Principles of Marketing [7 ed.] 9781488611841, 9781488611865

Table of contents :
Front Cover
Front Matter
Half title
Dedication
Full title
Imprint
Brief contents
Contents
Preface
A valuable learning package
Resources for educators and students
About the authors
The development story
Part 1 Defining marketing and the marketing process
Chapter 1 Marketing: Creating and capturing customer value
Learning objectives
Concept map
What is marketing?
Marketing defined
The marketing process
Understanding the marketplace and customer needs
Customer needs, wants and demands
Market offerings: Goods, services and experiences
Customer value and satisfaction
Exchanges, transactions and relationships
Markets
Designing a customer-driven marketing strategy
Selecting customers to serve
Choosing a value proposition
Marketing management orientations
Preparing an integrated marketing plan and program
Engaging customers and managing customer relationships
Customer relationship management
Engaging customers
Consumer-generated marketing
Partner relationship management
Capturing value from customers
Creating customer loyalty and retention
Growing share of customer
Building customer equity
Building the right relationship with the right customers
The changing marketing landscape
The digital age: Online, mobile and social media marketing
The challenging world economy
Measuring marketing’s contribution to organisational performance
Marketing in action 1.1 Are marketers really that ‘lousy at selling marketing’?
The growth of not-for-profit marketing
Rapid globalisation
Sustainable marketing: The call for more environmental and social responsibility
So, what is marketing? Pulling it all together
Student learning centre
Reviewing the learning objectives
Discussion questions
Critical thinking exercises
Navigating the key terms
Mini cases
1.1 Digital technologies in marketing
1.2 Customer-driven marketing strategy
1.3 Marketing analytics at work
1.4 Ethical reflection
References
Chapter 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships
Learning objectives
Concept map
Company-wide strategic planning: Defining marketing’s role
Defining a market-oriented mission
Setting company objectives and goals
Marketing in action 2.1 Strategic planning involves having the right people
Designing the business portfolio
Analysing the current business portfolio
Developing strategies for growth and downsizing
Planning marketing: Partnering to build customer relationships
Partnering with other company departments
Partnering with others in the marketing system
Marketing strategy and the marketing mix
Customer value-driven marketing strategy
Developing an integrated marketing mix
Managing the marketing effort
Marketing analysis
Marketing planning
Marketing implementation
Marketing department organisation
Marketing control
Measuring and managing return on marketing investment
Student learning centre
Reviewing the learning objectives
Discussion questions
Critical thinking exercises
Navigating the key terms
Mini cases
2.1 Marketing strategy
2.2 Customer focus
2.3 Marketing analytics at work
2.4 Ethical reflection
References
Part 2 Understanding the marketplace and consumers
Chapter 3 The marketplace and customers: Analysing the environment
Learning objectives
Concept map
The marketing environment
The company’s microenvironment
The company
Suppliers
Marketing intermediaries
Competitors
Publics
Customers
The company’s macroenvironment
Demographic environment
Economic environment
Natural environment
Technological environment
Political and social environment
Marketing in action 3.1 The quite real virtual experience
Cultural environment
Responding to the marketing environment
Student learning centre
Reviewing the learning objectives
Discussion questions
Critical thinking exercises
Navigating the key terms
Mini cases
3.1 Microeconomic environment
3.2 Technological environment
3.3 Marketing analytics at work
3.4 Ethical reflection
References
Chapter 4 Marketing analytics: Gaining customer insights
Learning objectives
Concept map
Marketing information and customer insights
Marketing information and today’s ‘big data’
Marketing analytics
Managing marketing information
Marketing in action 4.1 Netflix streams success with big data and marketing analytics
Assessing marketing information needs
Developing marketing information
Internal data
Competitive marketing intelligence
Marketing research
Defining the problem and research objectives
Developing the research plan
Primary data collection
Implementing the research plan
Interpreting and reporting the findings
Analysing and using marketing information
Customer relationship management
Distributing and using marketing information
Other marketing information considerations
Marketing research in small businesses and not-for-profit organisations
International marketing research
Public policy and ethics in marketing research
Student learning centre
Reviewing the learning objectives
Discussion questions
Critical thinking exercises
Navigating the key terms
Mini cases
4.1 Gathering data
4.2 Customer insights
4.3 Marketing analytics at work
4.4 Ethical reflection
References
Chapter 5 Buyer behaviour: Understanding consumer and business buyers
Learning objectives
Concept map
Consumer markets and consumer buyer behaviour
Model of consumer behaviour
Characteristics affecting consumer behaviour
Marketing in action 5.1 Consumer behaviour: A whole life story
The buyer decision process
Stages in the buyer decision process
The buyer decision process for new products
Stages in the adoption process
Individual differences in innovativeness
Influence of product characteristics on rate of adoption
Business markets and business buyer behaviour
Business markets
Business buyer behaviour
The business buying process
E-procurement: Buying on the internet
Business-to-business digital and social media marketing
Student learning centre
Reviewing the learning objectives
Discussion questions
Critical thinking exercises
Navigating the key terms
Mini cases
5.1 Consumer behaviour
5.2 Business buyer behaviour
5.3 Marketing analytics at work
5.4 Ethical reflection
References
Part 3 Designing a customer-driven strategy and mix
Chapter 6 Customer-driven marketing strategy: Creating value for target customers
Learning objectives
Concept map
Customer-driven marketing strategy
Market segmentation
Segmenting consumer markets
Marketing in action 6.1 ALDI: Offering a ‘same-for-less’ value proposition
Segmenting business markets
Segmenting international markets
Requirements for effective segmentation
Market targeting
Evaluating market segments
Selecting target market segments
Socially responsible target marketing
Differentiation and positioning
Positioning maps
Choosing a differentiation and positioning strategy
Communicating and delivering the chosen position
Student learning centre
Reviewing the learning objectives
Discussion questions
Critical thinking exercises
Navigating the key terms
Mini cases
6.1 Target marketing
6.2 Differentiation
6.3 Marketing analytics at work
6.4 Ethical reflection
References
Chapter 7 Products, services and brands: Offering customer value
Learning objectives
Concept map
What is a product?
Products, services and experiences
Levels of products and services
Product and service classifications
Product and service decisions
Individual product and service decisions
Marketing in action 7.1 Headspace and the unsought product
Product line decisions
Product mix decisions
Services marketing
Nature and characteristics of a service
Marketing strategies for service firms
The service–profit chain
Managing service differentiation
Branding strategy: Building strong brands
Brand equity
Building strong brands
Managing brands
Student learning centre
Reviewing the learning objectives
Discussion questions
Critical thinking exercises
Navigating the key terms
Mini cases
7.1 Industrial products
7.2 Packaging
7.3 Marketing analytics at work
7.4 Ethical reflection
References
