wireless communication and home-repair services. We will look at services more closely later in this chapter.

Product – Anything that can be offered to a market for attention, acquisition, use or consumption that might satisfy a want or need.

Products, services and experiences Product is a key element in the overall market offering, which often includes both tangible goods and services. At one extreme, the offer may consist of a pure tangible good, such as salt,

Healthcare constitutes 10–15 per cent of GDP in many countries and fulfils all criteria of being a typical service. Source: Shutterstock

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Service – Any activity or benefit that one party can offer to another that is essentially intangible and does not result in the ownership of anything.

screws, bricks and mortar – no services accompany the product. At the other extreme are pure services, for which the offer consists primarily of a service. Examples include a doctor’s examination or financial services. Between these two extremes, however, many goods-and-services combinations are possible. Today, as products and services become more commoditised, many companies are moving to a new level in creating value for their customers. To differentiate their offers they are creating and managing customer experiences with their brands or company. Experiences have always been an important part of marketing for some companies. Porsche has long manufactured dreams and Disney has manufactured dreams and memories through its movies and theme parks. Today, however, all kinds of firms are recasting their traditional goods and services to create experiences. Even banks, insurance companies and auditing firms are now emphasising experiences in their marketing. Companies that market experiences realise that customers are really buying much more than just products and services. They are buying what those offers will do for them. Remember the drill and the hole that we discussed in Chapter 1. Customers want a hole – not a drill in the first place.

Company case Financial services: Max Matthiessen Financial services, or more specifically financial advisors, are often debated. Financial advisors can be independent or restricted, and organised through brokers, agents, banks or insurance companies. A history of overselling, overpromising and under-delivery has resulted in consumer scepticism in relation to financial services – something that is a problem for the industry in general. In that context it can be hard to get through to the market, but it is also an opportunity for actors with a genuinely good reputation. Success is derived through long-term commitment. One of Sweden’s largest financial and employee benefit advisers, Max Matthiessen, offers pension schemes, life insurance, and asset management solutions to businesses, the self-employed and private individuals. Services provided include taking care of the administration of pension schemes etc. With a wide range of products at their disposal, personalised solutions are tailored for companies and individual advice is given to each client. Employees – whether they work for a large organisation or they are self-employed – get help finding the right insurance coverage and an individualised risk-return profile for their investments. In general terms, Max Matthiessen prioritises stability and sustainability and non-short-term profit. Nevertheless the client is offered a complete range of solutions for the desired portfolio composition. ‘If you want to take high risks, we can help you, but you have to convince us you’re absolutely aware about the risks you are taking,’ says Andreas Kåhlin, Manager and Partner at Max Matthiessen. In addition to its AAA financial rating, Max Matthiessen has won prestigious awards for its quality in advice, industry innovation, and Insurance Broker of the Year. ‘Awards like this give us great marketing exposure in independent channels and we don’t have to pay a single cent for it,’ says Kåhlin. ‘And it gives important feedback to our co-workers. The awards are extremely important in making our business model work in relation to our clients.’

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Thus far, Max Matthiessen is a partner organisation that operates solely in the Swedish market, and it makes a profit by selling financial services that fit its customers’ needs. The company services a large number of clients with a high net worth, which gives its customers an advantage since providers such as insurance companies and asset managers are prone to negotiate terms and conditions. The business model is, in principle, very simple: Max Matthiessen finances its advice and customer interaction through sales commission on the products provided by its suppliers. Thus, the consumer pays the same price as they would to a bank or insurance company and they may even get a discount and/or better products via Max Matthiessen than they would with a bank. Alternatively, the investor pays for the advice and receives all the sales commissions paid to Max Matthiessen by the providers. The latter is getting increasingly common, in particular when large companies are setting up employee benefits and retirement plans. An emerging and increasingly popular option among buyers is to buy services for a net price, and pay Max Matthiessen for the advice and negotiation power. In times of increasing consumer demand and a high level of transparency, not least because of the information and tools available on the internet, it is easy for consumers to compare products and services. If you do not have a long-term commitment in your financial advice, the market will react. Reputation and relationship are two very important factors to success for a financial adviser. Is it difficult to convince customers of the benefits of contacting a financial adviser instead of a bank or an insurance company? After all, margins vary across products and providers, so Max Matthiessen may have an incentive to sell particular products to its customers. ‘Sure, that would work in the short run and our short-term profits would rise. But we would soon get a bad reputation. Like all actors in our industry, we have to give the best advice, as regulated by law,’ says Kåhlin and adds that the investor will be informed about the margins that Max Matthiessen receives from the providers. Max Matthiessen’s motto is ‘we are not just another company’. The idea is to bring the best products available in the market to the customer.

Andreas Kåhlin, Manager and Partner at Max Matthiessen. Source: Max Matthiessen

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For a talented employee, it is easier to progress quickly at Max Matthiessen than at a firm of accountants or lawyers, as the structure is less rigid. A really talented and hard-working co-worker is likely to be discovered at an early stage. Kåhlin, who studied finance at Stockholm University School of Business, became a partner at 33 years of age. ‘Max Matthiessen has a rather flat organisation, with a focus on accountability. I think that is why we have been successful in attracting qualified professionals. We have a transparent structure and it is easy to calculate the value I add to the company. I have my own clients, and they generate some income. Of course, I do projects with my colleagues and if the customer wants something I’m not specialised in, I’ll call a colleague. But it’s not like in some other partner-owned consultancy firms, where there is one senior manager running the client relationship, and 10 or 15 people doing the job.’ Financial advisers such as Max Matthiessen are increasingly important in a market with oversupply. There is currently more supply than demand in the market for financial services, and this is unlikely to change. First, the market is global and companies in related industries attempt to expand their business models by offering their clients financial services too, e.g. banks selling insurance and the other way round. Second, the financial market is characterised by high fixed costs and low marginal costs. Setting up bank and client offices, an infrastructure to deal with all the legal issues and safety requirements, a website that fulfils high demands on security etc. is very expensive. But once the business is set up, it’s not much more expensive in fixed cost terms to have two million clients than it is to have one million clients. And a fund that invests in Asia has some costs, regardless of whether it manages SEK 100 million or SEK 10 billion. The higher the amount, the more likely it is very profitable. ‘And, at the end of the day, this is an opportunity for us. If there is a great fund that delivers a consistently good return, with adequate risk exposure while still fulfilling ethical standards, then we will recommend it to our clients. Good funds are getting more clients through our efforts,’ Kåhlin says. Max Matthiessen has found a niche in the market through its role as a link between the providers of financial services and the customers. ‘Our business model is easy to explain: we give our clients more value than if they contact the providers of financial instruments directly. First, we give you an overview that facilitates the process of finding the right product for you. Second, we recommend the product that will match your profile and preferences. Third, we have the competence needed to help you, with one contact for a wide variety of products, including life insurance, pension, long-term savings, funds, flat-rate savings products, and endowment insurance.’ The better the quality of the service providers, the better the product Max Matthiessen offers to its clients, so although banks are sometimes criticised for charging high fees, investing money with them over time is likely to be better than having it in a bank account, according to Kåhlin. ‘I think banks are doing a good job. Over time, investing in a fund is a great way to save money and make it grow. But I think we’ll help you find a solution that is better for you and more adapted to your needs. We give you more service, and you don’t have to pay more. The charges are the same,’ says Kahlin. So does Max Matthiessen contribute to healthy competition? ‘We do – if a bank introduces a new product, another provider will soon introduce something that is even better, and we are obliged to inform the customer about the best product available,’ says Kåhlin. Thus, the presence of Max Matthiessen in the market contributes to the development of new and better financial instruments. ‘We are a healthy business and we have been successful in adding customer value. Our mission is to find the best solutions for our clients. The market, our providers, needs to develop their products constantly in order to be of interest to our clients and us.’ So how does Max Matthiessen make sure its customers like what it is doing? Says Kåhlin: ‘After an appointment, the clients receive a survey to complete. We measure trust, competence and the way we are explaining complex issues, etc. The reply rate is approximately 50 per cent. The survey

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Source: Max Matthiessen

provides us with a lot of valuable information on how my colleagues and me can improve client relationships. Our customers are our primary marketing channel.’ Kåhlin predicts Max Matthiessen will grow in the future, and employ many business students. ‘You need a university degree to work for us. My degree has really helped me. And our personnel turnover is rather low. I’ve been with Max Matthiessen for thirteen years and still enjoy it. Max Matthiessen is a great employer but that’s only part of the explanation – if you create your own pool of clients, you want to keep it.’ Sources: Interview with Andreas Kåhlin, Partner at Max Matthiessen; www.maxm.se, accessed April 2015.

Levels of product and services Product planners need to think about products and services on three levels (see Figure 9.1). Each level adds more customer value. The most basic level is the core customer value, which addresses the question: what is the buyer really buying? When designing products, marketers must first define the core, problem-solving benefits or services that consumers seek. A woman buying lipstick buys more than lip colour. Charles Revson of Revlon saw this early: ‘In the factory, we make cosmetics; in the store, we sell hope.’ And people who buy a vacation trip to Hawaii are buying more than vacation and rest – they are buying experiences, new reference points in understanding various aspects of daily life, and stories to tell others about. At the second level, product planners must turn the core benefit into an actual product. They need to develop product and service features, design, a quality level, a brand name and packaging. For example, a smartphone is an actual product. Its name, parts, styling, features, packaging and other attributes have all been combined carefully to deliver the core customer value of staying connected. A hotel stay comes with a spacious and clean room, complimentary breakfast and WiFi, a nice location, bonus points, restaurant vouchers, and lounge access. 255

Chapter 9  Products and services

Figure 9.1  Three levels of product

Finally, the augmented product is built around the core benefit and actual product by offering additional consumer services and benefits. The hotel stay provides the guest with a ­complete solution to travelling and the needs that arise. Thus, the hotel gives a guest 24/7 access to qualified advice about the area through the concierge, quick 24/7 services when needed, and a toll-free telephone number and website to use if they have problems or ­questions. The service offered goes beyond what can be stated on the hotel’s website. Consumers see products as complex bundles of benefits that satisfy their needs. When developing products, marketers must first identify the core customer value that consumers seek from the product. They must then design the actual product and find ways to augment it in order to create this customer value and the most satisfying customer experience.

Consumer products – Goods and services bought by final consumers for personal consumption.

A smartphone could be analysed as a core product, with various functions for different customers, as actual product, and augmented product. Source: Shutterstock

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Product and service classifications Products and services fall into two broad classes based on the types of consumers that use them – consumer products and industrial products. Broadly defined, products also include other marketable entities such as experiences, organisations, people, places and ideas.

What is a product?

Consumer products Consumer products are products and services bought by final consumers for personal ­consumption. Marketers usually classify these products and services further based on how consumers go about buying them. Consumer products include convenience products, shopping products, speciality products and unsought products. These products differ in the ways consumers buy them and, therefore, in how they are marketed (see Table 9.1). Convenience products are consumer products and services that customers usually buy frequently, immediately and with a minimum of comparison and buying effort. Examples include laundry detergent, sweets, magazines and fast food. Convenience products are usually low-priced, and marketers place them in many locations to make them readily available when customers need them. Shopping products are less frequently purchased consumer products and services that customers compare carefully on suitability, quality, price and style. Consumers spend much time and effort in gathering information and making comparisons. Examples include furniture, clothing, used cars, major appliances, and hotel and airline services. Marketers usually distribute shopping products through fewer outlets but provide deeper sales support to help customers in their comparison efforts. Speciality products are consumer products and services with unique characteristics or brand identification for which a significant group of buyers is willing to make a special purchase effort. Examples include specific brands of cars, high-priced photographic equipment, designer clothes, and the services of medical or legal specialists. A Lamborghini car, for example, is a speciality product because buyers are usually willing to travel great distances to buy one. Buyers normally do not compare speciality products. They invest only the time needed to reach dealers selling the desired products. Unsought products are consumer products that the consumer either does not know about or knows about but does not normally think of buying. Most major new innovations are

Convenience product – A consumer product that customers usually buy frequently, immediately and with a minimum of comparison and buying effort. Shopping product – A consumer product that customers, in the process of selection and purchase, usually compare on such bases as suitability, quality, price and style. Speciality product – A consumer product with unique characteristics or brand identification for which a significant group of buyers is willing to make a special purchase effort.

Table 9.1  Marketing considerations for consumer products

Type of consumer product Marketing ­considerations

Convenience

Shopping

Speciality

Unsought

Customer buying behaviour

Frequent purchase, little planning, little comparison or shopping effort, low customer involvement

Less frequent ­purchase, much planning and ­shopping effort, ­comparison of brands on price, quality, style

Strong brand preference and loyalty, special purchase effort, little comparison of brands, low price sensitivity

Little product awareness, knowledge or, if aware, little or even negative interest

Price

Low price

Higher price

High price

Varies

Distribution

Widespread distribution, convenient locations

Selective distribution in fewer outlets

Exclusive distribution in only one or a few outlets per market area

Varies

Promotion

Mass promotion by the producer

Advertising and personal selling by both producer and resellers

More carefully targeted promotion by both ­producer and resellers

Aggressive advertising and personal selling by producer and resellers

Examples

Toothpaste, magazines, laundry detergent

Major appliances, ­televisions, furniture, clothing

Luxury goods, such as Tag Heuer watches or fine crystal

Life insurance, Red Cross blood donations

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Unsought product – A consumer product that the consumer either does not know about or knows about but does not normally think of buying.

unsought until the consumer becomes aware of them through advertising. Classic examples of known but unsought products and services are life insurance, pre-planned funeral services and blood donations to the Red Cross. By their very nature, unsought products require a lot of advertising, personal selling and other marketing efforts.

Industrial products Industrial products are those purchased for further processing or for use in conducting a business. Thus, the distinction between a consumer product and an industrial product is based on the purpose for which the product is bought. If a consumer buys a lawn mower for use around the home, the lawn mower is a consumer product. If the same consumer buys the same lawn mower for use in a landscaping business, the lawn mower is an industrial product. The three groups of industrial products and services include materials and parts, capital items, and supplies and services. Materials and parts include raw materials and manufactured materials and parts. Raw materials consist of farm products (wheat, cotton, livestock, fruits, vegetables) and natural products (fish, lumber, crude petroleum, iron ore). Manufactured materials and parts consist of component materials (iron, yarn, cement, wires) and component parts (small motors, tyres, castings). Most manufactured materials and parts are sold directly to industrial users. Price and service are the major marketing factors; branding and advertising tend to be less important. Capital items are industrial products that aid in the buyer’s production or operations, including installations and accessory equipment. Installations consist of major purchases such as buildings (factories, offices) and fixed equipment (generators, drill presses, large computer systems, lifts). Accessory equipment includes portable factory equipment and tools (hand tools, lift trucks) and office equipment (computers, fax machines, desks). They have a shorter life than installations and simply aid in the production process. The final group of industrial products is supplies and services. Supplies include operating supplies (lubricants, coal, paper, pencils) and repair and maintenance items (paint, nails, brooms). Supplies are the convenience products of the industrial field because they are usually purchased with a minimum of effort or comparison. Business services include maintenance and repair services (window cleaning, computer repair) and business advisory services (legal, management consulting, advertising). Such services are usually supplied under contract.

Organisations, persons, places and ideas

Social marketing – The use of commercial marketing concepts and tools in programmes designed to influence individuals’ behaviour to improve their well-being and that of society.

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As was discussed in the last chapter on brands, marketers have broadened the concept of a brand – or product – to include other market offerings – organisations, people, places and ideas. Organisations often carry out activities to ‘sell’ the organisation itself, not least to potential employees. This is called employer branding. And business firms sponsor public relations or corporate image advertising campaigns to market themselves and polish their images. People can also be thought of as products. Personal marketing, or self-marketing, consists of activities undertaken to create, maintain or change attitudes or behaviour towards particular people. Place marketing involves activities undertaken to create, maintain or change ­attitudes or behaviour towards particular places, i.e. cities, states, regions and nations that compete to attract tourists, new residents, conventions, and company offices and factories. Ideas can also be marketed. In one sense, all marketing is the marketing of an idea, whether it is the general idea of brushing your teeth or the specific idea that Crest ­toothpastes create ‘healthy, beautiful smiles for life’. Here, however, we narrow our focus to the ­marketing of social ideas. This area has been called social marketing, defined by the Social ­Marketing Institute as the use of commercial marketing concepts and tools in programmes designed to influence individuals’ behaviour to improve their well-being and that of society.1

The product life cycle

The product life cycle After launching a new product, it may live for several years but the life span of a product varies with product type, market structure, and many other factors. Most products, however, show similarities in terms of how they develop through different stages of the product life cycle (PLC). Although the exact shape and length of the life cycle is not known in advance, it is very useful to apply this model in planning and evaluating marketing approaches. Not only may different products be in different stages – the position in the product life cycle may vary across markets too. In general terms are mature markets at a later stage in the life cycle while less mature markets are following a couple of months, or a few years, later depending on product type and market circumstances. Figure 9.2 shows a typical PLC, the course that a product’s sales and profits take over its lifetime. The PLC has five distinct stages: 1. Product development begins when the company finds and develops a new-product idea. The company’s investment costs mount while there are no sales in this stage. 2. Introduction is a period of slow sales growth as the product is introduced in the ­marketplace. There are normally no profits in this stage since there are heavy expenses for product introduction and marketing. 3. Growth is a period of rapid market acceptance and increasing profits. 4. Maturity is a phase of slowdown in sales growth – the product has now achieved ­acceptance by most potential buyers. Profits level off or decline. 5. Decline is the last stage when sales fall off and profits drop. Not all products follow all five stages of the PLC – some stay in the mature stage for a long time while others are introduced and die quickly. Products may even enter the decline stage and then be cycled back into the growth stage through strong promotion or repositioning. The PLC concept can describe a product class (automobiles running on fossil fuel), a p ­ roduct form (small sports utility vehicle) or a brand (Mini Countryman, Nissan Qashqai or BMW X1). The PLC applies differently in each case. Product classes have the longest life cycles while product forms and, accordingly, brands representing a product form have shorter life cycles. The PLC concept can be applied to styles, fashions, and fads (Figure 9.3). A style is a basic and distinctive mode of expression that appears in homes (ranch, minimalism), clothing (formal, casual, hipster), and art (surrealist, abstract, impressionistic). Styles may last for generations, passing in and out of vogue. Many styles show several periods of renewed interest, which is obvious in our age of great interest for nostalgia. A fashion is a currently accepted or popular style in a given field. ‘Business casual’ is a typical fashion, and fashions tend to grow slowly, remain popular for a limited period of time, and then decline slowly. Fads are temporary periods of high sales driven by immediate product and brand popularity and ‘buzz marketing’ when applicable. A fad may be part of an otherwise normal PLC or may comprise a product’s entire life cycle.

Revenue/Profit

Introduction

Growth

Maturity

Decline

Figure 9.2  The product life cycle

Revenue

Profit Time

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Fashion

Sales

Sales

Style

Time

Fad

Sales

Figure 9.3  Styles, fashions and fads in the PLC

Time

Time

Product and service decisions Marketers make product and service decisions at three levels: individual product decisions, product line decisions and product mix decisions. We discuss each in turn.

Individual product and service decisions Figure 9.4 shows the important decisions in the development and marketing of individual products and services. We will focus on decisions about product attributes, packaging, ­labelling and product support services.

Product and service attributes Developing a product or service involves defining the benefits that it will offer. These benefits are communicated and delivered by product attributes such as quality, features and style and design.

Product quality  Product quality is one of the marketer’s major positioning tools. Quality has a direct impact on product or service performance; thus, it is closely linked to customer value and satisfaction. In the narrowest sense, quality can be defined as ‘freedom from defects’. But most customer-­centred companies go beyond this narrow definition. Instead, they define

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quality as the ­characteristics of a product or service that bear on its ability to satisfy stated or implied customer needs. Similarly, Siemens defines quality this way: ‘Quality is when our customers come back and our products don’t.’2 Product quality has two dimensions – level and consistency. In developing a product, the marketer must first choose a quality level that will support the product’s positioning. Here, product quality means performance quality – the ability of a product to perform its functions. For example, a Mercedes-Benz provides higher performance quality than a Chevrolet car: it has a smoother ride, provides more comfort, and lasts longer. Companies rarely try to offer the highest possible performance quality level – relatively few customers want or can afford the high levels of quality offered in products such as a ­Mercedes-Benz, Lexus or Rolls-Royce, a Poggenpohl kitchen or a Tag Heuer watch. Instead, ­companies choose a quality level that matches target market needs and the quality levels of ­competing products. Beyond quality level, high quality can also mean high levels of quality consistency. Here, product quality means conformance quality – freedom from defects and c­ onsistency in delivering a targeted level of performance. All companies should strive for high l­evels of conformance quality. In this sense, a Chevrolet can have just as much quality as a Mercedes-Benz. Although a Chevy doesn’t perform at the same level as a Mercedes-Benz, it can deliver as consistently the quality that customers pay for and expect. The high level of innovation in an Audi, a BMW or a Mercedes-Benz may cause some product quality ­problems a Ford doesn’t have.

Product features  A product can be offered with varying features. A stripped-down model, one without any extras, is the starting point. The company can create higher-level models by adding more ­features. Features are a competitive tool for differentiating the company’s product from competitors’ products. Being the first producer to introduce a valued new feature is one of the most effective ways to compete, e.g. a mobile phone camera or a hotel with organic breakfast. How can a company identify new features and decide which ones to add to its product? The company should periodically survey buyers who have used the product and ask the following questions. How do you like the product? Which specific features of the product do you like most? Which features could we add to improve the product? The answers provide the company with a rich list of feature ideas. The company can then assess each feature’s value to customers versus its cost to the company. Features that customers value highly in relation to costs should be added. Product style and design  Another way to add customer value is through distinctive product style and design. Design is a larger concept than style. Style simply describes the appearance of a product. Styles can be eye-catching or boring, or anywhere inbetween. A sensational style may grab attention and produce pleasing aesthetics, but it does not necessarily make the product perform better. Unlike style, design goes to the very heart of a product. Good design contributes to a product’s usefulness as well as to its looks. Design begins with a deep

Don’t forget Figure 9.1! The focus of all these decisions is to create core customer value

Product attributes

Branding

Packaging

Labelling

Product support services

Figure 9.4  Individual product decisions

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­ nderstanding of customer needs. Product designers should think less about product attribu utes and technical specifications and more about how customers will use and benefit from the product. Packaging involves designing and producing the container or wrapper for a product. Traditionally, the primary function of the package was to hold and protect the product. But more recently, numerous factors have made packaging an important marketing tool as well. Increased competition and clutter on retail shelves mean that packages must now perform many sales tasks – from attracting attention, to describing the product, to making the sale. Companies are realising the power of good packaging to create immediate consumer recognition of a brand. An average supermarket stocks 45,000 items; the average super-­ centre can carry as many as 150,000 items. The typical shopper passes some 300 items per minute, and more than 70 per cent of all purchase decisions are made in stores. In this highly competitive environment, the package may be the seller’s last and best chance to influence buyers. Thus, for many companies, the package itself has become an important promotional medium.3 ICA with its big and increasing share of private-labelled goods (egna märkesvaror) also has the opportunity to fill the shelves with its own products, thus further increasing its market power. Poorly designed packages can cause headaches for consumers and lost sales for the company. In recent years, product safety has also become a major packaging concern. Innovative packaging can give a company an advantage over competitors and boost sales. Sometimes even seemingly small packaging improvements can make a big difference. For example, Heinz revolutionised the 170-year-old condiments industry by inverting the good old ketchup bottle, letting customers quickly squeeze out every last bit of ketchup. At the same time, it adopted a ‘refrigerator-door-fit’ shape that not only slots into shelves more easily but also has a cap that is simpler for children to open. In the four months following the introduction of the new package, sales jumped 12 per cent. What’s more, the new package does double duty as a promotional tool.

Labelling Labels range from simple tags attached to products to complex graphics that are part of the package. They perform several functions. At the very least, the label identifies the product or brand and might also describe several things about the product – who made it, where it was made, when it was made, its contents, how it is to be used, and how to use it safely. Finally, the label might help to promote the brand, support its positioning and connect with ­customers. For many companies, labels have become an important element in broader marketing campaigns. Along with the positives, labelling also raises concerns. There has been a long history of legal concerns about packaging and labels. Numerous government laws have held that false, misleading or deceptive labels or packages constitute unfair competition. Labels can mislead customers, fail to describe important ingredients, or fail to include required safety warnings. As a result, many nations regulate labelling.

Product support services

Heinz revolutionised the ­condiments industry by ­inverting the ketchup bottle. Source: Courtesy of H.J. Heinz B.V.

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Customer service is another element of product strategy. A company’s offer usually includes some support services, which can be a minor or a major part of the total offering. Later in the chapter, we will discuss services as products in themselves. Here, we discuss services that augment actual products. The first step is to survey customers periodically to assess the value of current services and to obtain ideas for new ones. For example, many car manufacturers hold regular focus group interviews with owners and carefully watch complaints that come into their car dealerships. Through this approach, they will learn that buyers get very upset when repairs are not done correctly the first time. General Motors’ research indicates that customers who experience

Product and service decisions

good service are five times more likely to buy the same brand again than those who have had a bad service experience. A common expression in the automotive industry is: the salesperson sells the first car, the repair shop sells the next one. Once the company has assessed the quality of various support services to customers, it can take steps to fix problems and add new services that will both delight customers and yield profits to the company.

Product line decisions Beyond decisions about individual products and services, product strategy also calls for building a product line: a group of products that are closely related because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlets, or fall within given price ranges. The major product line decision involves product line length – the number of items in the product line. The line is too short if the manager can increase profits by adding items; the line is too long if the manager can increase profits by dropping items. Managers need to analyse their product lines periodically to assess each product item’s sales and profits and to understand how each item contributes to the line’s overall performance. Here, clever calculations are crucial – if the calculation is not right, the wrong decisions will be taken about which p ­ roducts to drop or add.4 Moreover, too many products add complexity all the way from R&D to ­production to the retail floor planning and stock-keeping. Product line length is influenced by company objectives and resources. For example, one objective might be to allow for upselling. Thus BMW wants to move customers up from its 1-series models to 2-, 3-, 4-, 5-, 6- and 7-series models. Another objective might be to allow cross-selling: Hewlett-Packard sells printers as well as cartridges. Still another objective might be to protect against economic swings: Inditex runs several clothing-store chains including Zara, Pull and Bear, Massimo Dutti, Bershka, Stradivarius and Oysho, thus covering different price points. With a CRM system important feedback for the development of the segmentation and brand positioning might be generated. A company can expand its product line in two ways: by line filling or by line ­s tretching. Product line filling involves adding more items within the present range of the line. There are several reasons for product line filling: reaching for extra p ­ rofits, ­s atisfying dealers, using excess capacity, being the leading full-line company, and ­p lugging holes to keep out competitors. Even though cannibalisation may be obvious, line filling may add market share and save companies under heavy competition from ­s uffering in the marketplace. Product line stretching occurs when a company lengthens its product line beyond its current range. The company can stretch its line downwards, upwards or both ways. Companies located at the upper end of the market can stretch their lines downwards to plug a market hole that would otherwise attract a new competitor or to respond to a competitor’s attack on the upper end. Armani did this by introducing Armani Exchange, clothing available at a reasonable price, thus making use of the brand name and increasing the total marginal contribution from its product range. Companies can also stretch their product lines upwards. Sometimes, companies stretch upwards in order to add prestige to their current products. Or they may be attracted by a faster growth rate or higher margins at the higher end. Companies in the middle range of the market may decide to stretch their lines in both ­directions. Marriott did this with its hotel product line. Along with regular Marriott hotels, it added eight new branded hotel lines to serve both the upper and lower ends of the market. Renaissance Hotels & Resorts aims to attract and please top executives; Fairfield Inn by Marriott, vacationers and business travellers on a tight travel budget; and Courtyard by Marriott, salespeople and other ‘road warriors’.5 One risk with this strategy is that some travellers will trade down after finding that the lower-price hotels in the Marriott chain give them pretty much everything they want. However, Marriott would rather capture its customers

Product line – A group of products that are closely related because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlets, or fall within given price ranges.

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who move downwards than lose them to competitors. Another risk is that Swedish consumers won’t get the full Marriott experience, or a mixed experience, as there are only two Marriott hotels in ­Sweden: an exclusive Renaissance hotel in Malmö, and a less exclusive Courtyard in ­Stockholm. When travelling abroad, customers may not book Marriott because they believe the hotels are ­over-priced – they have the reduced Marriott experience in mind when making their booking.

Product mix decisions Product mix (product portfolio) – The set of all product lines and items that a particular seller offers for sale.

An organisation with several product lines has a product mix. A product mix (or product ­portfolio) consists of all the product lines and items that a particular seller offers for sale. These product mix dimensions provide the handles for defining the company’s product strategy. Many companies manage very complex product portfolios, e.g. Sony: Sony Electronics, Sony Phones, Sony Computer Entertainment (games), Sony Pictures Entertainment (films, TV shows, music, DVDs), and Sony Financial Services (life insurance, banking and other ­offerings). And each major Sony business consists of several product lines. Product mix depth refers to the number of versions offered of each product in the line. Sony has a very deep product mix. The consistency of the product mix refers to how closely related the various product lines are in end use, production requirements, distribution channels, or some other way. ÖoB and Rusta, for example, have a low product mix consistency: the product mix offered is to a large extent based on what is available on the spot market at a low price, while premium brands in general have a high degree of product mix consistency.

Services marketing As noted at the beginning of the chapter, services are products too – just intangible ones. So all of the product topics we’ve discussed so far apply to services as well as to physical products. However, in this final section, we’ll focus in on the special characteristics and marketing needs that set services apart. Services have grown dramatically in recent years, and the service sector has accounted for more than 70 per cent of world GDP since 2009. In some countries the GDP service share is even higher: in Belgium, Denmark, France, the UK and the US it is 77–9 per cent; in Sweden, Switzerland and Germany it is 73 per cent. Australia (69 per cent) has a slightly lower services share due to an extensive domestic goods production. In predominantly service-producing countries with small commodity production, such as Hong Kong, the GDP service share is stable at around 93 per cent. In developing countries such as Angola, Bolivia, Cambodia, Central African Republic and Ethiopia, the level is still below 50 per cent.6 Service industries vary greatly. Governments offer services through courts, employment ­services, hospitals, military services, police and fire departments, postal service and schools. ­Private not-for-profit organisations offer services through museums, charities, churches, colleges, foundations and hospitals. A large number of business organisations offer services – airlines, banks, hotels, insurance companies, consulting firms, medical and legal practices, entertainment companies, real-estate firms, retailers and others.

Nature and characteristics of a service Service intangibility – A major characteristic of services – they cannot be seen, tasted, felt, heard or smelt before they are bought.

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A company must consider four special service characteristics when designing marketing ­programmes: intangibility, inseparability, variability and perishability (see Figure 9.5). Service intangibility means that services cannot be seen, tasted, felt, heard or smelt before they are bought. For example, people undergoing cosmetic surgery, seeing a therapist or ­taking piano lessons cannot see the result before the purchase. Airline passengers have nothing but a ticket and the promise that they and their luggage will arrive safely at the intended

Services marketing

Intangibility

Inseparability

Services cannot be seen, tasted, felt, heard or smelt before purchase

Services cannot be separated from their providers

Figure 9.5  Four service characteristics

Services Variability Quality of services depends on who provides them and when, where and how

Perishability Services cannot be stored for later sale or use

destination, hopefully at the same time. To reduce uncertainty, buyers look for indications and signals of service quality, e.g. by using web pages where other people’s experiences are outlined. They draw conclusions about quality from the place, people, price, equipment and communications that they can see. Therefore, the service provider’s task is to make the service tangible in one or more ways and to send the right signals about quality. One analyst calls this evidence management, in which the service organisation presents its customers with organised, honest evidence of its capabilities. Physical goods are produced, then stored, later sold, and still later consumed. In contrast, services are first sold, then produced and consumed at the same time. In services marketing, the service provider is the product. Service inseparability means that services cannot be separated from their providers, whether the providers are people or machines. If a service employee provides the service, then the employee becomes a part of the service. Because the customer is also present as the service is produced, provider-customer interaction is a special feature of services marketing. Both the provider and the customer affect the service outcome. Service variability means that the quality of services depends on who provides them as well as when, where and how they are provided. For example, some hotels – Radisson, say – have reputations for providing better service than others. Still, within a given Radisson hotel, one registration-counter employee may be cheerful and efficient, whereas another standing just a few feet away may be rather unpleasant and slow. Even the quality of a single Radisson employee’s service varies according to his or her energy and frame of mind at the time of each customer encounter. This is not the case with goods that go through a quality inspection before they leave the factory. Service perishability means that services cannot be stored for later sale or use. Some doctors charge patients for missed appointments because the service value existed only at that point and disappeared when the patient did not show up. The perishability of services is not a problem when demand is steady. However, when demand fluctuates, service firms often have difficult problems. For example, because of rush-hour demand, public transportation companies have to own much more equipment than they would if demand were even throughout the day. Thus, service firms often design strategies for producing a better match between demand and supply. Hotels and resorts charge lower prices in the off-season to attract more guests, and restaurants hire part-time employees to serve during peak periods.

Service inseparability – A major characteristic of services – they are produced and consumed at the same time and cannot be separated from their providers. Service variability – A major characteristic of services – their quality may vary greatly, depending on who provides them and when, where and how. Service perishability – A major characteristic of services – they cannot be stored for later sale or use.

Marketing strategies for service firms Just like manufacturing businesses, good service firms use marketing to position themselves strongly in chosen target markets. Jaguar says ‘The art of performance.’ At Radisson Blu, ‘Our goal is 100% Guest Satisfaction, which is also our promise to you. If you are not satisfied and we cannot make it right, you don’t have to pay!’ These and other service firms establish their 265

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positions through traditional marketing mix activities. However, because services differ from tangible products, they often require additional marketing approaches.

The service–profit chain In a service business, the customer and frontline service employee interact to create the service. Effective interaction, in turn, depends on the skills of frontline service employees and on the support processes – people and systems backing these employees. Thus, successful service companies focus their attention on both their customers and their employees. They understand the service–profit chain, which links service firm profits with employee and customer satisfaction. This chain consists of five links:7 ●●

Internal service quality: superior employee selection and training, a quality work environment and strong support for those dealing with customers, which results in …

●●

Satisfied and productive service employees: more satisfied, loyal, and hard-working employees, which results in …

●●

Greater service value: more effective and efficient customer value creation and service delivery, which results in …

●●

Satisfied and loyal customers: satisfied customers who remain loyal, repeat purchase and refer other customers, which results in …

●●

Healthy service profits and growth: superior service firm performance.