Chapter 8 New products: Developing and managing innovation
Learning objectives
Concept map
New-product development strategy
The new-product development process
Idea generation
Idea screening
Concept development and testing
Marketing strategy development
Business analysis
Product development
Test marketing
Commercialisation
Managing new-product development
Customer-centred new-product development
Team-based new-product development
Systematic new-product development
Product life-cycle strategies
Marketing in action 8.1 Mattel: Managing the fun and games
Introduction stage
Growth stage
Maturity stage
Decline stage
Additional product and service considerations
Product decisions and social responsibility
International product and services marketing
Student learning centre
Reviewing the learning objectives
Discussion questions
Critical thinking exercises
Navigating the key terms
Mini cases
8.1 Innovation
8.2 New-product development
8.3 Marketing analytics at work
8.4 Ethical reflection
References
Chapter 9 Pricing: Capturing customer value
Learning objectives
Concept map
What is a price?
Major pricing strategies
Customer value-based pricing
Cost-based pricing
Competition-based pricing
Other internal and external considerations affecting price decisions
Overall marketing strategy, objectives and mix
Organisational considerations
The market and demand
The economy
Other external factors
New-product pricing strategies
Market-skimming pricing
Market-penetration pricing
Product-mix pricing strategies
Product-line pricing
Optional-product pricing
Captive-product pricing
By-product pricing
Product-bundle pricing
Price-adjustment strategies
Discount and allowance pricing
Segmented pricing
Psychological pricing
Marketing in action 9.1 Pricing cues are customer clues
Promotional pricing
Geographical pricing
Dynamic and online pricing
International pricing
Price changes
Initiating price changes
Responding to price changes
Public policy and pricing
Pricing within channel levels
Pricing across channel levels
Student learning centre
Reviewing the learning objectives
Discussion questions
Critical thinking exercises
Navigating the key terms
Mini cases
9.1 Online price tracking
9.2 Rebates under the microscope
9.3 Marketing analytics at work
9.4 Ethical reflection
References
Chapter 10 Placement: Customer value fulfilment
Learning objectives
Concept map
Supply chains and the value delivery network
Supply chain goals
Major supply chain functions
The nature of marketing channels and value creation
How marketing channels add value
Number of channel levels
Channels in the service sector
Channel behaviour and organisation
Channel behaviour
Channel organisation
Marketing in action 10.1 Multichannel services marketing
Channel design and management decisions
Analysing consumer needs
Setting channel objectives
Identifying major channel alternatives
Evaluating the major alternatives
Channel management decisions
Retailing
Retailing: Connecting brands with consumers
Types of retailers
Retailer marketing decisions
Wholesaling
Types of wholesalers
Wholesaler marketing decisions
Wholesaling trends and developments
Student learning centre
Reviewing the learning objectives
Discussion questions
Critical thinking exercises
Navigating the key terms
Mini cases
10.1 Corporate VMN
10.2 Multichannel distribution networks
10.3 Marketing analytics at work
10.4 Ethical reflection
References
Chapter 11 Communicating customer value: Advertising and public relations
Learning objectives
Concept map
The promotion mix
Integrated marketing communications
The new marketing communications model
The need for integrated marketing communications
Marketing in action 11.1 It’s content marketing, not advertising
Shaping the overall promotion mix
The nature of each promotion tool
Promotion mix strategies
Advertising
Setting advertising objectives
Setting the advertising budget
Developing advertising strategy
Evaluating advertising effectiveness and return on advertising investment
Other advertising considerations
Public relations
The role and impact of public relations
The main public relations tools
Student learning centre
Reviewing the learning objectives
Discussion questions
Critical thinking exercises
Navigating the key terms
Mini cases
11.1 Integrated marketing communication
11.2 Public relations
11.3 Marketing analytics at work
11.4 Ethical reflection
References
Chapter 12 Personal selling and sales promotion: Creating value in relationships
Learning objectives
Concept map
Personal selling
The nature of personal selling
The role of the salesforce
Managing the salesforce
Designing salesforce strategy and structure
Recruiting and selecting salespeople
Training salespeople
Compensating salespeople
Supervising and motivating salespeople
Evaluating salespeople and salesforce performance
The personal selling process
Marketing in action 12.1 Social selling: Who needs salespeople?
Steps in the selling process
Personal selling and managing customer relationships
Sales promotion
Rapid growth of sales promotion
Sales promotion objectives
Major sales promotion tools
Developing the sales promotion program
Student learning centre
Reviewing the learning objectives
Discussion questions
Critical thinking exercises
Navigating the key terms
Mini cases
12.1 Supervising salespeople
12.2 Sales promotion
12.3 Marketing analytics at work
12.4 Ethical reflection
References
Chapter 13 Direct and digital marketing: Interactivity and fulfilment
Learning objectives
Concept map
The direct and digital marketing model
Direct and digital marketing
Benefits of direct and digital marketing to buyers and sellers
Direct marketing
Direct print and reproduction
Direct-response television and radio
Telemarketing
Kiosks and electronic dispensing
Digital marketing
Interacting in digital marketing
Search-engine optimised websites
Marketing in action 13.1 Search engine marketing: Three reasons why search engines exist
Search engine marketing
Online advertising
Email
Social media marketing
Other forms of online interaction
Interactivity
Customer-to-customer interaction
Customer-to-company interaction
Fulfilment response
Customer database use in direct and digital marketing
Customer database defined
Database use in direct and digital marketing
Evaluating direct and digital marketing results
Evaluating direct and digital marketing
Evaluating online marketing
Evaluating customer database performance
Public policy issues in direct and digital marketing
Irritation, unfairness, deception and fraud
Privacy
Student learning centre
Reviewing the learning objectives
Discussion questions
Critical thinking exercises
Navigating the key terms
Mini cases
13.1 Location-based marketing
13.2 Direct and digital marketing
13.3 Marketing analytics at work
13.4 Ethical reflection
References
Part 4 Extending marketing
Chapter 14 Sustainable marketing: Social responsibility, ethics and legal compliance
Learning objectives
Concept map
Sustainable marketing
Social criticisms of marketing
Marketing’s impact on individual customers
Marketing’s impact on society as a whole
Marketing’s impact on other businesses
Consumer actions to promote sustainable marketing
Consumerism
Environmentalism
Public actions to regulate marketing
Business actions towards sustainable marketing
Sustainable marketing principles
Marketing in action 14.1 Peoples coffee: Making a difference, one cup at a time
The role of ethics in marketing
Marketing ethics
The sustainable company
Legal compliance in marketing
Putting a compliance program in place
Legal education
Coverage of a legal compliance program
Student learning centre
Reviewing the learning objectives
Discussion questions
Critical thinking exercises
Navigating the key terms
Mini cases
14.1 Consumerism
14.2 Role of ethics in marketing
14.3 Marketing analytics at work
14.4 Ethical reflection
References
Appendix 1 Case studies
Appendix 2 The marketing plan: An introduction
Appendix 3 Marketing analytics spotlights
Appendix 4 Careers in marketing
Glossary
Index

Citation preview

principles of

marketing

7e

Armstrong Adam Denize Volkov Kotler

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e

for more ebook/ testbank/ solution manuals requests:

email [email protected]

principles of

marketing 7e

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e

Dedication From Gary Armstrong To my family – Kathy, KC, Keri, Mandy and Matt From Stewart Adam To my family – Maureen, Vanessa, Melissa, Michael, and my daughter-in-law, Yolanda From Sara Denize To my husband Leo, my children Pieter, Wendy and Julie, and all the wonderful little people in my life, Adele, Remy, James, Alicia, Jaz and Luca – with love From Michael Volkov To my family who are my inspiration, my guiding lights and loves – my wife Arabella, my girls Emma, Sarah and Cordelia, and my parents Lola and Boris. Thank you all for everything! From Philip Kotler To my wife Nancy, my daughters Amy, Melissa and Jessica, and my sons-in-law, Joel, Steve and Dan – with love

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e

for more ebook/ testbank/ solution manuals requests:

email [email protected]

principles of

marketing 7e Armstrong Adam Denize Volkov Kotler

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018 Pearson Australia 707 Collins Street Melbourne, VIC 3008 www.pearson.com.au Authorised adaptation from the United States edition, entitled MARKETING: AN INTRODUCTION, 13th edition, ISBN: 013414953X by ARMSTRONG, GARY; KOTLER, PHILIP, published by Pearson Education, Inc, Copyright 2017. All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage retrieval system, without permission from Pearson Education, Inc. Seventh adaptation edition published by Pearson Australia Group Pty Ltd., Copyright © 2018. The Copyright Act 1968 of Australia allows a maximum of one chapter or 10% of this book, whichever is the greater, to be copied by any educational institution for its educational purposes provided that that educational institution (or the body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act. For details of the CAL licence for educational institutions contact: Copyright Agency Limited, telephone: (02) 9394 7600, email: [email protected] All rights reserved. Except under the conditions described in the Copyright Act 1968 of Australia and subsequent amendments, no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. Senior Portfolio Manager: Elise Stone Development Editor: Anna Carter Project Manager: Anubhuti Harsh Production Manager: Abhishek Agarwal, iEnergizer/Aptara®, Ltd. Product Manager: Erin Nixon Content Developer: Katherine Horsey Rights and Permissions Editor: Lisa Woodland Lead Editor/Copy Editor: Helen Eastwood Proofreader: iEnergizer/Aptara®, Ltd. Indexer: iEnergizer/Aptara®, Ltd. Cover and internal design by Pier Vido Design Concept map illustrations: Bruce Rankin Cover illustration © Diana Johanna Velasquez/123RF Typeset by iEnergizer/Aptara®, Ltd. Printed in Malaysia 1 2 3 4 5 21 20 19 18 17 National Library of Australia Cataloguing-in-Publication entry Creator: Armstrong, Gary (Gary M.), author. Title: Principles of marketing / Gary Armstrong, Stewart Adam, Sara Denize, Michael Volkov, Philip Kotler. Edition: 7th edition. ISBN: 9781488611841 (paperback) ISBN: 9781488611865 (eBook) Notes: Includes index. Subjects: Marketing—Textbooks. Marketing—Management—Textbooks. Customer relations—Management— Textbook. Other Creators/Contributors: Adam, Stewart, author. Denize, Sara M. (Sara Marion), author. Volkov, Michael, author. Kotler, Philip, author. Every effort has been made to trace and acknowledge copyright. However, should any infringement have occurred, the publishers tender their apologies and invite copyright owners to contact them. Pearson Australia Group Pty Ltd ABN 40 004 245 943

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e

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Brief contents Prefacexiv About the authors xxii

Part 1 Defining marketing and the marketing process 1 Marketing: Creating and capturing customer value 2 Company and marketing strategy: Partnering to build customer engagement, value and relationships

Part 2 Understanding the marketplace and consumers 3 The marketplace and customers: Analysing the environment 4 Marketing analytics: Gaining customer insights 5 Buyer behaviour: Understanding consumer and business buyers

Part 3 Designing a customer-driven strategy and mix 6 Customer-driven marketing strategy: Creating value for target customers 7 Products, services and brands: Offering customer value 8 New products: Developing and managing innovation 9 Pricing: Capturing customer value 10 Placement: Customer value fulfilment 11 Communicating customer value: Advertising and public relations 12 Personal selling and sales promotion: Creating value in relationships 13 Direct and digital marketing: Interactivity and fulfilment

Part 4 Extending marketing 14 Sustainable marketing: Social responsibility, ethics and legal compliance

1 2 36

65 66 96 130

167 168 198 230 256 290 340 374 404

439 440

Appendix 1  Case studies 471 Appendix 2  The marketing plan: An introduction 484 Appendix 3  Marketing analytics spotlights 492 Appendix 4  Careers in marketing 516 Glossary522 Index534

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e

vi

Contents Prefacexiv A valuable learning package xix Resources for educators and students xxi About the authors xxii The development story xxv

Part 1 Defining marketing and the marketing process

1

Chapter 1 Marketing: Creating and capturing customer value Learning Objectives Concept map What is marketing?

2 2 3

Marketing defined

4 4

The marketing process

4

Understanding the marketplace and customer needs Customer needs, wants and demands

5 5

Market offerings: Goods, services and experiences6 Customer value and satisfaction

7

Exchanges, transactions and relationships8 Markets8 Designing a customer-driven marketing strategy Selecting customers to serve

9 9

Choosing a value proposition

10

Marketing management orientations

11

Preparing an integrated marketing plan and program

13

Engaging customers and managing customer relationships Customer relationship management

15 15

Engaging customers

16

Consumer-generated marketing

17

Partner relationship management

18

Capturing value from customers Creating customer loyalty and retention

18 18

Growing share of customer

19

Building customer equity

20

Building the right relationship with the right customers

20

The changing marketing landscape  The digital age: Online, mobile and social media marketing

21

The challenging world economy

23

Measuring marketing’s contribution to organisational performance

24

Marketing in Action 1.1 Are marketers really that ‘lousy at selling marketing’? The growth of not-for-profit marketing

25 26

21

Rapid globalisation

26

Sustainable marketing: The call for more environmental and social responsibility

28

So, what is marketing? Pulling it all together

28

Student Learning Centre • Reviewing the learning objectives • Discussion questions • Critical thinking exercises • Navigating the key terms • Mini cases 1.1 Digital technologies in marketing 1.2 Customer-driven marketing strategy 1.3 Marketing analytics at work 1.4 Ethical reflection • References

31 32 32 32 33 33 33 34 34 34

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e

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Contents

Part 2 Understanding the

Chapter 2

Company and marketing strategy: Partnering to build customer engagement, value and relationships Learning Objectives Concept map

36 36 37

Company-wide strategic planning: Defining marketing’s role Defining a market-oriented mission

38 38

Setting company objectives and goals

marketplace and consumers 65

39

Chapter 3

The marketplace and customers: Analysing the environment Learning Objectives Concept map

66 66 67

The marketing environment

68

The company’s microenvironment The company

68 68

Marketing in Action 2.1 Strategic planning involves having the right people

40

Marketing intermediaries

Designing the business portfolio Analysing the current business portfolio

41 42

Competitors70

Developing strategies for growth and downsizing44

Customers71

Suppliers69

Planning marketing: Partnering to build customer relationships 45 Partnering with other company departments 45 Partnering with others in the marketing system46 Marketing strategy and the marketing mix  Customer value-driven marketing strategy