Therefore, reaching service profits and growth goals begins with taking care of those who take care of customers. The legendary CEO of Scandinavian Airlines, Jan Carlzon, revolutionised the airline industry’s view of customer orientation and services, and made services marketing a key issue for many managers, with his focus on the staff who meet customers. Back in the 1980s he emphasised the importance of these employees by turning the hierarchy upside down, thus putting flight stewardesses, salespeople and airport personnel at the top, almost as if middle managers are the support personnel.8 Thus, service marketing requires more than just traditional external marketing using the four Ps. Figure 9.6 shows that service marketing also requires internal marketing and

At Radisson Blu (formerly SAS Radisson): ‘Our goal is 100% Guest Satisfaction, which is also our promise to you. If you are not satisfied and we cannot make it right, you don’t have to pay!’ What a generous promise! And it puts pressure on Radisson Blu and its employees to deliver a very high level of customer satisfaction. Source: Shutterstock

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Figure 9.6  Three types of marketing in service industries

i­nteractive marketing. Internal marketing means that the service firm must orient and motivate its customer-­contact employees and supporting service people to work as a team to provide customer satisfaction. Internal marketing must precede external marketing. This idea is closely related to employer branding: putting a marketing perspective on how the organisation presents itself for (existing and) potential employees.9 Interactive marketing means that service quality depends heavily on the quality of the buyer–seller interaction during the service encounter. In product marketing, product quality often depends little on how the product is obtained. But in services marketing, service quality

Internal marketing – Orienting and motivating customer-contact employees and supporting service people to work as a team to provide customer satisfaction.

Jan Carlzon, CEO of Swedish Linjeflyg in the 1970s and ­Scandinavian Airlines in the 1980s, revolutionised the airline industry perspective on service, and made services marketing a key issue for many managers, with his focus on the staff who meet customers. Source: Ronny Karlsson/Scanpix/ Press Association Images

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depends on both the service deliverer and the quality of the delivery. Service marketers, ­therefore, have to master interactive marketing skills.

Managing service differentiation Service companies face three major marketing tasks: they want to increase their service ­differentiation, service quality and service productivity. In these days of intense price competition, service marketers often complain about the difficulty of differentiating their services from those of competitors. To the extent that customers view the services of different providers as similar, they care less about the provider than about the price. The solution to price competition is to develop a differentiated offer, delivery and image. The offer can include innovative features that set one company’s offer apart from its competitors’ offers. Some hotels offer a unique service offer that covers all types of customer expectations and even – although hotel customers are very demanding these days! – go beyond what customers expect. The five-star Sofitel St James hotel in London is known for its outstanding service offer, which covers everything from business-centre services to a thorough understanding of customers’ needs and desires when it comes to booking a restaurant, a family trip or a visit to a London museum. Airlines differentiate their offers through frequent-flyer award programmes and special services. For example, British Airways offers spa services at its Arrivals Lounge at Heathrow Airport and softer in-flight beds, plumper pillows and cosier blankets. Says one advert: ‘Our simple goal is to deliver the best service you could ask for, without you having to ask.’ Service companies can differentiate their service delivery by having more able and reliable customer-contact people, by developing a superior physical environment in which the service product is delivered, or by designing a superior delivery process. For example, many grocery chains now offer online shopping and home delivery as a better way to shop than having to drive, park, wait in line and tote groceries home.

Managing service quality A service firm can differentiate itself by delivering consistently higher quality than its competitors provide. Unfortunately, service quality is harder to define and judge than product quality. For instance, it is harder to agree on the quality of a haircut than on the quality of a hair dryer. Customer retention is perhaps the best measure of quality – a service firm’s ability to hang on to its customers depends on how consistently it delivers value to them. Unlike product manufacturers who can adjust their machinery and inputs until everything is perfect, service quality will always vary, depending on the interactions between employees and customers. As hard as they try, even the best companies will have an occasional late delivery, burned steak or grumpy employee. However, good service recovery can turn angry customers into loyal ones. In fact, good recovery can win more customer purchasing and loyalty than if things had gone well in the first place. Empowering frontline service employees is crucial – to give them the authority, responsibility and incentives they need to recognise, care about and tend to customer needs. For example, H&M gives its employees the autonomy they need to make decisions on returns – something common in fast-moving consumer goods industries in general, and with clothing in particular. Zara, on the other hand, only gives this authority to the floor manager, meaning the customer has to wait. Long queues of people don’t make a particularly good impression on other customers, although there are reasons to keep control of returns.

Managing service productivity Service firms are under great pressure to increase service productivity. They can do so in several ways. They can train current employees better or hire new ones who will work harder or more skilfully. Or they can increase the quantity of their service by giving up some quality. The provider can ‘industrialise the service’ by adding equipment and standardising production, as in 268

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McDonald’s assembly-line approach to fast-food retailing. Finally, the service provider can harness the power of technology. Although we often think of technology’s power to save time and costs in manufacturing companies, it also has great – and often untapped – potential to make service workers more productive. Just think of somebody repairing a lift, a dishwasher or a heating system having access to the company’s entire knowledge databank when at the customer’s premises. However, companies must avoid pushing productivity to the detriment of quality. Attempts to industrialise a service or to cut costs can make a service company more efficient in the short run. But they can also reduce its longer-term ability to innovate, maintain service quality or respond to consumer needs and desires. Many airlines are learning this lesson the hard way as they attempt to streamline, and industrialising or standardising a service will reduce the positive side of variation: that customers get customised and personalised service. Consider Scandic Hotels, known for delivering a consistently good service quality, but whose standardisation of customer treatment may have done away with some of the local character that customers enjoy. Getting the same breakfast menu regardless of whether you visit Scandic in Sundsvall, Karlstad or Kalmar has benefits – you know what you are getting – but it reduces the opportunity to profile local hotels and make them reflect local circumstances. Employees know they must adhere to the standardised approach in order not to deviate from the customer process template. This is not only true for Scandic: the conflict between standardisation and flexibility is present in many service situations.

Lobby at the Scandic Anglais, Stockholm, Sweden. Scandic Hotels: treading the fine line between standardisation and flexibility. Source: Courtesy of Scandic Hotels

Service-dominant logic Services have long had a special place in marketing but a few key points might be emphasised. In 1977, Lyn Shostack made a call to marketers to ‘break free’ from goods marketing.10 More 269

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Service-dominant logic – A perspective in which the good is the provider of the service to the customer.

recently, in a 2004 article, Vargo and Lusch directly challenged the efficacy of the characteristic differentiators between services and goods (intangibility, heterogeneity, inseparability and perishability).11 The background for the emerging service-dominant logic may be described as follows. Marketing inherited a model of exchange from economics, which had a dominant logic based on the exchange of goods, which usually are manufactured output. The dominant logic focused on transactions and tangible resources. In recent decades, new perspectives have emerged that have a revised logic focused on intangible resources, the co-creation of value and relationships. The new perspectives are converging to form a new dominant logic for marketing, characterised by service provisions rather than goods as fundamental to economic exchange. As stated by Evert Gummesson: ‘Customers do not buy goods or services: they buy offerings which render services which create value … The traditional division between goods and services is long outdated. It is not a matter of redefining services and seeing them from a customer perspective; activities render services, things render services. The shift in focus to s­ ervices is a shift from the means and the producer perspective to the utilisation and the ­customer perspective.’12 With a service-dominant logic perspective, the good is the provider of the service to the customer. A mobile phone provides the service of connecting the user to the world around, and the service of the symbolic meaning the phone might render its user. The mobile phone is not viewed as being a good, but instead as the appliance to which the user co-creates value with the provider of the services when calling, surfing the web, and so on. According to Vargo and Lusch, a service-dominant logic rests on ten premises: ●●

Service is the fundamental basis of exchange.

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Indirect exchange masks the fundamental basis of exchange. Service is provided through complex combinations of goods, money and institutions, and thus the service basis of exchange is not always apparent.

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Goods are a distribution mechanism for service provision. Durable as well as non-durable goods derive their value through use, i.e. the service they provide.

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Operant resources are the fundamental source of competitive advantage: The service provider’s comparative ability to cause desired change drives competition.

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All economies are service economies. Service (singular) is only now becoming more apparent with increased specialisation and outsourcing.

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The customer is always a co-creator of value. Thus, value creation is based on provider– customer interaction.

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The enterprise cannot deliver value independently, it can only offer value propositions. Enterprises can offer their applied resources for value creation and collaboratively create value following the customer’s acceptance of value propositions.

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A service-centred view is inherently customer-oriented and relational, since service is defined in terms of customer-determined benefit.

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All social and economic actors are resource integrators, implying that the context of value creation is networks of networks.

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Value is always uniquely and phenomenologically determined by the beneficiary. Value is idiosyncratic, experiential, contextual and laden with meaning.

With this approach, the ten premises of service-dominant logic represent a development that has taken place over several decades – that of society undergoing a transition from a goods economy to a service economy. However, one may also talk about products as representations of any mix of goods and services, including places, people, ideas etc., i.e. the perspective that has been applied earlier in this chapter and throughout this book. When it comes to a ­marketing perspective, what matters is understanding customer needs and creating customer value. By doing this homework better than one’s competitors, the chance of success in the marketplace is great. 270

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Summary A product is more than a simple set of tangible features. Each product or service offered to customers can be viewed on three levels. The core customer value consists of the core problem-solving benefits that consumers seek when they buy a product. The actual product exists around the core and includes the quality level, features, design, brand name and packaging. The augmented product is the actual product plus the various services and benefits offered with it, such as a warranty, free delivery, installation and maintenance. Broadly defined, a product is anything that can be offered to a market for attention, acquisition, use or consumption that might satisfy a want or need. Products include physical objects but also services, events, persons, places, organisations/employers, ideas or mixes of these entities. Services are products that consist of activities, benefits or satisfactions offered for sale that are essentially intangible, such as banking, hotel, tax preparation and home-repair services. Products and services fall into two broad classes based on the types of consumers that use them: consumer products – those bought by final consumers – and industrial products – purchased for further processing or for use in conducting a business. Other marketable entities – such as organisations, people, places and ideas – can also be thought of as products. Individual product decisions involve product attributes, packaging and labelling. Product attribute decisions involve product quality, features, and style and design. Packaging provides many key benefits, such as protection, economy, convenience and promotion. Package decisions often include designing labels, which identify, describe and possibly promote the product in accordance with the company’s brand image. Most companies produce a product line rather than a single product. A product line is a group of products that are related in function, customer-purchase needs or distribution channels. Line stretching involves extending a line downwards, upwards or in both directions to occupy a gap that might otherwise be filled by a competitor. By contrast, line filling involves adding items within the present range of the line. All product lines and items offered to customers by a particular seller make up the product mix. The mix can be described in terms of four dimensions: width, length, depth and consistency. These dimensions are the tools for developing the company’s product strategy. Services are characterised by four key characteristics: they are intangible, inseparable, variable and perishable. Each characteristic poses problems and marketing requirements. Marketers work to find ways to make the service more tangible, to increase the productivity of providers who are inseparable from their products, to standardise the quality in the face of variability, and to improve demand movements and supply capacities in the face of service perishability. Good service companies focus attention on both customers and employees. They understand the service–profit chain, which links service firm profits with employee and customer satisfaction. Services marketing strategy calls not only for external marketing but also for internal marketing to motivate employees and interactive marketing to create service delivery skills among service providers. To succeed, service marketers must create competitive differentiation, offer high service quality and find ways to increase service productivity. The transition from goods to services as the major focus of the marketing offer has been going on for several decades now, and in the last decade, the idea of service-dominant logic has emerged, meaning that services are now the dominating perspective in marketing, and goods are just a vehicle to bring the service to the customer. However, with the perspective taken in this book, the concept of products covers not only goods and services in all existing mixes, but also places, people, organisations/employers and ideas, and focuses on adding customer value by understanding their needs and preferences. 271

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Key terms Product 251

Product line

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Service 252

Product mix (product portfolio)

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Consumer products

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Service intangibility

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Convenience product

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Service inseparability

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Shopping product

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Service variability

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Speciality product

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Service perishability

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Unsought product

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Service–profit chain

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Industrial product

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Internal marketing

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Social marketing

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Interactive marketing

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Product quality

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Service-dominant logic

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Packaging 262

Discussing the concepts 1. Give at least three examples of products that provide substantial consumer benefits and, accordingly, the opportunity to charge a higher price. Attempt to explain the benefits in a convincing manner.

3. What are the main differences between consumer and industrial products?

2. What is the main point and benefit of dividing a product or service into different product levels?

5. What characteristics do services have, as compared with physical products?

4. Give a few examples of downward stretch and a few of upward stretch, and discuss the implications of these strategies.

6. Describe the main thinking in service-­ dominant logic.

Applying the concepts 1. There are many examples of companies entering a new market with an exclusive brand, thus enjoying a high price premium for their products, and then high sales volumes become the priority. For instance, by being featured in ICA’s weekly advertising, the sales volume of a product may see a short-term increase of several hundred per cent. But there is a risk that consumers won’t pay the price premium once the campaign is finished. Discuss two examples of companies that may have to deal with this issue of balancing price premium and brand strength, on the one hand, against sales volume, on the other. 2. Choose three industries you have a fair knowledge of, and explain how the increasing focus on ­experiences is influencing the industry and their marketing offers. 3. A British Airways advertisement suggests the following: ‘Our simple goal is to deliver the best service you could ask for, without you having to ask.’ It is an ambitious statement which many customers expect the company to live up to. But how is it realised? Describe, by referring to an example chosen by you, how a company can work to deliver on an ambitious promise such as this.

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References

References 1 Accessed online at www.social-marketing.org/aboutus.html (August 2008). 2 Quotes and definitions from Philip Kotler, Kotleron Marketing (New York: Free Press, 1999, p. 17); and www. asq.org ( July 2008). 3 See ‘Supermarket facts’, www.fmi.org/facts_figs/?fuseaction=superfact (accessed April 2008); and ‘Wal-Mart facts’, www.walmartfacts.com/StateByState/?id=2 (accessed April 2008). 4 Henrik Nehler, Activity-Based Costing. Avbildning, integration och nytta, IMIE dissertation, no. 88 (Linköping University, 2005). 5 Information online at www.marriott.com (accessed August 2007). 6 Data from the World Bank, 2015. 7 See James L. Heskett, W. Earl Sasser Jr. and Leonard A. Schlesinger, The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value (New York: Free Press, 1997); James L. Heskett, W. Earl Sasser and Leonard A. Schlesinger, The Value Profit Chain: Treat Employees Like Customers and Customers Like Employees (New York: Free Press, 2003); and John F. Milliman, Jeffrey M. Ferguson and Andrew J. Czaplewski, ‘Breaking the cycle’, Marketing Management (March–April 2008, pp. 14–17). 8 Jan Carlzon and Tomas Lagerstrom, Rivpyramiderna! En bok om den nya manniskan, chefen och ledaren (Bonniers, 1985). 9 Anders Parment and Anna Dyhre, Sustainable Employer Branding. Guidelines, Worktools and Best Practices (Liber, 2009). 10 Lynn G. Shostack, ‘Breaking free from product marketing’, Journal of Marketing, 41, 73–80 (April 1977). 11 Stephen L. Vargo and Robert F. Lusch, ‘Evolving to a new dominant logic for marketing’, Journal of Marketing, 68(1), 1–17 (2004); Stephen L. Vargo and Robert F. Lusch, ‘The four service marketing myths: remnants of a goods-based manufacturing model’, Journal of Service Research, 6(4), 324–35 (2004). 12 Evert Gumesson, ‘Relationship marketing: its role in the service economy’, in Understanding Services Management, William J. Glynn and James G. Barnes, eds (New York: John Wiley and Sons, 1995, pp. 250–1).

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Company case – It’s complicated: price-setting in the medical technology industry

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What is a price, actually?

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Source: Christophe Simon/Getty Images

Chapter preview In this chapter, we look at a second major marketing mix tool – pricing. If effective product development, promotion and marketing channels sow the seeds of business success, effective pricing is the harvest. That being said, the overall pricing strategy reflects the company, brand and product attractiveness, thus being an outcome of rather than input to the company’s business model. Firms successful at creating customer value with the other marketing mix activities must still capture some of this value in the prices they earn. Yet, despite its importance, many firms do not handle pricing well. In this chapter, we’ll look at internal and external considerations that affect pricing decisions and examine both general pricing approaches and applied pricing strategies: new-product pricing strategies, product mix pricing strategies, price adjustment strategies and price reaction strategies. We start the chapter with a story about Medtronic, the world’s largest medical technology company, operating in an industry that – like many others – is characterised by intensive competition, high development costs, long product life cycles, high margins and an interesting mixture of business and consumer market characteristics. The company must also consider what impact its prices will have on other parties in its business environment.

Learning objectives After reading this chapter, you should be able to: 1 Discuss the importance of understanding customer value perceptions when setting prices. 2 Discuss the importance of company and product costs in setting prices. 3 Identify and define the other important external and internal factors affecting a firm’s pricing decisions. 4 Describe the major strategies for pricing imitative and new products. 5 Discuss how companies adjust their prices to take into account different types of customers and situations. 6 Discuss the key issues related to initiating and responding to price changes.