47 48

Developing an integrated marketing mix

50

Managing the marketing effort  Marketing analysis

51 51

Marketing planning

53

Marketing implementation

54

Marketing department organisation

54

Marketing control

55

Measuring and managing return on marketing investment 

56

Student Learning Centre • Reviewing the learning objectives • Discussion questions • Critical thinking exercises • Navigating the key terms • Mini cases 2.1 Marketing strategy 2.2 Customer focus 2.3 Marketing analytics at work 2.4 Ethical reflection • References

59 59 60 60 60 60 61 61 62 62

69

Publics70 The company’s macroenvironment Demographic environment 

72 72

Economic environment

79

Natural environment

80

Technological environment

83

Political and social environment

83

Marketing in Action 3.1 The quite real virtual experience Cultural environment

84 87

Responding to the marketing environment

90

Student Learning Centre • Reviewing the learning objectives • Discussion questions • Critical thinking exercises • Navigating the key terms • Mini cases 3.1 Microeconomic environment 3.2 Technological environment 3.3 Marketing analytics at work 3.4 Ethical reflection • References

91 91 92 92 92 92 93 93 94 94

Chapter 4

Marketing analytics: Gaining customer insights Learning Objectives Concept map

96 96 97

Marketing information and customer insights 98 Marketing information and today’s ‘big data’ 98

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e

vii

viii

Contents

Marketing analytics

99

Model of consumer behaviour

132

Managing marketing information

99

Characteristics affecting consumer behaviour 

133

Marketing in Action 4.1 Netflix streams success with big data and marketing analytics

100

Assessing marketing information needs

102

Developing marketing information Internal data

103 103

Competitive marketing intelligence

104

Marketing research 105 Defining the problem and research objectives106 Developing the research plan

106

Primary data collection

109

Implementing the research plan

118

Interpreting and reporting the findings

118

Analysing and using marketing information 119 Customer relationship management 119 Distributing and using marketing information120 Other marketing information considerations121 Marketing research in small businesses and not-for-profit organisations 121 International marketing research

121

Public policy and ethics in marketing research123 Student Learning Centre • Reviewing the learning objectives • Discussion questions • Critical thinking exercises • Navigating the key terms • Mini cases 4.1 Gathering data 4.2 Customer insights 4.3 Marketing analytics at work  4.4 Ethical reflection • References

125 126 126 126 126 126 127 127 128 128

Chapter 5

Buyer behaviour: Understanding consumer and business buyers Learning Objectives Concept map

130 130 131

Consumer markets and consumer buyer behaviour 

132

Marketing in Action 5.1 Consumer behaviour: A whole life story

139

The buyer decision process Stages in the buyer decision process

145 145

The buyer decision process for new products Stages in the adoption process

148 148

Individual differences in innovativeness149 Influence of product characteristics on rate of adoption Business markets and business buyer behaviour Business markets 

149 150 151

Business buyer behaviour 

153

The business buying process 

156

E-procurement: Buying on the internet 

159

Business-to-business digital and social media marketing

160

Student Learning Centre • Reviewing the learning objectives • Discussion questions • Critical thinking exercises • Navigating the key terms • Mini cases 5.1  Consumer behaviour  5.2  Business buyer behaviour 5.3  Marketing analytics at work 5.4  Ethical reflection • References

161 161 162 162 163 163 163 163 164 164

Part 3 Designing a customer-

driven strategy and mix

167

Chapter 6 Customer-driven marketing strategy: Creating value for target customers Learning Objectives Concept map

168 168 169

Customer-driven marketing strategy 

170

Market segmentation Segmenting consumer markets

171 171

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e

for more ebook/ testbank/ solution manuals requests:

email [email protected]

Contents

Marketing in Action 6.1 ALDI: Offering a ‘same-for-less’ value proposition Segmenting business markets

174 178

Segmenting international markets

179

Requirements for effective segmentation

179

Market targeting  Evaluating market segments

180 180

Selecting target market segments

181

Socially responsible target marketing

185

Differentiation and positioning  Positioning maps

186 186

Choosing a differentiation and positioning strategy

187

Communicating and delivering the chosen position

192

Student Learning Centre • Reviewing the learning objectives • Discussion questions • Critical thinking exercises • Navigating the key terms • Mini cases 6.1  Target marketing  6.2  Differentiation 6.3  Marketing analytics at work 6.4  Ethical reflection • References

What is a product?  Products, services and experiences

193 193 194 194 194 194 195 196 196 197

Branding strategy: Building strong brands  218 Brand equity 218 Building strong brands

220

Managing brands

224

Student Learning Centre • Reviewing the learning objectives • Discussion questions • Critical thinking exercises • Navigating the key terms • Mini cases 7.1  Industrial products 7.2  Packaging 7.3  Marketing analytics at work 7.4   Ethical reflection • References

225 226 226 226 227 227 227 227 228 228

Chapter 8

New products: Developing and managing innovation Learning Objectives Concept map

230 230 231

New-product development strategy

232

The new-product development process  Idea generation

232 232 235

198 198 199

Marketing strategy development

236

Business analysis

237

Product development

237

200 200

Test marketing

238

202

Services marketing  Nature and characteristics of a service

216

Concept development and testing

Product and service classifications

Product mix decisions

215

Managing service differentiation

234

201

Marketing in Action 7.1 Headspace and the unsought product Product line decisions

The service–profit chain

Idea screening

Levels of products and services Product and service decisions Individual product and service decisions

214

   

Chapter 7

Products, services and brands: Offering customer value Learning Objectives Concept map

Marketing strategies for service firms

205 205 206 211 212 213 213

Commercialisation238 Managing new-product development  239 Customer-centred new-product development239 Team-based new-product development

240

Systematic new-product development

240

Product life-cycle strategies 

241

Marketing in Action 8.1 Mattel: Managing the fun and games Introduction stage

242 244

Growth stage

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e

245

ix

x

Contents

Maturity stage

245

Decline stage

246

Additional product and service considerations  Product decisions and social responsibility

247 247

International product and services marketing248 Student Learning Centre • Reviewing the learning objectives • Discussion questions • Critical thinking exercises • Navigating the key terms • Mini cases 8.1  Innovation 8.2  New-product development 8.3  Marketing analytics at work 8.4  Ethical reflection • References

251 251 252 252 252 252 253 253 253 254

Price-adjustment strategies  Discount and allowance pricing Segmented pricing

272

Psychological pricing

273

Marketing in Action 9.1 Pricing cues are customer clues Promotional pricing

276

Dynamic and online pricing

277

International pricing

278

Price changes Initiating price changes

279 279

Responding to price changes

282 282

Pricing across channel levels

283

261

Competition-based pricing

263 264

Chapter 10

256 256 257

What is a price? 

258

Major pricing strategies  Customer value-based pricing

258 259

Other internal and external considerations affecting price decisions Overall marketing strategy, objectives and mix

264

Organisational considerations

265

The market and demand

265

The economy

267

Other external factors

268

New-product pricing strategies  Market-skimming pricing Market-penetration pricing Product-mix pricing strategies  Product-line pricing

268 269 269 270 270

Optional-product pricing

270

Captive-product pricing

270

By-product pricing

271

Product-bundle pricing

271

281

Public policy and pricing  Pricing within channel levels

Cost-based pricing

Pricing: Capturing customer value Learning Objectives Concept map

274 275

Geographical pricing

Student Learning Centre • Reviewing the learning objectives • Discussion questions • Critical thinking exercises • Navigating the key terms • Mini cases 9.1  Online price tracking  9.2  Rebates under the microscope  9.3  Marketing analytics at work 9.4  Ethical reflection • References

Chapter 9

271 272

285 286 286 286 287 287 287 287 288 289

Placement: Customer value fulfilment Learning Objectives Concept map

290 290 291

Supply chains and the value delivery network Supply chain goals

292 295

Major supply chain functions The nature of marketing channels and value creation  How marketing channels add value

297 300 301

Number of channel levels

302

Channels in the service sector

304

Channel behaviour and organisation  Channel behaviour Channel organisation

304 304 305

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Contents

Marketing in Action 10.1 Multichannel services marketing

310

Channel design and management decisions 311 Analysing consumer needs 312

Advertising  Setting advertising objectives

350 351

Setting the advertising budget

353

Developing advertising strategy

354

Setting channel objectives

312

Identifying major channel alternatives

312

Evaluating advertising effectiveness and return on advertising investment

363

Evaluating the major alternatives

313

Other advertising considerations

364

Channel management decisions

313

Retailing 314 Retailing: Connecting brands with consumers314 Types of retailers

314

Retailer marketing decisions

321

Wholesaling Types of wholesalers

327 327

Wholesaler marketing decisions

330

Wholesaling trends and developments

331

Student Learning Centre • Reviewing the learning objectives • Discussion questions • Critical thinking exercises • Navigating the key terms • Mini cases  10.1 Corporate VMN 10.2 Multichannel distribution networks 10.3 Marketing analytics at work  10.4 Ethical reflection • References

333 334 334 335 335 335 336 337 338 338

Chapter 11

The main public relations tools

340 340 341

The promotion mix

342

Integrated marketing communications  342 The new marketing communications model342 The need for integrated marketing communications345 Marketing in Action 11.1 It’s content marketing, not advertising

346

Shaping the overall promotion mix The nature of each promotion tool

347 348 349

366 366 367

Student Learning Centre • Reviewing the learning objectives 369 • Discussion questions 369 • Critical thinking exercises 370 • Navigating the key terms 370 • Mini cases 371 11.1  Integrated marketing communication371 11.2  Public relations  371 11.3  Marketing analytics at work 372 11.4  Ethical reflection 372 • References 372

Chapter 12

Personal selling and sales promotion: Creating value in relationships 374 Learning Objectives 374 375 Concept map Personal selling  The nature of personal selling The role of the salesforce

Communicating customer value: Advertising and public relations Learning Objectives Concept map

Promotion mix strategies

Public relations  The role and impact of public relations

376 376 377

Managing the salesforce  378 Designing salesforce strategy and structure 378 Recruiting and selecting salespeople

382

Training salespeople

383

Compensating salespeople

384

Supervising and motivating salespeople

384

Evaluating salespeople and salesforce performance387 The personal selling process 

387

Marketing in Action 12.1 Social selling: Who needs salespeople? Steps in the selling process

388 389

Personal selling and managing customer relationships

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Sales promotion  Rapid growth of sales promotion

392 393

Customer-to-customer interaction

420

Customer-to-company interaction

421

Sales promotion objectives

393

Fulfilment response

421

Major sales promotion tools

394

Customer database use in direct and digital marketing  Customer database defined

422 422

Developing the sales promotion program397 Student Learning Centre • Reviewing the learning objectives • Discussion questions • Critical thinking exercises • Navigating the key terms • Mini cases 12.1  Supervising salespeople  12.2  Sales promotion 12.3  Marketing analytics at work 12.4  Ethical reflection • References

399 400 400 401 401 401 401 402 402 403

Chapter 13

404 404 405

The direct and digital marketing model  Direct and digital marketing

406 406

Benefits of direct and digital marketing to buyers and sellers

408

Direct marketing  Direct print and reproduction

409 409 409

Telemarketing409 Kiosks and electronic dispensing Digital marketing Interacting in digital marketing Search-engine optimised websites Marketing in Action 13.1 Search engine marketing: Three reasons why search engines exist Search engine marketing Online advertising 

Evaluating direct and digital marketing results  Evaluating direct and digital marketing Evaluating online marketing

426 426 427

Evaluating customer database performance429 Public policy issues in direct and digital marketing  Irritation, unfairness, deception and fraud

430 430

Privacy431

Direct and digital marketing: Interactivity and fulfilment Learning Objectives Concept map

Direct-response television and radio

Database use in direct and digital marketing423

410 411 411 411

413 415 416

Email417 Social media marketing 

418

Other forms of online interaction

419

Interactivity

420

Student Learning Centre • Reviewing the learning objectives • Discussion questions • Critical thinking exercises • Navigating the key terms • Mini cases 13.1  Location-based marketing 13.2  Direct and digital marketing 13.3  Marketing analytics at work 13.4  Ethical reflection • References

433 434 434 435 435 435 436 436 437 437

Part 4 Extending marketing

439

Chapter 14 Sustainable marketing: Social responsibility, ethics and legal compliance Learning Objectives Concept map

440 440 441

Sustainable marketing

442

Social criticisms of marketing 443 Marketing’s impact on individual customers443 Marketing’s impact on society as a whole

446

Marketing’s impact on other businesses448

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Consumer actions to promote sustainable marketing 449 Consumerism449 Environmentalism450 Public actions to regulate marketing

453

Business actions towards sustainable marketing  Sustainable marketing principles

453 453

Appendix 1

Marketing in Action 14.1 Peoples Coffee: Making a difference, one cup at a time

456

The role of ethics in marketing  Marketing ethics

457 457

The sustainable company Legal compliance in marketing Putting a compliance program in place

Case studies

460 460

Appendix 4

Coverage of a legal compliance program

462 467 467

471

The marketing plan: An introduction 484

Appendix 3

461

468 468 468 468 468 469 469 470

Appendix 2

460

Legal education Student Learning Centre • Reviewing the learning objectives • Discussion questions

• Critical thinking exercises • Navigating the key terms • Mini cases 14.1  Consumerism  14.2  Role of ethics in marketing  14.3  Marketing analytics at work  14.4  Ethical reflection • References

Marketing analytics spotlights Careers in marketing

492 516

Glossary522 Index534

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Preface Welcome to your Principles of Marketing package The seventh edition of Principles of Marketing makes the road to learning and teaching marketing more effective, understandable and enjoyable than ever. Its approach is designed for you the reader, and strikes a careful balance between depth of coverage and ease of learning. The seventh edition’s learning design – with revised integrative concept maps at the start of each chapter – enhances student understanding. Principles of Marketing ensures you will come to class well prepared and leave with a richer understanding of basic marketing concepts, strategies and practices.

The marketing journey: Creating and capturing customer value Top marketers all share a common goal: to put the consumer at the heart of marketing. Today’s marketing is all about creating customer value and building profitable customer relationships. It starts with understanding consumer needs, wants and demands, deciding which target markets the organisation can serve best, and developing a compelling value proposition by which the organisation can attract, keep and grow targeted consumers. If the organisation does these things well, it will reap the rewards in terms of market share, profits and customer equity. In this seventh edition of Principles of Marketing, you will see how customer value – creating it and capturing it – drives every good marketing strategy.