Company case It’s complicated: price-setting in the medical technology industry American medical device company Medtronic has a strong market presence in Europe and each country has its own product mix, structure of customers, and – which is typical of this industry – mixture of consumers as product users and professional buyers who sign agreements. In the selling process, there are often doctors involved, and they may have the final say in the buying decisions. Professional buyers have a strong emphasis on price – while still seeing product characteristics as very important – but doctors are primarily focused on what the medical device can do for the patient, and thus they are important from a selling point of view. So what does this mean in terms of price-setting? Josef Smeds, Business Unit Manager, Sweden & Iceland, for diabetes products at Medtronic, explains: ‘Price-setting strategies differ from situation to situation. Sometimes we follow the “school book approach”; we do marketing research or buy services from a marketing research agency. They conduct a price-sensitivity analysis, they ask customers how much they want to pay, and deliver an analysis and several figures that help us in making the decisions. We use their recommendations but normally adjust prices since we know by experience that customers may underestimate how much they are willing to pay for a product. And a few per cent higher prices can really boost our margins.’ Medtronic’s product range includes insulin pumps, consumables like sensors and

Price-setting strategies differ from situation to situation. Source: Anders Parment

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Some products generate sales of other products. This insulin pump, for example, creates sales of daily consumables. Source: Courtesy of Meditronic AB

infusion sets, and systems for continued glucose monitoring, all aimed at helping people suffering from diabetes to live a better life. Smeds emphasises the importance of understanding the market. ‘In Sweden, for example, only few of our patients are paying for the products, and there is no co-payment. The product is either bought by hospitals or bought on prescription by a physician through a pharmacy. So we often deliver to the hospitals at short notice and then invoice the county region,’ he says. Smeds describes price-setting as a complex issue. ‘Over time you develop an efficient and flexible mindset that helps you make price-setting decisions. You look at other countries and use experiences from countries with similar characteristics as the Nordic countries. We conduct marketing research and compare the European markets. Sometimes a product generates sales of other products, e.g. an insulin pump generates daily use of consumables, so we need to consider the entire marginal contribution of the product and the additional sales it creates. However, this is based on assumptions of the product’s life cycle and how many additional sales it will generate and there may be a conflict. On the one hand, each product should bear its own costs. On the other hand, if it creates more sales of other products, even a loss might be okay. But then you need to integrate the calculated loss into the calculus of other products. So it’s all very complex and people in an organisation may have their own ideas of what is the best solution.’ There is also a time factor, and time to market may be crucial when launching new products. Many millions of SEK may have been spent to speed up the product development process, and for competitive reasons, it may be unwise to postpone the product launch. ‘Sometimes it’s based on intuition and experiences from other countries. Research takes time – and costs money,’ says Smeds. In understanding the interplay between supply and demand mechanisms and marketing spending, every industry may have its own characteristics. ‘For us, it’s crucial that physicians understand the value of our products. So we use well-known physicians and other Health Care professionals in our marketing. If they like our products and recommend them to others, it’s the best marketing you can get. Physicians or specialised nurses, who often make the final purchase decisions, are demanding

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when it comes to product performance and we can’t really get acceptance for new product introductions without an excellent product and evidence that confirms the product’s qualities,’ says Smeds. ‘So we try to find a number of well-known, highly qualified physicians before the product launch. They get the opportunity to see the product beforehand. But they are not sell-outs; they will not help us unless they are really convinced the product is of substantial value for their patients.’ Given these preconditions, an interesting question is whether price-setting is a key strategic issue or a result of other marketing mix factors. ‘Well, many of the products we launch are entirely new products, product innovations, so there are no, or few, references for the price-setting. So we are price-setters, and we might have the opportunity to charge a premium price provided the product adds superior value in the buyers’ experience. If the product is successful and priced accordingly, it really strengthens our brand. In some other cases, we are number two, market followers, and thus we are price-takers,’ says Smeds. ‘Nowadays there is also a trend to conduct health economics – calculations that take indirect societal benefits and costs into consideration – from which a price of a product can be derived. If we can prove our product generates substantial benefits, the public sector is likely to buy it, even at what could be considered a rather high price,’ he says. However, although it may seem easy to apply prices based on customers’ willingness to pay, the calculus perspective remains strong, as in most big, international organisations: ‘Although much speaks for charging as high price as possible, in a big, multinational organisation like Medtronic, the traditional cost-based price-setting still has some influence on the final prices. There is a heritage of looking at a target gross margin threshold.’ Finally, Smeds explains some trends in the industry in which Medtronics operates: ‘Price sensitivity is a lot higher compared to a decade ago. In all major markets, the public sector is much more cost-focused and doctors are under more restrictions when they decide on product procurement. But if you can prove your product improves life for patients, you can still charge a fair price which makes room for continuous development of innovating products that will help develop and grow your business.’ Source: Interview with Josef Smeds, Business Unit Manager, Sweden & Iceland, Medtronic Diabetes, April 2015.

Value-seeking customers have put increased pricing pressure on many companies. Thanks to global players in different industries – H&M, IKEA, Ryanair and Wal-Mart – consumers enjoy the opportunities of buying cheaper products and many companies are looking for ways to slash prices.1 In many industries, goods have become a lot cheaper. However, cutting prices is often not the best answer. Reducing prices unnecessarily can lead to lost profits and damaging price wars. It can signal to customers that the price is more important than the customer value a brand delivers. Instead, companies should sell value, not price. They should persuade customers that paying a higher price for the company’s brand is justified by the greater value they gain. The challenge is to find the price that will let the company make a fair profit by getting paid for the customer value it creates. HP, Epson, Canon and Lexmark have long dominated the printer industry with a maddening ‘razor-and-blades’ pricing strategy (as in, give away the razor, then make your profits on the blades). They sell printers at little or no profit. But once you own the printer, you’re stuck buying their grossly overpriced, high-margin replacement ink cartridges. For example, you can pick up a multifunction inkjet printer for less than SEK 800. But the tricolour inkjet cartridge that goes with it is likely to cost several hundred SEK, and 25 high-quality photo paper sheets SEK 200 – the paper alone costs more than complete photo processing from, for example, www.fujidirekt.se including delivery if, say, 50 copies are ordered. The price per ounce of inkjet printer ink can exceed the per-ounce price of an expensive perfume, premium champagne or even caviar. 279

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The big manufacturers seem content with this captive-product pricing strategy. In fact, they pull in four times more revenues from ink cartridges and paper than from the printers themselves. Customers don’t like being held hostage and having to pay through the nose for ink and paper – some are outraged by it. But what can they do? The answer has been that only HP cartridges work with HP printers. Buying another brand isn’t the answer, either – all of the manufacturers pursue the same pricing strategy. And it’s difficult to compare long-term perprint prices across manufacturers. However, alternatives have emerged: there are refills to buy for inkjet cartridges and compatible (or pirate) cartridges available at substantially lower prices. In the long run, the printer manufacturers may have to rethink their price-setting, meaning the hardware may become more expensive. Pricing decisions are subject to a complex array of company, environmental and ­competitive forces. To make things even more complex, a company sets not a single price but rather a ­pricing structure that covers different items in its line. This pricing structure changes over time as products move through their life cycles, and as the competitive environment and cost structures change, the company considers when to initiate price changes and when to respond to them.

What is a price, actually? In the narrowest sense, price is the amount of money charged for a product or service. From a broader marketing perspective, price is the sum of all the values that customers give up in order to gain the benefits of having or using a product or service. Historically, price has been the major factor affecting buyer choice. In recent decades, non-price factors have gained increasing importance but price still remains one of the most important elements determining a firm’s market share and profitability. Price is the only element in the marketing mix that produces revenue; all other elements represent costs. Price is also one of the most flexible marketing mix elements. Unlike product features and channel commitments, prices can be changed quickly. At the same time, pricing is the number-one problem facing many marketing executives, and many companies do not handle pricing well. One frequent problem is that companies are too quick to reduce prices in order to get a sale rather than convincing buyers that their product’s greater value is worth a higher price. While the company overall is putting heavy effort into increasing customer value, strengthening the brand and increasing price premium over competitors, prices may be reduced too much and too quickly to get more short-term sales. It is important to be aware of this tension between pricing and sales figures, on the one hand, and other activities that attempt to improve customer value and thus the opportunities to charge a higher price, on the other.2 Thus, pricing may be too cost-oriented rather than customer value-oriented. It is not uncommon to hear managers complain that the company’s products are given away for too low a price. Some managers view pricing as a big headache, preferring instead to focus on the other marketing mix elements. However, smart managers treat pricing as a key strategic tool for creating and capturing customer value. Prices have a direct impact on a firm’s bottom line. A small percentage improvement in price can generate a large percentage in profitability. More importantly, as a part of a company’s overall value proposition, price plays a key role in creating customer value and building customer relationships. ‘Instead of running away from pricing,’ says the expert, ‘savvy marketers are embracing it’.3

Factors to consider when setting prices In setting the right price, a host of factors come into play. The price the company charges will fall somewhere between one that is too high to produce any demand and one that is too low to produce a profit. Figure 10.1 summarises the major considerations in setting price. Customer 280

Factors to consider when setting prices

Customer perceptions of value Price ceiling No demand above this price

Other internal and external considerations Marketing strategy, objectives and mix Nature of the market and demand Competitors’ strategies and prices

Product costs

Figure 10.1  Considerations in setting price

Price floor No profits below this price

perceptions of the product’s value set the ceiling for prices. If customers perceive that the price is greater than the product’s value, they will not buy the product. Product costs set the floor for prices. In setting its price between these two extremes, a company must consider a number of other internal and external factors, including its overall marketing strategy and mix, the nature of the market and demand, and competitors’ strategies and prices.

Customer perceptions of value In the end, the customer will decide whether a product’s price is right. When customers buy a product, they exchange something of value (the price) in order to get something of value (the benefits of having or using the product). Effective, customer-oriented pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures this value.

Value-based pricing Good pricing begins with a complete understanding of the value that a product or service creates for customers. Value-based pricing uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Hence, the marketer cannot design a product and marketing programme and then set the price. Price is considered along with the other marketing mix variables before the marketing programme is set. Figure 10.2 compares value-based pricing with cost-based pricing. Cost-based pricing is product-driven, and input to prices comes from calculus and controlling. The company designs what it considers to be a good product, adds up the costs of making the product, and sets a price that covers costs plus a target profit. Marketing must then convince buyers that the product’s value at that price justifies its purchase. If the price turns out to be too high, the company must settle for lower mark-ups or lower sales, both resulting in disappointing profits. Value-based pricing reverses this process. The company first assesses customer needs and value perceptions. It then sets its target price based on customer perceptions of value. The targeted value and price then drive decisions about what costs can be incurred and the resulting product design. As a result, pricing begins with analysing consumer needs and value perceptions. Input comes from the market, not from the controlling department. The customer’s value perception must not exceed the company’s costs of producing a particular product. In many cases, customers are not willing to pay the price of a product, and companies stop producing and selling it or decide not to start manufacturing it at all after getting this information from marketing research. Some activities may be outsourced, thus allowing the company to offer the product at a price the customer will accept. It is sometimes cheaper to source activities from another company than to produce them in-house. For example, a new car buyer normally enjoys a road assistance service that lasts for a couple of years and will cover any costs incurred by unplanned breakdowns. But seldom will the car manufacturer or its national sales companies run the service as efficiently as companies specialised in roadside assistance. The same holds for hospital or university restaurants – the hospital or university may control pricing but can hardly compete with Eurest, Hörs or Sodexo on cost structures. It’s important to remember that ‘good value’ is not the same as ‘low price’. For example, some car buyers consider the luxurious Bentley Continental GT car to be really good value,

Value-based pricing – Setting price based on buyers’ perceptions of value rather than on the seller’s cost.

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Figure 10.2  Cost-based versus value-based pricing Source: From T.T. Nagle and R.K. Holden, The Strategy and Tactics of Pricing, 3rd edn (Upper Saddle River, NJ: Prentice Hall, 1995). Copyright © 1995. Reprinted with permission of Pearson Education, Inc.

Good-value pricing – ­Offering just the right combination of quality and good service at a fair price.

even at an eye-popping price of $175,000 – in Sweden, prices start at SEK 1,850,000. Around 10,000 new Bentleys are sold every year, indicating that at least these buyers find the car delivers good value – certainly like many others who can’t afford it.4 Every Bentley GT is built by hand, an old-world bit of automaking requiring 160 hours per vehicle. Craftsmen spend 18 hours simply stitching the perfectly joined leather of the GT’s steering wheel, almost as long as it takes to assemble an entire VW Golf. The results are impressive: Dash and doors are mirrored with walnut veneer, floor pedals are carved from aluminium, window and seat toggles are cut from actual metal rather than plastic, and every air vent is perfectly chromed within a car that has brilliantly incorporated technological sophistication. With this perspective, the GT is a bargain. A company using value-based pricing must find out what value buyers assign to different competitive offers. However, companies often find it hard to measure the value customers will attach to its product. For example, calculating the cost of ingredients in a meal at a fancy restaurant is relatively easy. But assigning a value to other satisfactions such as taste, environment, relaxation, conversation and status is very hard. And these values will vary both for different consumers and different situations. Still, consumers will use these perceived values to evaluate a product’s price, so the company must work to measure them. Sometimes, companies ask consumers how much they would pay for a basic product and for each benefit added to the offer. Or a company might conduct experiments to test the perceived value of different product offers. The rule is easy. If the seller charges more than the buyers’ perceived value, the company’s sales will suffer. If the seller charges less, its products sell very well. But they produce less revenue than they would if they were priced at the level of perceived value. We now examine two types of value-based pricing: good-value pricing and value-added pricing.

Good-value pricing  During the past decade, marketers have noted a fundamental shift in consumer attitudes towards price and quality. More and more, marketers have adopted ­good-value pricing strategies – offering just the right combination of quality and good service at a fair price. Examples include the introduction of less expensive versions of established, brand-name products, e.g. cheaper lines of premium clothing brands, restaurants offering ‘value menus’ or hotels offering family packages. As a response to companies’ decisions to implement tougher policies on travel costs in general and flying business class in particular, airlines have introduced Premium Economy classes named Plus (SAS), Premium Voyageur (Air France/KLM) or Premium Economy (Lufthansa). With this approach, the traveller is offered what frequent business travellers need at a cost of about half the business class ticket. An important type of good-value pricing at the retail level is everyday low pricing (EDLP). EDLP involves charging a constant, everyday low price with few or no temporary price ­discounts, e.g. nappies, or 10 litres of milk in a city-centre ICA Supermarket to attract local customers who may be attracted by the even lower prices at ICA Maxi. An upmarket restaurant may offer a number of ‘Always at Grodan’ menus that make the restaurant available to more people. Value-added pricing  Value-based pricing doesn’t mean simply charging what customers want to pay or setting low prices to meet the competition. In many marketing situations, the challenge is to build the company’s pricing power – its power to escape price competition and

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Value menus might represent value-added pricing – a way of making the restaurant customer pay more, and receive more value for money.

Everyday low pricing is a great thing. But if the discount is ­marginal – in this case the ­customer pays SEK 27.50 instead of SEK 27.90 if buying two items of detergent – it looks unprofessional and customers may get the impression the store is trying to delude them. Source: Anders Parment

to justify higher prices and margin. To increase pricing power, a firm must retain or build the value of its market offering. This is especially true for suppliers of commodity products, which are characterised by little differentiation and intense price competition. To increase their pricing power, many companies adopt value-added pricing strategies. Rather than cutting prices to match competitors, they attach value-added features and services to differentiate their offers and thus support higher prices. Customers are motivated not by price, but by what they get for what they paid. ‘If consumers thought the best deal was simply a question of money saved, we’d all be shopping in one big discount store,’ says one pricing expert. ‘Customers want value and are willing to pay for it. Savvy marketers price their products accordingly.’5 This book provides many examples – in all chapters – of companies applying value-added pricing. Offering something different and getting paid for it is an essential marketing strategy.

Value-added pricing – Attaching value-added features and services to differentiate a company’s offers and thus support higher prices.

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Company and product costs

Cost-based pricing – Setting prices based on the costs of producing, distributing and selling the product plus a fair rate of return for effort and risk.

Costs set the floor for price but the goal isn’t always to minimise costs. In fact, many firms invest in higher costs so that they can claim higher prices and margins (think about Bentley cars). The key is to manage the spread between costs and prices – how much the company makes for the customer value it delivers. Whereas customer-value perceptions set the price ceiling, costs set the floor for the price that the company can charge. Cost-based pricing involves setting prices based on the costs for producing, distributing and selling the product plus a fair rate of return for its effort and risk. A company’s costs may be an important element in its pricing strategy. Some companies, such as Ryanair, Wal-Mart and Dacia, work to become the ‘low-cost producers’ in their industries. Companies with lower costs can set lower prices that result in smaller margins but greater sales and profits. Other companies, however, intentionally pay higher costs so that they can claim higher prices and margins. It costs more to make a Dynaudio sound system than a Philips sound system but the higher costs result in higher quality, and more customer value. Transparency makes it increasingly difficult to maintain high margins6 The high degree of transparency that now characterises almost any business and the environment it operates in has a multitude of roots and effects: ●

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●

●

●

●

●

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User-provided information (e.g. websites that provide hotel reviews, client-based ranking of banks, or car workshops, and student-based university rankings) gradually gains power and contributes to making buyers question company-generated information, including on pricing. Companies that want a dialogue with their customers and other stakeholders to get invaluable feedback on their operations have to apply openness and transparency in their operations. Communication must therefore be transparent and fair and companies should accept constructive criticism from customers and other stakeholders. Companies have to explain significant product or service risks, component substitutions, or other foreseeable eventualities that could affect customers or their perception of the purchase decision – if not, the company is likely to lose customers, reputation and, if not immediately then later, profitability. Active web forums and similar ensure that prices are disclosed and, increasingly, financing terms, price deals and discounts. There are websites specialising in discount codes and sites that run price comparisons – at the end of the day, transparency will promote further transparency and companies that attempt to hide their prices, terms and conditions will lose buyers, attractiveness and profitability. An increased transparency about what people are doing (social media make a contribution here!) and the willingness of young people in particular to make requests at short notice and not being afraid of making demands of companies, salespeople, bankers, employers etc. has created a new situation for selling and employing alike. Openness, transparency and trust are necessary foundations of a communications strategy when buyers use new and fast communication tools, can easily find information elsewhere and expect full and honest information to be provided by companies. A more open attitude, particularly among young individuals, and better tools to share information, mean that few young people hesitate to share information about discounts on products they buy – be it white goods or a new car, or the interest rate on a mortgage – hence making it a lot easier to compare offers. Under-performing staff will face a tough time: customers are increasingly evaluating the personnel they meet, hence providing the company with direct market feedback. This happens both through existing systems and with new techniques. When there was less openness, ‘voting with your feet’ was the likely consequence of customer dissatisfaction.

Factors to consider when setting prices

●

The new transparency reflects the transition from companies being in power to consumers (and employees) increasingly having the upper hand in negotiations and purchasing decisions.

Cost structures The company must watch its costs carefully. If it costs the company more than competitors to produce and sell its product, the company will need to charge a higher price or make less profit, putting it at a competitive disadvantage.

Costs at different levels of production To price wisely, management needs to know how its costs vary with different levels of production. For example, suppose Sony Mobile Phones has built a plant to produce 1,000 mobile phones per day. Figure 10.3(a) shows the typical short-run average cost curve (SRAC). It shows that the cost per phone is high if Sony Mobile Phones’ factory produces only a few per day. But as production moves up to 1,000 phones per day, average cost falls as fixed costs are spread over more units. Sony Mobile Phones try to produce more than 1,000 mobile phones per day, but average costs will increase because the plant becomes inefficient. Workers have to wait for machines, the machines break down more often, and workers get in each other’s way. If Sony Mobile Phones believed it could sell 2,000 mobile phones a day, it should consider building a larger plant. The plant would use more efficient machinery and work arrangements. Also, the unit cost of producing 2,000 units per day would be lower than the unit cost of producing 1,000 units per day, as shown in the long-run average cost (LRAC) curve (Figure 10.3(b)). In fact, a 3,000-capacity plant would even be more efficient, according to Figure 10.3(b). But a 4,000-daily production plant would be less efficient because of increasing diseconomies of scale – too many workers to manage, paperwork slowing things down, and so on. Figure 10.3(b) shows that a 3,000-daily production plant is the best size to build if demand is strong enough to support this level of production.

Costs as a function of production experience Suppose Sony Mobile Phones runs a plant that produces 3,000 units per day. As Sony Mobile Phones gains experience in producing phones, it learns how to do it better. Workers learn shortcuts and become more familiar with their equipment. With practice, the work becomes better organised, and better equipment and production processes develop. With higher volume, Sony Mobile Phones becomes more efficient and gains economies of scale. As a result, average cost tends to fall with accumulated production experience. This is shown in Figure 10.4.7 Thus,

Figure 10.3 Cost per unit at different levels of production

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Figure 10.4  Cost per unit as a function of accumulated production: the experience curve

Experience curve (learning curve) – The drop in the average per-unit ­production cost that comes with accumulated ­production experience.

the average cost of producing the first 100,000 mobile phones is SEK 200 per unit. When the company has produced the first 200,000 mobile phones the average cost has fallen to SEK 180. After its accumulated production experience doubles again to 400,000, the average cost is SEK 140. This drop in the average cost with accumulated production experience is called the experience curve (learning curve). If a downward-sloping experience curve exists, this is highly significant for the company. Not only will the company’s unit production cost fall, but it will fall faster if the company makes and sells more during a given time period. But the market has to stand ready to buy the higher output. And to take advantage of the experience curve, Sony Mobile Phones must get a large market share early in the product’s life cycle. This suggests the following pricing strategy: Sony Mobile Phones should price its mobile phones low; its sales will then increase, and its costs will decrease through gaining more experience, and then it can lower its prices further. Changing consumer demands and increased flexibility in manufacturing have reduced the power of the experience curve. First, unlike examples still used in some literature on calculus, it is not as expensive as it was in the past to provide different product versions and lines in the same factory. Second, and probably more importantly, consumers now represent a broader range of preferences. Economies of scale may also be interpreted from a broader perspective. Ryanair is certainly not the biggest airline in the world. It flies to about 180 destinations while Delta Airlines flies to almost 500. Delta operates 785 aircraft, almost twice as much as Ryanir with slightly more than 400 aircraft. But Ryanair makes use of economies of scale thinking: it only operates one aircraft – the Boeing 737 – on all routes. Most airlines of Ryanair’s size have five to 15 different types of aircraft in use, which means considerable complexity in planning, procurement, spare parts stock-keeping, pilot training etc. Ryanair saves a lot by applying the one-aircraftfits-all approach. Needless to say, it loses some flexibility in the other end but with the ambition to be the operator in the industry with the lowest costs, the economies of scale approach makes sense. A single-minded focus on reducing costs and exploiting the experience curve will not always work. Experience-curve pricing carries some major risks. The aggressive pricing might give the product a cheap image. The strategy also assumes that competitors are weak and not willing to fight it out by meeting the company’s price cuts. Finally, while the company is building volume under one technology, a competitor may find a lower-cost technology that lets it start at prices lower than those of the market leader, who still operates on the old ­experience curve.

Cost-plus pricing Cost-plus pricing – Adding a standard mark-up to the cost of the product.

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The simplest pricing method is cost-plus pricing – adding a standard mark-up to the cost of the product. Construction companies, for example, submit job bids by estimating the total project cost and adding a standard mark-up for profit. Lawyers, accountants and other professionals typically price by adding a standard mark-up to their costs. Some sellers tell their customers they will charge cost plus a specified mark-up; for example, aerospace companies price this way to the government.

Factors to consider when setting prices

To illustrate mark-up pricing, suppose a toaster manufacturer had the following costs and expected sales:

Variable cost SEK 100 Fixed cost SEK 3,000,000 Expected unit sales 50,000 Then the manufacturer’s cost per toaster is given by the following:

Unit cos t = variable cos t +

SEK 3,000,000 fixe d cos ts = SEK 100 + = SEK 160 unit s ale s 50,000

Now suppose the manufacturer wants to earn a 20 per cent mark-up on sales. The manufacturer’s mark-up price is given by the following:

Mark@up price =

unit cost SEK 160 = = SEK 200 1 - desired return on sales 1 - 0.2

The manufacturer would charge dealers SEK 200 per toaster and make a profit of SEK 40 per unit. The dealers, in turn, will mark up the toaster. If dealers want to earn 50 per cent on the sales price, they will mark up the toaster to SEK 400 (SEK 200 + 50% of SEK 400). This number is equivalent to a mark-up on cost of 100 per cent (SEK 200/SEK 200). Does using standard mark-ups to set prices make sense? Generally, no. Any pricing method that ignores demand and competitor prices is not likely to lead to the best price. Still, mark-up pricing remains popular for many reasons. First, sellers are more certain about costs than about demand. By tying the price to cost, sellers simplify pricing – they do not need to make frequent adjustments as demand changes. Second, when all firms in the industry use this pricing method, prices tend to be similar and price competition is thus minimised. Third, many people feel that cost-plus pricing is fairer to both buyers and sellers. Sellers earn a fair return on their investment but do not take advantage of buyers when buyers’ demand becomes great.

Break-even analysis and target profit pricing Another cost-oriented pricing approach is break-even pricing (or a variation called target profit pricing). The firm tries to determine the price at which it will break even or make the target profit it is seeking. Such pricing is used by car manufacturers, which prices its cars to achieve a 15–20 per cent profit on its investment. This pricing method is also used by public utilities, which are constrained to make a fair return on their investment. Target pricing uses the concept of a break-even chart, which shows the total cost and total revenue expected at different sales volume levels. Figure 10.5 shows a break-even chart for the toaster manufacturer discussed here. Fixed costs are SEK 3,000,000 regardless of sales volume.

Figure 10.5  Break-even chart for determining target price

Cost in SEK (thousands)

12,000 10,000

Break-even pricing (target profit pricing) – Setting price to break even on the costs of making and marketing a product, or setting price to make a target profit.

SEK

8000 6000 4000 2000 0

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Variable costs are added to fixed costs to form total costs, which rise with volume. The total revenue curve starts at zero and rises with each unit sold. The slope of the total revenue curve reflects the price of SEK 200 per unit. The total revenue and total cost curves cross at 30,000 units. This is the break-even ­volume. At SEK 200, the company must sell at least 30,000 units to break even, that is, for total ­revenue to cover total cost. Break-even volume can be calculated using the following formula:

Bre ak@e ve n volum e =

SEK 3,000,000 fixe d cos t = = 30,000 price - variable cos t SEK 200 - SEK 100

If the company wants to make a target profit, it must sell more than 30,000 units at SEK 200 each. Suppose the toaster manufacturer has invested SEK 10,000,000 in the business and wants to set price to earn a 20 per cent return, or SEK 2,000,000. In that case, it must sell at least 50,000 units at SEK 200 each. If the company charges a higher price, the market may not buy even a lower needed volume. Much depends on the price elasticity and competitors’ prices. The manufacturer should consider different prices and estimate break-even volumes, probable demand and profits for each. This is done in Table 10.1. The table shows that as price increases, break-even volume drops (column 2). But as price increases, demand for the toasters also falls off (column 3). At the SEK 140 price, because the manufacturer clears only SEK 40 per toaster (SEK 140 – SEK 100 in variable costs), it must sell a very high volume to break even. Even though the low price attracts many buyers, demand still falls below the high breakeven point, and the manufacturer loses money. At the other extreme, with a SEK 220 price the manufacturer clears SEK 120 per toaster and must sell only 25,000 units to break even. But at this high price, consumers buy too few toasters, and profits are negative. The table shows that a price of SEK 180 yields the highest profits. Note that none of the prices produce the manufacturer’s target profit of SEK 2,000,000. To achieve this target return, the manufacturer will have to search for ways to lower fixed or variable costs, thus lowering the break-even volume. Customer perceptions of value set the upper limit for prices and costs set the lower limit. However, in setting prices within these limits, the company must consider a number of other internal and external factors.

Other internal and external considerations affecting price decisions Overall marketing strategy, objectives and mix If the company has selected its target market and positioning carefully, then its pricing strategy will be fairly straightforward. Pricing may play an important role in helping to accomplish Table 10.1  Break-even volume and profits at different prices

(1) Price (SEK)

(2) Unit demand needed to break even

(3) Expected unit demand at given price

140

75,000

71,000

160

50,000

180

(4) Total revenue [(1) × (3)] (SEK)

(5)

(6)

Total costs*

Profit [(4)–|5)] (SEK)



9,940,000

10,100,000

160,000

67,000



10,720,000

9,700,000

1,020,000

37,500

60,000



10,800,000

9,000,000

1,800,000

200

30,000

42,000



8,400,000

7,200,000

1,200,000

220

25,000

23,000



5,060,000

5,300,000

−240,000

*Assumes fixed costs of SEK 3,000,000 and constant unit variable costs of SEK 100.

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Factors to consider when setting prices

company objectives at many levels. A firm can set prices to attract new customers or to profitably retain existing ones. It can set prices low to prevent competition from entering the market or set prices at competitors’ levels to stabilise the market. It can price to keep the loyalty and support of resellers or to avoid government intervention. Prices can be reduced temporarily to create excitement for a brand. Or one product may be priced to help the sales of other ­products in the company’s line. Price is only one of the marketing mix tools that a company uses to achieve its marketing objectives. Price decisions must be co-ordinated with other product mix decisions to form a consistent and effective integrated marketing programme. A decision to position the product on high-performance quality will mean that the seller must charge a higher price to cover higher costs. And producers whose resellers are expected to support and promote their products may have to build larger reseller margins into their prices. Premium brand retailers, in particular, need higher margins, since volumes are normally lower while operating costs are higher. Bang & Olufsen expect their retailers to provide an impressive showroom with lots of space to look at their products. Moreover, by exposing the entire product range, the chance of a customer buying a more expensive product is higher than if the upper-range products are only shown in brochures and on the internet. Thus, Bang & Olufsen want their retailers to exhibit the entire product range. Companies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge. Here, price is a crucial product-positioning factor that defines the product’s market, competition and design. Many firms support such price-­ positioning strategies with a technique called target costing, a potent strategic weapon. Target costing reverses the usual process of first designing a new product, determining its cost, and then asking, ‘Can we sell it for that?’ Instead, it starts with an ideal selling price based on customer-value considerations and then targets costs that will ensure that the price is met. For example, when budget providers of food decide to introduce a new product, they first make sure that a target price of say SEK 9.90 or 14.90 can be reached.

Target costing – Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met.

The market and demand In this section, we take a deeper look at the price–demand relationship and how it varies for different types of markets. We then discuss methods for analysing the price–demand relationship. The seller’s pricing freedom varies with different types of markets. Economists recognise four types of markets, each presenting a different pricing challenge. Under pure competition, the market consists of many buyers and sellers trading in a uniform commodity such as wheat, copper or financial securities. No single buyer or seller has much effect on the going market price. If price and profits rise, new sellers can easily enter the market. In a purely competitive market, marketing research, product development, pricing, advertising and sales promotion play little or no role. Thus, sellers in these markets do not spend much time on marketing strategy. Under monopolistic competition, the market consists of many buyers and sellers who trade over a range of prices rather than a single market price. A range of prices occurs because sellers can differentiate their offers to buyers. Either the physical product can be varied in quality, features or style, or the accompanying services can be varied. Buyers see differences in sellers’ products and will pay different prices for them. Sellers try to develop differentiated offers for different customer segments and, in addition to price, freely use branding, advertising and personal selling to set their offers apart. Under oligopolistic competition, the market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies. The product can be uniform (steel, aluminium) or non-uniform (cars, computers). There are few sellers because it is difficult for new sellers to enter the market. Each seller is alert to competitors’ strategies and moves. If Statoil were to slash its fuel price by 10 per cent, buyers would quickly switch to this supplier. The other petrol stations would have to respond by lowering their prices or increasing their services. 289

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In a pure monopoly, the market consists of one seller. The seller may be a government monopoly (e.g. the Swedish pharmacy Apoteket and secondary schools in the past, before competition was an issue), a private regulated monopoly (a power company), or a private non-regulated monopoly (Nespresso coffee machine capsules or vacuum cleaner bags). Pricing is handled differently in each case. In a regulated monopoly, the government permits the company to set rates that will yield a ‘fair return’. Non-regulated monopolies are free to price at what the market will bear. However, they do not always charge the full price for a number of reasons: a desire not to attract competition, a desire to penetrate the market faster with a low price, or a fear of government regulation.

Demand curve – A curve that shows the number of units the market will buy in a given time period, at different prices that might be charged.

Price elasticity – A measure of the sensitivity of demand to changes in price.