Updated in the seventh edition This seventh edition of Principles of Marketing has been thoroughly revised to reflect the major trends and forces that marketing must take into account in this era of customer value and relationships. Here are just some of the main changes you will find in this edition: • The seventh edition builds on our learning design. The book’s more active and integrative presentation includes in-chapter learning enhancements that guide you along the road to learning marketing. The chapter-opening layout provides a concept map that graphically previews and positions each chapter and its key concepts, providing you with a visual guide to more easily navigate the chapter. End-of-chapter features summarise important concepts and highlight important themes, such as marketing and the economy, technology, ethics and marketing financial analysis. Critical thinking exercises and mini cases provide opportunities for you to practise marketing skills. In all, the new design enhances student understanding and facilitates learning. • Throughout the seventh edition, you will find important coverage of the rapidly changing nature of customer relationships with companies and brands. Today’s marketers aim to create deeper consumer involvement and a sense of community surrounding a brand – to make the brand a meaningful part of consumers’ conversations and their lives. New relationship-building tools include everything from websites, blogs, in-person events and video sharing, to online communities and social networks such as Facebook, YouTube, Twitter and LinkedIn, or the organisation’s own social networking sites. • Every chapter shows how companies are marketing in local and international economies that sometimes are quite turbulent. Starting with sections on adding customer value in each chapter, and

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Preface

•

•

•

•

•

• •

•

continuing with discussions and examples integrated throughout the text, the seventh edition shows how, now more than ever, marketers must focus on creating customer value and sharpening their value propositions to serve the needs of today’s more frugal consumers. Increasingly, marketing is taking the form of two-way conversations between consumers and brands. The seventh edition contains material on the exciting trend towards content marketing and consumer-generated marketing, by which marketers invite consumers to play a more active role in providing customer insights that shape new products and marketing communication among other developments. This can be seen in Chapters 11 and 13 in particular. This edition provides new and expanded discussions of new marketing technologies, from the use of social media (Chapter 13) to radio-frequency identification (RFID) (Chapter 10), and the use of various digital tools and technologies discussed throughout the book but particularly in Chapters 1, 5, 11 and 13. In line with the book’s emphasis on measuring and managing return on marketing, discussion on marketing analytics is threaded throughout the book. Appendix 3 ‘Marketing analytics spotlights’ provides in-depth analysis and discussion, supported by relevant case studies, to encourage students to apply analytical thinking to relevant concepts in related chapters. The mini cases at the end of each chapter provide further opportunities to practise using marketing analytics. The topic of marketing strategy in Chapter 2 is linked with a sample marketing plan presented in Appendix 2. The marketing plan is set in the exciting and continually developing market of the tablet PC – a market that is highly relevant to today’s connected consumers. The seventh edition provides refreshed and expanded coverage of the explosive developments in integrated marketing communications and direct and digital marketing. It discusses how marketers are incorporating a host of new digital and direct marketing approaches in order to build and create more targeted, personal and interactive customer relationships. No other marketing textbook provides more current or encompassing coverage of these exciting developments. The end-of-chapter discussion questions, critical thinking exercises and mini cases have been updated and are linked to the chapter learning objectives and AACSB General Skill Area requirements. Key terms are highlighted in the discussion throughout, presented as margin definitions alongside the in-text references and compiled in an updated, page-referenced list at the end of each chapter and in the comprehensive glossary at the end of the book. One of the four mini cases presented at the end of each chapter invites the reader to consider the role of ethics in the marketing context and the question: ‘What would I do …?’.

Five major customer value and engagement themes The seventh edition of Principles of Marketing builds on five major customer value and engagement themes, as described below. 1 Creating value for customers in order to capture value from customers in return. Today’s marketers must be effective at creating customer value, engaging customers and managing customer relationships. Outstanding marketing companies understand the marketplace and customer needs, design value-creating marketing strategies, develop integrated marketing programs that engage customers and deliver value and satisfaction, and build strong customer relationships and brand community. In return, they capture value from customers in the form of sales, profits and customer equity. This innovative customer value and engagement framework is introduced at the start of Chapter 1 in a five-step marketing process model, which details how marketing creates customer value and captures value in return. The framework is carefully developed in the first two chapters and then fully integrated throughout the remainder of the book.

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Preface

2 Customer engagement and today’s digital and social media. New digital and social media have taken today’s marketing by storm, dramatically changing how companies and brands engage consumers and how consumers connect and influence each other’s brand behaviours. The seventh edition thoroughly explores the contemporary concept of customer engagement marketing and the exciting new digital and social media technologies that help brands to engage customers more deeply and interactively. Discussion of the topic begins in Chapter 1 (see, in particular, the sections ‘Customer engagement and today’s digital and social media’ and ‘The digital age: Online, mobile and social media marketing’) and carries through to a refreshed Chapter 13 ‘Direct and digital marketing: Interactivity and fulfilment’, which summarises the latest developments in digital engagement and relationship-building tools. In all chapters in between, you will find revised and expanded coverage of the exploding use of digital and social media tools to create customer engagement and build brand community. 3 Building and managing strong, value-creating brands. Well-positioned brands with strong brand equity provide the basis upon which to build both customer value and profitable customer relationships. Today’s marketers must position their brands powerfully and manage them well to create valued brand experiences. The seventh edition provides a deep focus on brands, anchored by a Chapter 7 section, ‘Branding strategy: Building strong brands’. 4 Measuring and managing return on marketing. Especially in uneven economic times, marketing managers must ensure their marketing dollars are being well spent. In the past, many marketers spent freely on big, expensive marketing programs, often without considering carefully the financial returns on their spending. But all that has changed rapidly. ‘Marketing accountability’ – measuring and managing marketing return on investment – has now become an important part of strategic marketing decision making. This emphasis on marketing accountability is addressed throughout the seventh edition and particularly in Chapter 2, in Appendix 3 ‘Marketing analytics spotlights’ and in the end-of-chapter ‘Marketing analytics in action’ mini cases. 5 Sustainable marketing around the globe. As technological developments continue to make the world an increasingly smaller place, marketers must be effective at marketing their brands globally and in sustainable ways. New content throughout the seventh edition emphasises the concepts of global marketing and sustainable marketing – that is, meeting the present needs of consumers and businesses while also preserving or enhancing the ability of future generations to meet their needs. The seventh edition integrates global marketing and sustainability topics throughout the book.

An emphasis on real marketing and bringing marketing to life This new edition of Principles of Marketing takes a practical approach to marketing management, providing countless in-depth, real-life examples and stories designed to engage you with marketing concepts and bring modern marketing to life. There is a wealth of chapter-opening, within-chapter and end-of-chapter learning devices that are designed to help you to learn, link and apply major concepts: • Chapter-opening concept maps. Each chapter is introduced with a graphical concept map. These maps are designed to contextualise the main topics that are introduced in the chapter and discussed in detail, and to help the reader navigate each chapter and more easily interconnect the various elements being discussed. • Figures. Throughout each chapter, figures support the text and enhance student learning. • Marketing in action. Each chapter contains one Marketing in action feature that delves into the real marketing practices of large and small companies.