Analysing the price–demand relationship  Each price the company might charge will lead to a different level of demand. The relationship between the price charged and the resulting demand level is shown in the demand curve in Figure 10.6. The demand curve shows the number of units the market will buy in a given time period at different prices that might be charged. In the normal case, demand and price are inversely related; that is, the higher the price, the lower the demand. In the case of prestige goods, the demand curve sometimes slopes upward. Consumers think that higher prices mean more quality. For example, Gibson Guitar Corporation once toyed with the idea of lowering its prices to compete more effectively with rivals such as Yamaha and Ibanez that make cheaper guitars. To its surprise, Gibson found that its instruments didn’t sell as well at lower prices. ‘We had an inverse [price–demand relationship],’ noted Gibson’s chief executive. ‘The more we charged, the more product we sold.’ At a time when other guitar manufacturers have chosen to build their instruments more quickly, cheaply and in greater numbers, Gibson still promises guitars that ‘are made one-at-a-time, by hand. No shortcuts. No substitutions.’8 Most companies try to measure their demand curves by estimating demand at different prices. The type of market makes a difference. In a monopoly, the demand curve shows the total market demand resulting from different prices. If the company faces competition, its demand at different prices will depend on whether competitors’ prices stay constant or change with the company’s own prices. Price elasticity of demand  Marketers also need to know price elasticity – how responsive demand will be to a change in price. Consider the two demand curves in Figure 10.6. In Figure 10.6(a), a price increase from P1 to P2 leads to a relatively small drop in demand from Q2 to Q1. In Figure 10.6(b), however, the same price increase leads to a large drop in demand from Q2 to Q1. If demand hardly changes with a small change in price, we say the demand is inelastic. If demand changes greatly, we say the demand is elastic. The price elasticity of demand is given by the following formula:

Price elasticity of demand =

Figure 10.6  Inelastic and elastic demand

290

% change in quantity demand % change in price

Factors to consider when setting prices

Suppose demand falls by 10 per cent when a seller raises its price by 2 per cent. Price elasticity of demand is therefore –5 (the minus sign confirms the inverse relation between price and demand) and demand is elastic. If demand falls by 2 per cent with a 2 per cent increase in price, then elasticity is –1. In this case, the seller’s total revenue stays the same: the seller sells fewer items but at a higher price that preserves the same total revenue. If demand falls by 1 per cent when price is increased by 2 per cent, then elasticity is –1/2 and demand is inelastic. The less elastic the demand, the more it pays for the seller to raise the price. What determines the price elasticity of demand? Buyers are less price-sensitive when the product they are buying is unique or when it is high in quality, prestige or exclusiveness. They are also less price-sensitive when substitute products are hard to find or when they cannot easily compare the quality of substitutes. On particular occasions, e.g. fresh strawberries or potatoes in midsummer, consumers are less price-sensitive. Finally, buyers are less price-sensitive when the total expenditure for a product is low relative to their income or when the cost is shared with another party.9 A convenience store may charge twice the supermarket retail price for frozen dill pickles or baking powder, but hardly anything more for milk, a typical day-by-day product about which consumers are well informed and therefore rather price-sensitive. If demand is elastic rather than inelastic, sellers will consider lowering their prices. A lower price will produce more total revenue. This practice makes sense as long as the extra costs of producing and selling more do not exceed the extra revenue. At the same time, most firms want to avoid pricing that turns their products into commodities. In recent years, forces such as deregulation, dips in the economy and the instant price ­comparisons afforded by the internet and other technologies have increased consumer price sensitivity.

Competitors’ strategies and prices In setting its prices, the company must also consider competitors’ costs, prices and market offerings. Consumers will base their judgments of a product’s value on the prices that competitors charge for similar products. A consumer who is thinking about buying a Canon EOS camera will evaluate Canon’s customer value and price against the value and prices of comparable products. In addition, the company’s pricing strategy may affect the nature of the competition it faces. If Canon follows a high-price, high-margin strategy, it may attract competition. A low-price, low-margin strategy, however, may stop competitors or drive them out of the market. In assessing competitors’ pricing strategies, the company should ask several questions. First, how does the company’s market offering compare with competitors’ offerings in terms of customer value? If consumers perceive that the company’s product or service provides greater value, the company can charge a higher price. Next, how strong are current competitors and what are their current pricing strategies? If the company faces a host of smaller competitors charging high prices relative to the value they deliver, it might charge lower prices to drive weaker competitors out of the market. If the market is dominated by larger, low-price competitors, the company may decide to target unserved market niches with value-added products at higher prices. Finally, the company should ask: how does the competitive landscape influence customer price sensitivity?10 Customers will be more price-sensitive if they see few differences between competing products and buy whichever product costs the least. The more ­information customers have about competing products and prices before buying, the more price-sensitive they will be. Easy product comparisons help customers to assess the value of different options and to decide what prices they are willing to pay. Finally, customers will be more price-sensitive if they can switch easily from one product alternative to another. 291

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New-product pricing strategies Pricing new products can be especially challenging. Just think about all the things you’d have to consider in pricing a new product, say the first portable microwave oven or the iWatch. What’s more, you’d have to start thinking about the price – along with many other marketing considerations – at the very beginning of the design process. Pricing strategies usually change as the product passes through its life cycle. The introductory stage is especially challenging. Companies bringing out a new product face the challenge of setting prices for the first time, and the decisions made will have a long-term impact on how the new product will be perceived, priced and marketed in years to come. Companies can choose between two broad strategies: ­market-skimming pricing and market-penetration pricing.

Market-skimming pricing Market-skimming ­ pricing – Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more ­profitable sales. Market-penetration ­pricing – Setting a low price for a new product in order to attract a large number of buyers and a large market share.

292

Many companies that invent new products set high initial prices to ‘skim’ revenues layer by layer from the market. Home electronics companies, e.g. Sony and Samsung, frequently use this strategy, called market-skimming pricing (or price skimming). New products are introduced at high prices, and purchased only by customers who really want the new technology and can afford to pay a high price for it. The prices then come down both through Sony’s and Samsung’s ambitions to skim the maximum amount of revenue from each segment of the market, and as new competitors enter the market.11 Market skimming makes sense only under certain conditions. First, the product’s quality and image must support its higher price and enough buyers must want the product at that price. ­Second, the costs of producing a smaller volume cannot be so high that they cancel out the advantage of charging more. Finally, competitors should not be able to enter the market easily and undercut the high price. This approach is used particularly when a product is new on the market.

Market-penetration pricing Rather than setting a high initial price to skim off small but profitable market segments, some companies use market-penetration pricing. They set a low initial price in order to penetrate

Product mix pricing strategies

the market quickly and deeply – to attract a large number of buyers quickly and win a large market share. The high sales volume results in falling costs, allowing the companies to cut their prices even further. For example, Dell used penetration pricing to enter the personal computer market, selling high-quality computer products through lower-cost direct channels. Its sales soared when HP, Apple and other competitors selling through retail stores could not match its prices. And IKEA uses penetration pricing to boost its success in many markets. The same holds for RyanAir and many other budget brands: it is almost impossible for companies with lower sales volume to compete on price. Several conditions must be met for this low-price strategy to work. First, the market must be highly price-sensitive so that a low price produces more market growth. Second, production and distribution costs must fall as sales volume increases. Finally, the low price must help to keep out the competition, and the penetration price must maintain its low-price position – otherwise, the price advantage maybe only temporary.

Product mix pricing strategies Most individual products are part of a broader product mix and must be priced accordingly. The strategy for setting a product’s price often has to be changed when the product is part of a product mix, as is normally the case. Firms look for a set of prices that maximises the profits on the total product mix. Pricing is difficult because the various products have related demand and costs and face different degrees of competition. We now take a closer look at the five product mix pricing situations summarised in Table 10.2: product line pricing, optional-product pricing, captive-product pricing, by-product pricing and product bundle pricing.

Product line pricing Companies usually develop product lines rather than single products. With product line pricing, price steps are between various products in a product line based on cost differences

Product line pricing – ­Setting the price steps between various ­products in a product line based on cost differences between the products, customer evaluations of different features and competitors’ prices.

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Table 10.2  Product mix pricing strategies

Strategy

Description

Product line pricing

Setting prices across an entire product line

Optional-product pricing

Pricing optional or accessory products sold with the main product

Captive-product pricing

Pricing products that must be used with the main product

By-product pricing

Pricing low-value by-products to get rid of them

Product bundle pricing

Pricing bundles of products sold together

between the products, customer evaluations of different features and competitors’ prices. The price steps should take into account cost differences between the products in the line, and – in line with a modern approach where customers’ willingness to pay is crucial – they should account for differences in customer perceptions of the value of different features. This approach is very common and is used throughout the industry of, e.g., white goods, home electronics, bicycles, cars and boats. It is also highly applicable to services, e.g. haircut at premium hair salon Björn Axen in Stockholm: trainee haircut SEK 485; junior hairdresser haircut SEK 570; hairdresser haircut SEK 800; top stylist haircut SEK 955; and senior top stylist haircut SEK 1,180. Loopia webbhotel charges SEK 84 a month for the ‘private package’ and SEK 167 a month for the ‘company package’ – the latter certainly offers more store space and services, but may not entail many more costs for Loopia, but reflects the higher willingness to pay for more services.

Optional-product pricing Many companies use optional-product pricing – offering to sell optional or accessory products along with their main product. For example, a car rental company offers a GPS navigation system at a cost of SEK 100 a day (e.g. Hertz NeverLost) – very expensive compared with the cost of buying a portable GPS, which starts at less than SEK 1,000 for a decently good one. From the customer perspective, however, paying an additional fee is a very convenient way of getting the GPS service, particularly if visiting another country. The same price-setting method – optional-product pricing – is used for child seats. It may cost as much to rent a booster chair for a week as the price for buying one. However, few parents would come up with the idea upon late arrival with toddlers in another country to drive to a supermarket that is open late and buy a booster seat and a GPS. Safety and convenience speak for taking the rental car ­company’s offer. Pricing these options is a sticky problem. Automobile companies must decide which items to include in the base price and which to offer as options. Until the 1990s, the normal pricing strategy of many companies, including General Motors, Audi and Mercedes, was to advertise a stripped-down model at a base price to pull people into the showrooms and then to devote most of the showroom space to option-loaded cars at higher prices. However, a car stripped of so many comforts and conveniences may turn buyers off and make the car difficult to sell in the used-car market. Selling a used Audi A5 Sportback without Xenon headlights or a BMW 7 series without leather upholstery is not easy. Increasingly, most advertised prices today represent well-equipped cars but, at the same time, new options emerge so it is still possible to increase the price by 50 to 75 per cent by adding every factory option available.12

Captive-product pricing Companies that make products that must be used along with a main product are using ­captive-product pricing. Examples of captive products are razor blade cartridges, computer games and printer cartridges. Producers of the main products (razors, video game consoles, 294

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and printers) often price them low and set high mark-ups on the supplies. For example, Gillette sells low-priced razors but makes money on the replacement cartridges. Companies that use captive-product pricing must be careful – consumers trapped into buying expensive supplies may come to resent the brand that ensnared them. In the case of services, this captive-product pricing is called two-part pricing. The price of the service is broken into a fixed fee plus a variable usage rate. Mobile phone companies may charge a flat rate for a basic calling plan, then charge for minutes over what the plan allows, and connection fees have risen substantially in the last decade. Thus, a flat rate of SEK 499 per month may generate another SEK 237.5 for the phone company if 250 calls at SEK 0.95 connection fee are made.

By-product pricing Producing products and services often generates by-products. If the by-products have no value and if getting rid of them is costly, this will affect the pricing of the main product. Using by-product pricing, the company seeks a market for these by-products to help offset the costs of disposing of them and to help make the price of the main product more competitive. The by-products themselves can even turn out to be profitable. For example, a slaughterhouse that once had to pay to dispose of its by-products now gets paid for them by selling to companies that produce biogas (see Chapter 1).

Product bundle pricing Using product bundle pricing, sellers often combine several of their products and offer the bundle at a reduced price. For example, fast-food restaurants bundle a burger, fries and a soft drink at a ‘combo’ price. Resorts sell specially priced holiday packages that include air fare, accommodation, meals and entertainment. And charter airlines are doing the same. Price bundling can promote the sales of products consumers might not otherwise buy, but the combined price must be low enough to get them to buy the bundle.13

Price-adjustment strategies Setting the base price for a product is only the start. The company must then adjust the price to adjust for customer and situational differences. Here we examine the seven price ­adjustment strategies summarised in Table 10.3: discount and allowance pricing, segmented pricing, psychological pricing, promotional pricing, geographical pricing, dynamic pricing and ­international pricing.

Discount and allowance pricing Most companies adjust their basic price to reward customers for certain responses, such as volume purchases and off-season buying. These price adjustments – called discounts and ­allowances – can take many forms. Discounts include quantity discounts, price reductions to buyers who buy large volumes. Such discounts provide an incentive to the customer to buy more from one given seller, rather than from many different sources. A functional discount (also called a trade discount) is offered by the seller to trade-channel members who perform certain functions, such as selling, storing and record-keeping. A seasonal discount is a price reduction to buyers who buy merchandise or services out of season. For example, lawn and garden equipment manufacturers offer seasonal discounts to retailers during the autumn and winter months to encourage early ordering in anticipation of the heavy spring and summer selling seasons, and winter tyres

Discount – A straight ­reduction in price on purchases during a stated period of time.

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Table 10.3  Price-adjustment strategies

Allowance – Promotional money paid by ­manufacturers to retailers in return for an ­agreement to feature the ­manufacturer’s products in some way. Segmented pricing – Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs.

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Strategy

Description

Discount and ­allowance pricing

Reducing prices to reward customer responses such as volume purchases or promoting the product

Segmented pricing

Adjusting prices to allow for differences in customers, products or locations

Psychological pricing

Adjusting prices for psychological effect

Promotional pricing

Temporarily reducing prices to increase short-term sales

Geographical pricing

Adjusting prices to account for the geographic location of customers

Dynamic pricing

Adjusting prices continually to meet the characteristics and needs of ­individual customers and situations

International pricing

Adjusting prices for international markets

may be offered at a seasonal discount in the spring. Seasonal discounts allow the seller to keep production steady during an entire year. Allowances are another type of reduction from the list price. For example, trade-in ­allowances are price reductions given for turning in an old item when buying a new one. Promotional allowances are payments or price reductions to reward dealers for participating in advertising and sales support programmes.

Segmented pricing Companies will often adjust their basic prices to allow for differences in customers, products and locations. In segmented pricing, the company sells a product or service at two or more prices, even though the difference in prices is not based on differences in costs. Segmented pricing takes several forms. Under customer-segment pricing, different customers pay different prices for the same product or service. Museums, for example, may charge a lower admission for students and senior citizens. Under product-form pricing, different versions of the product are priced differently but not according to differences in their costs. A 0.5-litre bottle of Coke may cost SEK 12.90 at your local supermarket while a 1.5-litre bottle costs SEK 14.90. A dramatic difference in price per litre, but they are often bought for different purposes, the small one for portability and the big bottle for use at home. Using location pricing, a company charges different prices for different locations, even though the cost of offering each location is more or less the same. For instance, cinemas vary their seat prices because of audience preferences for certain locations. Finally, using time pricing, a firm varies its price by the season, the month, the day and even the hour. Some public utilities vary their prices to commercial users by time of day and weekend versus weekday. Resorts give weekend and seasonal discounts. Shell petrol stations used to offer 50 per cent off a car wash after 9 pm – ­meaning company car drivers will come before 9 pm as there will be less queueing, while those who have to pay the cost themselves are likely to come after 9 pm, although that means queueing. Segmented pricing goes by many names. Airlines may call it revenue management or yield management, to reflect the practice of selling the right product to the right consumer at the right time for the right price. The airlines routinely set prices hour-by-hour – even ­minute-by-minute – depending on seat availability, demand and competitor price changes. Thus, the price you pay for a given seat on a given flight might vary greatly depending not just on class of service, but also on when and where you buy the ticket. The person sitting next to you in an aircraft or fast train may have paid five times the amount you paid. For segmented pricing to be an effective strategy, the costs of segmenting and watching the market cannot exceed the extra revenue obtained from the price difference. And of course, the segmented pricing must also be legal. Most importantly, segmented prices should reflect real

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differences in customers’ perceived value. Consumers in higher price tiers must feel that they’re getting their extra money’s worth for the higher prices paid.

Psychological pricing Price says something about the product. For example, many consumers use price to judge quality. A SEK 800 bottle of perfume may contain only SEK 30 worth of scent, but some people are willing to pay the SEK 800 because this price indicates something special. In using psychological pricing, sellers consider the psychology of prices and not simply the economics. For example, consumers usually perceive higher-priced products as having higher quality. When they can judge the quality of a product by examining it or by calling on past experience with it, they use price less to judge quality. But when they cannot judge quality because they lack the information or skill, price becomes an important quality signal.

Psychological pricing – A pricing approach that considers the psychology of prices and not simply the economics; the price is used to say something about the product.

Company case Budget airlines: pricing dishonesty? Back in 2005, Eurostar (the high-speed train service linking London to Paris and other European capitals) criticised the pricing dishonesty of some airlines. It claimed that the consumer never really sees the total up-front price when he or she makes a booking. Director of Communications for Eurostar at the time, Paul Charles, was critical of airlines, believing that they were guilty of dishonest pricing. In his view, consumers wanted transparent pricing. He believed Eurostar was up-front about all charges and that its advertising did

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not mislead. He was adamant that the full price was always featured and it would never advertise a price not including taxes and charges. Perhaps Eurostar and Charles have a point. Have you ever seen a headline price in a newspaper, magazine or website for a flight or holiday where the price looks extremely attractive? When you start to go through the online booking service, the additional costs are not immediately apparent, sometimes not appearing until the last minute when you see tax, fuel surcharges, airport fees, single occupancy supplements, supplements because there are less than four booking, etc. The list can go on. What appeared to be a highly competitive price is now above, or at best on a par with, the competition. How many consumers stop at this point and look elsewhere for a better deal? Perhaps the airlines and the tour operators know that many will book anyway. In early 2008, consumer groups were questioning the legality of budget airlines’ ‘hidden’ charges. Consumers were obviously paying far more than the advertised price. The UK’s Office of Fair Trading was asked to pass judgment on whether a range of unfair practices were, in fact, legal. Laws were already in place to make airlines include any compulsory taxes or charges in the price, but no-frills airlines had come up with other ways to hide these costs. As demonstrated by Ryanair, the most common way of recouping the extra costs without including them in the headline price is to charge SEK 165 for the first bag that is checked on to the flight, and SEK 385 for the second – meaning SEK 1,100 for two bags for a return journey. If they are pre-booked. If not, it’s twice that price. Additional costs to consumers include other lateral thinking sources: Ryanair charges SEK 55 oneway for internet check-in, SEK 88 one-way for priority boarding and a SEK 110 handling fee (even with a Ryainair Visa card!). The choice of no travel insurance is hidden between Latvia and Lithuania (and not in alphabetical order!). In Ryanair’s defence, Chief Executive Michael O’Leary said, ‘It’s our ultimate ambition to get to a stage where the fare is free. Already £1 in every £6 earned by the airline comes from non-ticket areas. We are up-front about it, the baggage charges at Ryanair will rise. The check-in charges will rise. Until we get to 40 per cent doing it online over the next year or two – that [charge] will double.’ In July 2008, the European Parliament agreed to ban airlines from advertising prices that do not include taxes and other charges that, as far as the consumer is concerned, are unavoidable. EU ministers had already adopted a common position on the matter and the issue was not voted on, but new rules came into force by the end of 2008. The changes were actually welcomed by the 35 members of the Association of European Airlines (AEA). In some EU countries, laws were already in place to phase out the sort of advertising that many believe has deliberately misled the consumer. Robert Evans, a British Member of the European Parliament, commented that passengers are attracted by low prices in advertisements but can find themselves paying up to 100 times that much in reality. Customers expect to pay the advertised price. The AEA represents many of the national airlines rather than the no-frills airlines, so it had a vested interest in the situation being regulated in order to give the national airlines a fairer chance. David Henderson of AEA believed that the move was in response to consumers being annoyed that the prices they were expected to pay did not relate to the price that had attracted them to the service in the first place. Consumers and airlines wanted clarity and consumers would from now on be given accurate information at the outset. However, the European Parliament decision only relates to including the unavoidable costs, which must be included in the air fare. This is just the price of letting the customer get on the flight and nothing more. The ruling still allows the airline to charge its customers for putting their bags in the hold, more if they want to sit in a particular seat, and more if they want priority boarding. The Communications Director of easyJet explained the company’s stance on avoidable and unavoidable costs: ‘At easyJet, we do regard hold baggage as an avoidable cost. I realise this might sound slightly strange to some people. But given the high price of oil, we want to encourage people to pack less – because it is cheaper for us if you do that. And why should our passengers – who don’t take any hold baggage at all – have to subsidise those who do?’

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The new rules across Europe have made working out what the consumer will and will not have to pay somewhat easier, but there are still additional costs, hidden costs and, as many conventional airlines describe it, dishonest prices. The European Commission investigated 137 airline and tour operator websites, and revealed that around a third were misleading customers. The Commission had carried out a similar investigation earlier, in 2007, and half of the sites that had been seen to breach EU rules had not yet corrected the faults. Sources: Quotes and other information from Eurostar (www.eurostar.com); easyJet (www.easyjet.com); and Ryanair (www.ryanair.com).

Another aspect of psychological pricing is reference prices – prices that buyers carry in their minds and refer to when looking at a given product. The reference price might be formed by noting current prices, remembering past prices or assessing the buying situation. Sellers can influence or use these consumers’ reference prices when setting price. For example, a company could display its product next to more expensive ones in order to imply that it belongs in the same class. Department stores often sell women’s clothing in separate departments differentiated by price: clothing found in the more expensive department is assumed to be of better quality. Consumers don’t have all the skill or information they need to determine whether they are paying a good price. They don’t have the time, ability or inclination to research different brands or stores, compare prices and get the best deals. Instead, they may rely on certain cues that signal whether a price is high or low. Interestingly, such pricing cues are often provided by sellers.14 Imagine, for instance, that it’s Saturday morning and you stop by your local supermarket to pick up a few items for a party. Walking through the aisles, you’re bombarded with prices. But are they good prices? If you’re like most shoppers, you don’t really know. So to help you out, retailers themselves give you a host of subtle and not-so-subtle signals telling you whether a given price is relatively high or low. For example, sales signs shout out ‘Sale!’, ‘Reduced’, ‘Price after rebate!’ or ‘Now 2 for only . . .!’ Prices ending in 9 let you know that the product has to be a bargain. Another good clue is signpost pricing – low prices on products for which you have accurate price knowledge, suggesting that the store’s other prices must be low as well. A price-matching guarantee also suggests that one store’s prices are lower than another’s – how else could they make such a promise? However, price-matching guarantees have been issued by companies offering odd low-cost products, which are not available from competitors – hence, the guarantee is practically useless. Are such pricing signals really helpful hints? Research shows that the word sale beside a price (even without actually varying the price) can increase demand by more than 50 per cent. But do these signals really help customers? The answer, often, is yes – careful buyers really can take advantage of such cues to find good buys. And if used properly, retailers can use such tactics to provide useful price information to their customers. Used improperly, however, they can mislead consumers, tarnishing a brand and damaging customer relationships. Even small differences in price can signal product differences. Consider a bicycle at SEK 3,000 compared with one priced at SEK 2,995. The actual price difference is only SEK 5, but the psychological difference can be much greater. Some psychologists argue that each digit has symbolic and visual qualities that should be considered in pricing. Thus, 8 is round and even and creates a soothing effect, whereas 7 is angular and creates a jarring effect.15 Interestingly, digitisation has contributed to a more limited use of prices like SEK 1,999 or SEK 895. In online stores selling items that are available also through other distribution channels, price-setting is often based on a margins formula that results in prices like SEK 317 or SEK 5,127.

Reference prices – Prices that buyers carry in their minds and refer to when looking at a given product.

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Promotional pricing Promotional pricing – Temporarily pricing ­products below list price, and sometimes even below cost, to increase short-term sales.

With promotional pricing, companies will temporarily price their products below list price and sometimes even below cost to create buying excitement and urgency. Promotional pricing takes several forms. A seller may simply offer discounts from normal prices to increase sales and reduce inventories. Sellers also use special-event pricing in certain seasons to draw more customers. Thus, linens are promotionally priced every January to attract weary Christmas holiday shoppers back into stores. Manufacturers sometimes offer cash rebates to consumers who buy the product from dealers within a specified time; the manufacturer sends the rebate directly to the customer. Some producers offer low-interest financing, longer warranties or free maintenance to reduce the consumer’s ‘price’. Promotional pricing, however, can have adverse effects. Used too frequently and copied by competitors, price promotions can create ‘deal-prone’ customers who wait until brands go on sale before buying them. Or constantly reduced prices can erode a brand’s value in the eyes of customers. Marketers sometimes become addicted to promotional pricing, using price promotions as a quick fix instead of sweating through the difficult process of developing effective longer-term strategies for building their brands. The use of promotional pricing can also lead to industry price wars.

Geographical pricing Geographical pricing – Setting prices for customers located in different parts of the country or world.

A company also must decide how to price its products for customers located in different parts of the country or world. We will look at five geographical pricing strategies. One option is to charge each customer shipping and other costs. Called FOB-origin pricing, this practice means that the goods are placed free on board (hence, FOB) a carrier. At that point the title and responsibility pass to the customer, who pays the freight from the factory to the destination. The disadvantage is high costs for distant customers. Uniform-delivered pricing is the opposite of FOB pricing. Here, the company charges the same price to all customers, regardless of their location. It is fairly easy to administer and facilitates marketing, since the seller can advertise its price nationally. Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. The company sets up two or more zones. All customers within a given zone pay a single total price; the more distant the zone, the higher the price. Using basing-point pricing, the seller selects a given city as a ‘basing point’ and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually shipped. Finally, the seller who is anxious to do business with a certain customer or geographical area might use freight-absorption pricing. Using this strategy, the seller absorbs all or part of the actual freight charges in order to get the desired business. The seller might reason that if it can get more business, its average costs will fall and more than compensate for its extra freight cost. Freight-­absorption pricing is used for market penetration and to hold on to increasingly competitive markets.

Dynamic pricing Throughout most of history, prices were set by negotiation between buyers and sellers. Fixed price policies – setting one price for all buyers – is a relatively modern idea that arose with the development of large-scale retailing at the end of the nineteenth century. Today, most prices are set this way. However, some companies are now reversing the fixed pricing trend. They are using dynamic pricing – adjusting prices continually to meet the characteristics and needs of individual customers and situations. The flexibility of the internet allows web sellers to instantly and constantly adjust prices for a wide range of goods based on demand dynamics. In many cases, this involves regular changes in the prices that web sellers set for their products. In others, such as eBay or Priceline, 300

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consumers negotiate the final prices they pay. Still other companies customise their offers based on the characteristics and behaviours of specific customers.16 Dynamic pricing offers many advantages for marketers. For example, internet sellers such as Amazon.com can mine their databases to gauge a specific shopper’s desires, measure his or her means, instantaneously tailor products to fit that shopper’s behaviour, and price products accordingly. Catalogue retailers doing business on the web can change prices on the fly according to changes in demand or costs, changing prices for specific items on a day-by-day or even hour-by-hour basis. Dell uses dynamic pricing to achieve real-time balancing of supply and demand for computer components, and SJ does the same for train travel. By raising prices on components in short supply and dropping prices for oversupplied items, Dell actually reshapes demand on the go to meet supply conditions. Buyers also benefit from the web and dynamic pricing. Price comparison sites – e.g. pricerunner.se – offer instant product and price comparisons from thousands of vendors. Buyers can also negotiate prices at online auction sites and exchanges, e.g. blocket.se and ebay. com. Suddenly the centuries-old art of haggling is back in vogue. Dynamic pricing can also be controversial. Amazon.com learned this some years ago when it experimented with lowering prices to new customers in order to woo their business. When regular customers learned through internet chatter that they were paying generally higher prices than first-timers, they protested loudly. But this is nothing new: newspapers and magazines have offered better deals for new consumers for a long time.

International pricing Companies that market their products internationally must decide what prices to charge in the different countries in which they operate. In some cases, a company can set a uniform worldwide price. For example, Boeing sells its jetliners at about the same price everywhere – and buyers regardless of geographic location get substantial discounts, whether in the United States, Europe or a developing country. If they didn’t, there would be brokers earning money from the arbitrage profits that might be made. However, most companies adjust their prices to reflect local market conditions and cost considerations. The price that a company should charge in a specific country depends on many factors, including economic conditions, competitive situations, laws and regulations, and development of the wholesaling and retailing system. Consumer perceptions and preferences may also vary from country to country, calling for different prices. Or the company may have different marketing objectives in various world markets, which require changes in pricing strategy. For example, Sony Mobile Phones might introduce a new Xperia model into mature markets in highly developed countries with the goal of quickly gaining mass-market share – this would call for a penetration-pricing strategy. In contrast, it might enter a less-developed market by targeting smaller, less price-sensitive segments; in this case, market-skimming pricing makes sense. Costs play an important role in setting international prices. Travellers abroad are often surprised to find that goods that are relatively inexpensive at home may carry outrageously higher price tags in other countries. A pair of Levi’s selling for SEK 300 in Canada might go for SEK 800 in Europe, and a Gucci handbag going for only SEK 8,000 in Milan, Italy, might fetch SEK 14,500 in Brazil. In some cases, such price escalation may result from differences in selling strategies or market conditions. In most instances, however, it is simply a result of the higher costs of selling in another country – the additional costs of product modifications, shipping and insurance, import tariffs and taxes, exchange-rate fluctuations and physical distribution.

Price changes When and how should a company change its price? What if costs rise, putting the squeeze on profits? What if the economy sags and customers become more price-sensitive? Or what if a major competitor raises or drops its prices? 301

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International price differences: a Gucci bag selling for SEK 8,000 in Italy might fetch SEK 14,500 in Brazil. Source: Christophe Simon/Getty Images

After developing their pricing structures and strategies, companies often face situations in which they must initiate price changes or respond to price changes by competitors.

Initiating price changes In some cases, the company may find it desirable to initiate either a price cut or a price increase. In both cases, it must anticipate possible buyer and competitor reactions.

Initiating price cuts Several situations may lead a firm to consider cutting its price. One such circumstance is excess capacity. Another is falling demand in the face of strong price competition. In such cases, the firm may aggressively cut prices to boost sales and share. But as the airline, fast-food, car and other industries have learned in recent years, cutting prices in an industry loaded with excess capacity may lead to price wars as competitors try to hold on to market share. Industry production capacity can’t be controlled by a single firm and thus attempts to bring supply and demand into balance are likely to result in a loss in market shares.17

Initiating price increases A successful price increase can greatly improve profits. For example, if the company’s profit margin is 3 per cent of sales, a 1 per cent price increase will boost profits by 33 per cent if sales 302

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volume is unaffected. A major factor in price increases is cost inflation. Rising costs squeeze profit margins and lead companies to pass cost increases along to customers. Another factor leading to price increases is excessive demand: when a company cannot supply all that its customers need, it may raise its prices, ration products to customers, or both. When raising prices, the company must avoid being perceived as a ‘price gouger’. For example, facing rapidly rising petrol prices, angry customers are accusing the major oil companies of ­enriching themselves at the expense of consumers. Customers have long memories, and they will eventually turn away from companies or even whole industries that they perceive as charging excessive prices. Claims of price gouging may even bring about increased government regulation. Consider the oil industry: are rapidly rising gas prices justified, or are the oil companies unfairly lining their pockets by gouging consumers who have few alternatives? The Swedish Competition Authority has taken action against the oil industry, and it is likely to step in if it finds that companies are harming price competition. As a core element of our free-­ market economy, ­companies are usually not free to charge whatever prices they wish. Many laws govern the rules of fair play in pricing. There are some techniques for avoiding these problems. One is to maintain a sense of fairness surrounding any price increase. Price increases should be supported by company communications telling customers why prices are being raised. Making low-visibility price moves first is also a good technique: some examples include dropping discounts, increasing minimum order sizes, and curtailing production of low-margin products. The company sales force should help business customers find ways to economise.

Buyer reactions to price changes Customers do not always interpret price changes in a straightforward way. A price increase, which would normally lower sales, may have some positive meanings for buyers. For ­example, what would you think if Rolex raised the price of its latest watch model? On the one hand, you might think that the watch is even more exclusive or better made. On the other hand, you might think that Rolex is simply being greedy by charging what the traffic will bear. Similarly, consumers may view a price cut in several ways. For example, what would you think if Rolex were to suddenly cut its prices? You might think that you are getting a better deal on an exclusive product. More likely, however, you’d think that quality had been reduced, and the brand’s luxury image might be tarnished. A brand’s price and image are often closely linked. A price change, especially a drop in price, can adversely affect how consumers view the brand.

Competitor reactions to price changes A firm considering a price change must worry about the reactions of its competitors as well as those of its customers. Competitors are most likely to react when the number of firms involved is small, when the product is uniform, and when the buyers are well informed about products and prices. How can the firm anticipate the likely reactions of its competitors? The problem is complex because, like the customer, the competitor can interpret a company price cut in many ways. It might think the company is trying to grab a larger market share, or that it’s doing poorly and trying to boost its sales. Or it might think that the company wants the whole industry to cut prices to increase total demand.

Responding to price changes Here we reverse the question and ask how a firm should respond to a price change by a competitor. The firm needs to consider several issues. Why did the competitor change the price? Is the price change temporary or permanent? What will happen to the company’s market share and profits if it does not respond? Are other competitors going to respond? Besides these 303

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Figure 10.7  Assessing and responding to a competitor’s price cut

issues, the company must also consider its own situation and strategy and possible customer reactions to price changes. Figure 10.7 shows the ways a company might assess and respond to a competitor’s price cut. Suppose the company learns that a competitor has cut its price and decides that this price cut is likely to harm company sales and profits. It might simply decide to hold its current price and profit margin. The company might believe that it will not lose too much market share, or that it would lose too much profit if it reduced its own price. Or it might decide that it should wait and respond when it has more information on the effects of the competitor’s price change. If the company decides that effective action can and should be taken, it might make any of four responses. First, it could reduce its price to match the competitor’s price. It may decide that the market is price-sensitive and that it would lose too much market share to the lower-priced competitor. Some companies might also reduce their product quality, services and marketing communications to retain profit margins, but this will ultimately hurt long-term market share. Alternatively, the company might maintain its price but raise the perceived value of its offer. It could improve its communications, stressing the relative value of its product over that of the lower-price competitor. The firm may find it cheaper to maintain price and spend money to improve its perceived value than to cut price and operate at a lower margin. Or, the company might improve quality and increase price, moving its brand into a higher price-value position. Finally, the company might launch a low-price ‘fighting brand’ – adding a lower-price item to the line or creating a separate lower-price brand. This is necessary if the particular market segment being lost is price-sensitive and will not respond to arguments of higher quality.