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Preface

• Reviewing the learning objectives. A summary at the end of each chapter reviews the main chapter concepts and links them to the chapter’s learning objectives. • Discussion questions and critical thinking exercises. At the end of each chapter, issues are raised and scenarios presented to invite discussion and the critical exploration of marketing ideas. • Navigating the key terms. A helpful listing of chapter key terms, in alphabetical order and with page numbers, facilitates easy reference. • Mini cases. Brief sections at the end of each chapter provide four short application cases that facilitate discussion of current issues and company situations. Of the four mini cases for each chapter, one presents ‘Marketing analytics in action’ and one invites ‘Ethical reflection’. • Case studies. Appendix 1 sets out case studies prepared by marketing academics from around Australia and New Zealand, which have multiple applications in the various chapters. A table at the beginning of the appendix outlines how these four case studies link with the content of the chapters. • Marketing plan. Appendix 2 contains a sample marketing plan that demonstrates how to apply important marketing planning concepts. • Marketing analytics spotlights. Appendix 3 sets out marketing analytics spotlights that demonstrate how to apply many of the analytical methods and introduce the financial analysis that helps to guide, assess and support marketing decisions. A ‘Marketing analytics at work’ mini case at the end of each chapter provides opportunity to apply analytical and financial thinking to relevant chapter concepts. • Careers in marketing. Appendix 4 provides an overview of marketing career paths and lays out a process for landing a marketing job that best matches your special skills and interests. More than ever before, the seventh edition of Principles of Marketing provides an effective and enjoyable total package designed to guide you along the road to learning marketing!

Learning aids that create value and engagement This book provides a practical, managerial approach to marketing and gives you – the reader – a rich variety of examples and applications to illustrate the main decisions that marketing management face in their efforts to balance the organisation’s objectives and resources against needs and opportunities in the global marketplace. These learning aids are illustrated on the following pages.

Learning objectives Each chapter begins with learning objectives that prepare the reader for the chapter material and detail the learning goals.

Chapter 8 New products: Developing and managing innovation

LO 1 Explain how companies find and develop new-product ideas. (p. 232)

Chapter

8

NEW-PRODUCT IDEAS

231

ACQUISITION

NEW-PRODUCT DEVELOPMENT PROCESS Customer-centered • Team based • Systematic

New products: Developing and managing innovation

LO 2 List and define the steps in the new-product development process, and describe the main considerations in managing this process. (pp. 232–41)

In Chapter 7, you learned how marketers manage and develop products and brands. In this chapter, we examine two additional product topics: developing new products and managing products through their life cycles. New products are the lifeblood of an organisation. However, new-product development is risky, and

Idea generation

Idea screening

Concept development and testing

Marketing strategy development

Commercialisation

Test marketing

Product development

Business analysis

many new products fail. So, the first part of this chapter lays out a process for developing and introducing successful new products. Marketers want new products to enjoy long and successful lives. In the second part of the chapter, we show that every product passes through several life-cycle stages and that each stage poses new challenges requiring different marketing strategies and tactics. We wrap up our product discussion

PRODUCT LIFE CYCLE CHANGES

by looking at two additional considerations: social responsibility in product decisions, and international

Shaped by ethical and international market considerations

product and services marketing.

LO 3

For a visual representation of the chapter, please see the concept map on the following page.

Learning

Objectives

Describe the stages of the product life cycle and how marketing strategies change during the product life cycle. (pp. 241–47)

Learning Objective 1 Explain how companies find and develop new-product ideas. New-product development strategy p. 232 Learning Objective 2 List and define the steps in the new-product development process, and describe the main considerations in managing this process. The new-product development process pp. 232–39 Managing new-product development pp. 239–41

LO 4 Discuss socially responsible product decisions, and international product and services marketing. (pp. 247–50)

Learning Objective 3 Describe the stages of the product life cycle and how marketing strategies change during the product life cycle. Product life-cycle strategies pp. 241–47 Learning Objective 4 Discuss socially responsible product decisions, and international product and services marketing. Additional product and service considerations pp. 247–50

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INTRODUCTION

GROWTH

MATURITY

DECLINE

•Innovators •Few competitors •Low sales •Negative profit

•Early adopters •Growing competition •Rapidly rising sales •Rising profit

•Middle majority •Stable competition •Peak sales •High profit

•Laggards •Declining competition •Declining sales •Declining profit

Basic product Cost–plus pricing Selective distribution Build awareness Sales promotion to entice trial

Product extensions Penetration pricing Intensive distribution Build awareness and interest Leverage high demand

Diversity brand Price to match competition Intensive distribution Stress brand differences Encourage brandswitching

Phase out Cut price Selective distribution Reduce advertising Reduces sales promotion

Concept map graphically previews and positions each chapter and its key concepts, providing a visual guide to enable easy navigation of the chapter content.

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Chapter 8 New products: Developing and managing innovation

Part 3 Designing a customer-driven strategy and mix

month, believed that all salt is the same and wanted to pay the same price, the company would not benefit from segmenting this market. To be useful, market segments must be: • Measurable: The size, purchasing power and profiles of the segments can be measured. Certain segmentation variables are difficult to measure. For example, there are approximately 30.5 million left-handed people in the United States – almost equalling the entire population of Canada. Yet, few products are targeted towards this left-handed segment. The main problem may be that the segment is hard to identify and measure. There are no data on the demographics of lefties, and neither the United States Census Bureau, the Australian Bureau of Statistics nor Statistics New Zealand keep track of left-handedness in their surveys. Private data companies keep reams of statistics on other demographic segments but not on left-handers. • Accessible: The market segments can be effectively reached and served. Suppose a fragrance company finds that heavy users of its brand are single men and women who stay out late and socialise a lot. Unless this group lives or shops at certain places and is exposed to certain media, its members will be difficult to reach. • Substantial: The market segments are large or profitable enough to serve. A segment should be the largest possible homogeneous group worth pursuing with a tailored marketing program. It would not pay, for example, for an automobile manufacturer to develop cars especially for people whose height is greater than two metres. • Differentiable: The segments are conceptually distinguishable and respond differently to different marketing mix elements and programs. If married and unmarried women respond similarly to a sale on perfume, they do not constitute separate segments. • Actionable: Effective programs can be designed for attracting and serving the segments. For example, although one small airline identified seven market segments, its staff was too small to develop separate marketing programs for each segment.

Questions

❷ In mid-2016, Niantic launched Pokémon Go and, in doing so, reached out to loyal, older Pokémon players as well as attracting a new, younger

❶ Discuss the options for Mattel in the face of intense competition and

market. How could Mattel use the same strategy to rejuvenate its brands?

declining sales for its key brands (see Figure 8.2 for hints).