Summary This chapter looks at internal and external considerations that affect pricing decisions and examines general pricing approaches. Despite the increased role of non-price factors in the modern marketing process, price remains an important element in the marketing mix. Good pricing begins with a complete understanding of the value that a product or service creates for customers and setting a price that captures that value. Customer perceptions of the product’s value set the ceiling for prices. Value-based pricing uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. 304

Summary

The price the company charges will fall somewhere between one that is too high to produce any demand and one that is too low to produce a profit. Whereas customer perceptions of value set the ceiling for prices, company and product costs set the floor. Cost-based pricing involves setting prices based on the costs for producing, distributing and selling the product plus a fair rate of return for effort and risk. However, cost-based pricing is product-driven rather than ­customer-driven. If the price turns out to be too high, the company must settle for lower mark-ups or lower sales, both resulting in disappointing profits. The company must watch its costs carefully. If it costs the company more than it costs competitors to produce and sell its product, the company must charge a higher price or make less profit, putting it at a competitive disadvantage. To price wisely, management also needs to know how its costs vary with different levels of production and accumulated production experience. Cost-based pricing approaches include cost-plus pricing and break-even pricing (or target profit pricing). Other internal factors that influence pricing decisions include the company’s overall marketing strategy, objectives, mix and organisation for pricing. Price is only one element of the company’s broader marketing strategy. If the company has selected its target market and positioning carefully, then its marketing mix strategy, including price, will be fairly straightforward. Some companies position their products on price and then tailor other marketing mix decisions to the prices they want to charge. Other companies de-emphasise price and use other marketing mix tools to create non-price positions. Common pricing objectives might include survival, current profit maximisation, market share leadership, or customer retention and relationship building. Price decisions must be co-ordinated with product design, distribution and promotion decisions to form a consistent and effective marketing programme. Other external pricing considerations include the nature of the market and demand, competitors’ strategies and prices, and environmental factors such as the economy, reseller needs and government actions. The seller’s pricing freedom varies with different types of markets, but in general terms the customer decides whether the company has set the right price. So the company must understand concepts like demand curves (the price–demand relationship) and price elasticity (consumer sensitivity to prices). Companies’ pricing structures change, e.g. as a product passes through its life cycle. The company can decide on one of several price-quality strategies for introducing an imitative product, including premium pricing, economy pricing, good value or overcharging. In pricing innovative new products, it can use market-skimming pricing by initially setting high prices to, skim’ the maximum amount of revenue from various segments of the market. Or it can use market-­ penetrating pricing by setting a low initial price to penetrate the market deeply and win a large market share. Companies apply a variety of price adjustment strategies to account for differences in consumer segments and situations. One is discount and allowance pricing, whereby the company establishes cash, quantity, functional or seasonal discounts, or varying types of allowances. A second strategy is segmented pricing, where the company sells a product at two or more prices to accommodate different customers, product forms, locations or times. Sometimes companies consider more than economics in their pricing decisions, using psychological pricing to better communicate a product’s intended position. In promotional pricing, a company offers discounts or temporarily sells a product below list price as a special event, sometimes even selling below cost as a loss leader. Another approach is geographical pricing, whereby the company decides how to price to distant customers, choosing from such alternatives as FOB-origin pricing, uniform-delivered pricing, zone pricing, basing-point pricing and freight-absorption pricing. Finally, international pricing means that the company adjusts its price to meet different conditions and expectations in different world markets. When a firm considers initiating a price change, it must consider customers’ and ­ competitors’ reactions. There are different implications to initiating price cuts and initiating 305

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price increases. Buyer reactions to price changes are influenced by the meaning customers see in the price change. Competitors’ reactions flow from a set reaction policy or a fresh analysis of each situation.

Key terms Price 280

By-product pricing

295

Value-based pricing

281

Product bundle pricing

295

Good-value pricing

282

Discount 295

Value-added pricing

283

Allowance 296

Cost-based pricing

284

Segmented pricing

296

Experience curve (learning curve)

286

Psychological pricing

297

Cost-plus pricing

286

Reference prices

299

Break-even pricing (target profit pricing)

287

Promotional pricing

300

Target costing

289

Geographical pricing

300

Demand curve

290

FOB-origin pricing

300

Price elasticity

290

Uniform-delivered pricing

300

Market-skimming pricing

292

Zone pricing

300

Market-penetration pricing

292

Basing-point pricing

300

Product line pricing

293

Freight-absorption pricing

300

Optional-product pricing

293

Dynamic pricing

300

Captive-product pricing

294

Discussing the concepts 1. Explain the differences between value­based pricing and cost-based pricing. 2. Name and describe the two types of ­value-based pricing methods. 3. Compare and contrast fixed and variable costs and give an example of each. 4. Discuss other internal and external considerations besides cost and customer perceptions of value that affect pricing decisions. 5. Name and describe the four types of markets recognised by economists and discuss the pricing challenges posed by each. 6. Explain market-skimming and market-­ penetration pricing strategies. Why would a marketer of innovative high-tech products choose market-skimming pricing rather

306

than market-penetration pricing when launching a new product? When are market-skimming and market-penetration the right approaches to use? Your discussion may go beyond what the text in this ­chapter covers. 7. Name and briefly describe the five product mix pricing decisions. 8. Retailers often use psychological pricing as a price-adjustment strategy. Explain this pricing strategy. How do reference prices affect psychological pricing decisions? 9. Compare and contrast the geographic pricing strategies companies use for customers located in different parts of the country or world. Which strategy is best? Could any tendencies in terms of what is getting more common be identified?

Marketing by the numbers

10. What factors influence the price a company charges in different countries?

11. Why would a company consider cutting its price?

Applying the concepts 1. In a small group, discuss your perceptions of value and how much you are willing to pay for the following products: cars, frozen dinners, jeans and trainers. Are there differences among members of your group? Explain why those differences exist. Discuss some examples of brands of these products that are positioned to deliver different value to consumers, e.g. the more-for-less positioning. 2. Find estimates of price elasticity for a variety of consumer goods and services. Explain what price elasticities of 0.5 and 2 mean. (Note: these are absolute values, as price elasticity is usually negative.) 3. What does the following positioning statement suggest about the firm’s marketing objectives, marketing mix strategy and costs? ‘No one beats our prices. We crush the competition.’ Explain what this statement means for various steps in the marketing process. 4. You are an owner of a small independent chain of coffee houses competing head-to-head with Coffeehouse by George – certainly a small player with its about 30 coffee houses compared to Starbucks, but with more market power than you enjoy. The retail price your customers pay for coffee is exactly the same as at Coffeehouse by George. The wholesale price you pay for roasted coffee beans has increased by 25 per cent. You know that you cannot absorb this increase and that you must pass it on to your customers. However, you are concerned about the consequences of an open price increase. Discuss three alternative price-increase strategies that address these concerns.

Focus on ethics You’ve heard of a monopoly, but have you ever heard of a monopsony? A monopsony involves one powerful buyer and many sellers. The buyer is so powerful that it can drive prices down. An example of pure monopsony is a business that is the only buyer of labour in an isolated region. A business like this is able to pay lower wages than it would under competition. Cases of pure monopsony are rare, although monopsonistic elements are found wherever there are many sellers and few purchasers. 1. Is there an example of a monopsony in your own country? Explain why this might be the case. 2. Is it fair that a buyer can exert so much power over a supplier? Are there any benefits to consumers?

Marketing by the numbers (A) Reseller margins are important when setting prices, but it is often the case that manufacturers will suggest a price, referred to as the recommended retail price or the manufacturer’s recommended price. However, it is the retailer that ultimately decides. Manufacturers may well have to work backwards from the retail price by deducting whatever mark-ups might be demanded by resellers that will lead to the products being sold to the consumer. In this way, the manufacturer can then determine the volume of the products that will need to be sold in order to break even. 1. A consumer purchases a smartphone for SEK 1,500 from a retailer. If the retailer’s mark-up is 40 per cent, and the wholesaler’s mark-up is 15 per cent, both based on their selling prices, for what price does the manufacturer sell the product to the wholesaler?

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2. If the unit variable costs for each smartphone are SEK 400 and the manufacturer has fixed costs totalling SEK 2,000,000, how many mobile phones must this manufacturer sell to break even? How many must it sell to realise a profit of SEK 8,000,000? (B) A business sells fashionable and up-to-date covers for mobile phones. The phone covers are handmade and sold to retailers at SEK 120 per unit. The mobile phone covers cost the business SEK 40 to manufacture. The business does not pay its sales teams a fixed salary; instead they are paid a flat rate of SEK 5 commission per unit sold to retailers. The distribution costs are also SEK 5 and the factory’s fixed costs are SEK 40,000 per month. The business needs to make a series of key calculations to ascertain how it is performing. 1. What is the variable cost of producing 1,000 mobile phone covers? 2. What is the contribution earned from each mobile phone cover? 3. A business increases its price per unit from SEK 50 to SEK 60. At SEK 50 the sales were 6,000 units; they are now 5,500. Explain how the price change has affected demand. 4. If there is a 40 per cent rise in the rent paid by a business for its factory unit, what will happen to the fixed cost line on a break-even chart?

References 1 George Mannes, ‘The urge to unbundle’, Fast Company (27 February 2005, pp. 23–4). Also see Stuart Elliott, ‘Creative spots, courtesy of a stalled economy’, New York Times (11 April 2008). 2 Anders Parment, ‘Distribution strategies for volume and premium brands in highly competitive consumer markets’, Journal of Retailing and Consumer Services, 15(4), 250–65 (2008). 3 For more on the importance of sound pricing strategy, see Thomas T. Nagle and John Hogan, The Strategy and Tactics of Pricing: A Guide to Growing More Profitably (Upper Saddle River, NJ: Prentice Hall, 2007, Ch.1). 4 John Tayman, ‘The six-figure steal’, Business 2.0 ( June 2005, pp. 148–50); and www.automotive.com/2008/12/ bentley/continental/pricing/index.html (accessed April 2008); Swedish prices range from SEK 1,800,000 to 2,200,000 (May 2010). 5 Elizabeth A. Sullivan, ‘Value pricing: smart marketers know cost-plus can be costly’, Marketing News (15 January 2008, p. 8). Also see Venkatesh Bala and Jason Green, ‘Charge what your products are worth’, Harvard Business Review (September 2007, p. 22). 6 Slightly modified and adapted to general marketing circumstances – from Anders Parment, Auto Brand. Building Successful Car Brands for the Future (New York: Kogan Page, 2014). 7 Here accumulated production is drawn on a semilog scale so that equal distances represent the same percentage increase in output. 8 Joshua Rosenbaum, ‘Guitar maker looks for a new key’, Wall Street Journal (11 February 1998, p. B1); and information accessed online at www.gibson.com, September 2008. 9 See Thomas T. Nagle and John Hogan, The Strategy and Tactics of Pricing: A Guide to Growing More Profitably (Upper Saddle River, NJ: Prentice Hall, 2007, Ch. 7). 10 See Robert J. Dolan, ‘Pricing: a value-based approach’, Harvard Business School Publishing, 9 (3 November 2003). 11 See Philip Kotler and Kevin Lane Keller, Marketing Management, 13th edn (Upper Saddle River, NJ: Prentice Hall, 2008, pp. 383–4); and Chris Tribbey, ‘HDTV prices projected to drop 15% in 2008’, Home Media Magazine (20–6 January 2008, p. 10). 12 Anders Parment, Automobile Marketing: Distribution Strategies for Competitiveness (VDM Verlag, 2009). 13 See Thomas T. Nagle and John Hogan, The Strategy and Tactics of Pricing (Upper Saddle River, NJ: Prentice Hall, 2007, pp. 244–7); Bram Foubert and Els Gijsbrechts, ‘Shopper response to bundle promotions for ­packaged goods’, Journal of Marketing Research (November 2007, pp. 647–62); Roger M. Heeler et al., ‘Bundles = discount? Revisiting complex theories of bundle effects’, Journal of Product & Brand Management, 16(7), 492–500 (2007); and Timothy J. Gilbrideef et al., ‘Framing effects in mixed price bundling’, Marketing Letters ( June 2008, pp. 125–40).

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References

14 Based on information from Eric Anderson and Duncan Simester, ‘Mind your pricing cues’, Harvard Business Review (September 2003, pp. 96–103). Also see Heyong Min Kim and Luke Kachersky, ‘Dimensions of price salience: a conceptual framework for perceptions of multi-dimensional prices’, Journal of Product and Brand Management, 15(2), 139–47 (2006); and Monika Kukar-Kinney et al., ‘Consumer responses to characteristics of price-matching guarantees’, Journal of Retailing (April 2007, p. 211). 15 For more discussion, see Manoj Thomas and Vicki Morvitz, ‘Penny wise and pound foolish: the double-digit effect in price cognition’, Journal of Consumer Research ( June 2005, pp. 54–64); Alex Mindlin, ‘For a memorable price, trim syllables’, New York Times (14 August 2006), accessed at www.nytimes.com; Christine Harris and Jeffery Bray, ‘Price endings and consumer segmentation’, Journal of Product & Brand Management, 16(3), 200-5 (2007); Wilson Rothman, ‘The weird science of pricing’, Money (April 2007, p. 127); and Keith S. Coulter and Robin A. Coulter, ‘Distortion of price discount perceptions: the right digit of fact’, Journal of Consumer Research (August 2007, pp. 162–71). 16 Example adapted from Louise Story, ‘Online pitches made just for you’, New York Times (6 March 2008). 17 Anders Parment, Automobile Marketing: Distribution Strategies for Competitive Success (VDM Verlag, 2009).

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Marketing channels

Chapter

eleven

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Supply chains and the value delivery network

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The nature and importance of marketing channels

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Channel behaviour and organisation

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Company case – Zara: controlling the marketing channel

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Changing channel organisation: a modern approach

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Channel design decisions

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Company case – Marketing channel strategies for multi-franchised premium products

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Channel management decisions

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Marketing logistics and supply chain management

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Retailing

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Company case – Mystery shopping

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Company case – Gekås in Ullared: the ever-expanding retailer

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Company case – Wal-Mart: almost unimaginably big on a global basis – but why not in Scandinavia?

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Company case – Phantom shoppers

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Wholesaling

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Mini contents

Source: Mikael Utterstrom/Alamy

Chapter preview We now arrive at the third marketing mix tool – marketing channels. Firms rarely work alone in creating value for customers and building profitable customer relationships. Instead, most are only a single link in a larger supply chain and marketing channel. As such, an individual firm’s success depends not only on how well it performs but also on how well its entire marketing channel competes with competitors’ channels. The first part of this chapter explores the nature of marketing channels and the marketer’s channel design and crucial management decisions that have to be made. Distribution has become a truly strategic activity for most companies. We then examine physical distribution – or logistics – an area that is growing in importance and sophistication. In the last section, we’ll look more closely at two major channel intermediaries – retailers and wholesalers. You already know something about retailing – you’re served every day by retailers of all shapes and sizes – but you probably know much less about the horde of wholesalers that work behind the scenes. In this chapter, we’ll examine the characteristics of different kinds of retailers and ­wholesalers, the marketing decisions they make and trends for the future.

Learning objectives After reading this chapter, you should be able to: 1 Explain why companies use marketing channels and discuss the functions these channels perform. 2 Discuss how channel members interact and how they organise to perform the work of the channel. 3 Identify the major decisions open to a company in setting up marketing channels. 4 Explain how companies select, motivate and evaluate channel members. 5 Explain the role of retailers in the marketing channel and describe the major types of retailers. 6 Explain the major types of wholesalers and their marketing decisions. 7 Describe the major retailer marketing decisions.

The nature and importance of marketing channels

Clever strategies for marketing channels can contribute strongly to customer value and create competitive advantage for both a firm and its channel partners. It demonstrates that firms cannot create competitiveness and bring value to customers by themselves. Instead, they must work closely with other firms in a larger value delivery network.

Supply chains and the value delivery network Producing a product or service and making it available to buyers requires building relationships with key suppliers and resellers in the company’s supply chain. This supply chain consists of ‘upstream’ and ‘downstream’ partners. Upstream from the company is the set of firms that supply the raw materials, components, parts, information, finances and expertise needed to create a product or service. Marketers, however, have traditionally focused on the ‘downstream’ side of the supply chain – on the marketing channel that looks towards the customer. Downstream marketing channel partners, such as wholesalers and retailers, form a vital connection between a firm and its customers. The term supply chain may be too limited – it takes a make-and-sell view of the business. It suggests that raw materials, productive inputs and factory capacity should serve as the starting point for market planning. A better term would be demand chain because it suggests a ­sense-and-respond view of the market. Taking this view, planning starts with the needs of ­target customers, to which the company responds by organising a chain of resources and ­activities with the goal of creating customer value. Even a demand chain view of a business may be too limited, because it takes a step-by-step, linear view of purchase–production–consumption activities. Companies are often forming more numerous and complex relationships with other firms than a chain perspective would suggest. Therefore, value delivery networks may be a more appropriate term to use in many instances. As defined in Chapter 2, a value delivery network is made up of the company, suppliers, distributors and ultimately customers who ‘partner’ with each other to improve the performance of the entire system. This chapter focuses on marketing channels – on the downstream side of the value delivery network. We examine four major questions concerning marketing channels. What is the nature of marketing channels and why are they important? What are the critical decisions and main problems companies face in designing and managing their marketing channels? How do channel firms interact and organise to do the work of the channel? And, finally, what role do physical distribution and supply chain management play in attracting and satisfying customers?

Value delivery network – The network made up of the company, suppliers, distributors, and ultimately customers who ‘partner' with each other to improve the performance of the entire system in delivering customer value.

The nature and importance of marketing channels Few producers sell their goods directly to the final users. Instead, most use intermediaries to bring their products to market. They try to forge a marketing channel – a set of interdependent organisations that help to make a product or service available for use or consumption by the consumer or business user. A company’s channel decisions directly affect every other marketing decision. Nonetheless, companies often pay too little attention to their marketing channels, sometimes with damaging results. Marketing channel decisions often involve long-term commitments to other firms. While advertising, pricing or promotion programmes can easily be changed, just like old products could be scrapped and replaced by new ones as market tastes evolve, marketing channels are different. Through contracts with franchisees, independent dealers or large retailers, they cannot readily replace these channels with company-owned stores or websites if conditions

Marketing channel – A set of interdependent organisations that h