The product life-cycle (PLC) concept can describe a product class (petrol-powered automobiles), a product form (SUVs) or a brand (the Toyota Landcruiser). The PLC concept applies differently in each case. Product classes have the longest life cycles – the sales of many product classes stay in the mature stage for a long time. Product forms, in contrast, tend to have the standard PLC shape. Product forms such as dial telephones and VHS tapes passed through a regular history of introduction, rapid growth, maturity and decline. A specific brand’s life cycle can change quickly because of changing competitive attacks and responses. For example, although laundry soaps (product class) and powdered detergents (product form) have enjoyed fairly long life cycles, the life cycles of specific brands have tended to be much shorter. The PLC concept also can be applied to what are known as styles, fashions and fads. Their special life cycles are shown in Figure 8.3. A style is a basic and distinctive mode of expression. For example, styles appear in homes (colonial, ranch, transitional), clothing (formal, casual) and art (realist, surrealist, abstract). Once a style is invented, it may last for generations, passing in and out of vogue. A style has a cycle showing several periods of renewed interest. A fashion is a currently accepted or popular style in a given field. For example, the more formal ‘business attire’ look of corporate dress of the 1980s and 1990s gave way to the ‘business casual’ look of today. Fashions tend to grow slowly, remain popular for a while and then decline slowly. Fads are temporary periods of unusually high sales driven by consumer enthusiasm and immediate product or brand popularity.19 A fad may be part of an otherwise normal life cycle, as in the case of recent surges in the sales of poker chips and accessories. Or the fad may comprise a brand’s or product’s entire life cycle. The ‘Pet Rock’ is a classic example. Upon hearing his friends complain about how expensive it was to care for their dogs, advertising copywriter Gary Dahl joked about his pet rock. He soon wrote a spoof of a dog-training manual for it, titled The Care and Training of Your Pet Rock. Soon, Dahl was selling some 1.5 million ordinary beach pebbles at $4 a pop. Yet the fad, which broke one October, had sunk like a stone by the next February. Dahl’s advice to those who want to succeed with a fad: ‘Enjoy it while it lasts.’ Who could forget such fads as ‘Keep Calm’ posters, mugs and tea-towels or the ‘Ice Bucket Challenge’?20

Linking the concepts Pause for a bit and think about segmentation. As a consumer yourself, think about your own personal experience when you shop. ● Identify specific companies, other than the examples already mentioned, that practise the different types of segmentation just discussed.

● How do the stores you shop at use the segmentation concepts you are reading about here? And why do they do this? ● Using the segmentation bases you have just read about, segment the Australian footwear market. Describe each of the major segments and sub-segments. Keep these segments in mind as you read the next section on market targeting.

Market targeting (pp. 180–86)

Fashion

style

A basic and distinctive mode of expression.

fashion

A currently accepted or popular style in a given field.

fad

A fashion that enters quickly, is adopted with great zeal, peaks early and declines quickly.

Fad

Sales

Style

Market segmentation reveals the firm’s market segment opportunities. The firm now has to evaluate the various segments and decide how many and which segments it can serve best. We now look at how companies evaluate and select target segments.

243

Sales

Linking the concepts are included at the end of each chapter’s main sections.

Sales

Evaluating market segments In evaluating different market segments, a firm must look at three factors: (1) segment size and growth, (2) segment structural attractiveness, and (3) company objectives and resources. The company must first collect and analyse data on current segment sales, growth rates and expected profitability for various segments. It will be interested in segments that have the right size and growth characteristics. But ‘right size and growth’ is a relative matter. The largest, fastest-growing segments are not always the most

Time

Time

Time

Figure 8.3 Styles, fashions and fads

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M06_ARMS1841_07_SE_C06.indd 180

206

Marketing in Action 7.1

Student learning centre Each chapter concludes with a section dedicated to student learning. It provides a summary of the chapter relative to the chapter learning objectives, discussion questions, critical thinking exercises and a pagereferenced list of the chapter’s key terms.

Chapter 4 Marketing analytics: Gaining customer insights

Part 3 Designing a customer-driven strategy and mix

Student Learning Centre

Headspace and the unsought product

125

Learning Objective 3. Outline the steps in the marketing research process. (pp. 105–19)

The first step in the marketing research process involves defining the problem and setting the research objectives, which may be exploratory, descriptive or causal

research. The second step consists of developing a research plan for collecting

data from primary and secondary sources. The third step calls for implementing Let’s face it, some goods and services are not at the top of our shopping list.

both online and in the real world. Headspace ‘built’ a stigma! Actually, they built

Life insurance or a will, smoke detectors and security alarms, a gravestone, a

an enormous panelled dome at a railway station in Melbourne. For five days,

thermometer or survival gear – these are all examples of goods and services we

travellers were invited to ‘take away’ the stigma by removing a panel. Each panel

just don’t want to think about needing. They are unsought products. Even though

had a message about mental health and how to get help. Following the outdoor

we do not really want these products they are often needed. For example, every

event, the campaign launched online, with a digital ‘stigma’ to break down.

home should have a smoke detector (and, often, more than one) – it’s the law!

The opportunity to break down the digital stigma not only encourages visitors to

But many home owners do not think about installing a smoke detector until their

access the website but also provides those visitors with a story and information

real estate agent reminds them they cannot sell their home without one. So local

about youth mental health. The campaign was promoted via television, radio,

governments and smoke-detector manufacturers and distributors can spend a

social and digital media, and flyers. Comedian Dave Hughes, who experienced

great deal of time and money reminding us to install smoke detectors and to

mental health issues at the age of 21, also supported the campaign.

unsought products that marketers play a big role in bringing to our attention.

Reviewing the learning objectives To create value for customers and build meaningful relationships with them, marketers must first gain fresh, deep insights into what customers need and want. Such insights come from good marketing information. As a result of the recent explosion of ‘big data’ and marketing technology, companies can now obtain great quantities of information, sometimes even too much. Consumers themselves are now generating a tidal wave of bottom-up information through their smartphones, computers and tablets via online browsing and blogging, apps and social media interactions, and texting and video. The challenge is to transform today’s vast volume of consumer information into actionable customer

The Big Stigma campaign aimed to change the way people think about

check regularly that they are working. Smoke detectors are just one of many

and market insights.

mental wellbeing and to encourage young people to get information and help

Headspace aims both to help young people with mental health matters and to

when needed. In marketing terms, the goal was to shift the services and support

improve the ‘wellbeing of young Australians’. Each year, many young people face

provided by Headspace from unsought to a service actively sought out by young

health and wellbeing issues that compromise their mental wellness, and many

people. Let’s take a closer look at how they did this.

face these problems alone – they don’t seek help. Sometimes this is because

Headspace is a service – a service that is not only unsought but also intangible.

they do not realise they need help but, more often than not, it is because they

It is difficult for young people to understand what the service will provide.

are embarrassed or because of a perceived stigma. For young people, support for

The Big Stigma campaign brings the issue of youth mental health into the open,

mental wellbeing is an unsought service.

and makes it more real. Each panel removed from the Big Stigma represents

Recently, Headspace launched a campaign to tackle this issue head on.

another person who has heard the message and who understands the

The campaign aimed to break down the stigma by creating an engaging experience,

issues a bit better. With more people talking about youth mental health,

the marketing research plan by gathering, processing and analysing the

information. The fourth step consists of interpreting and reporting the findings. Additional information analysis helps marketing managers apply the information

and provides them with sophisticated statistical procedures and models from which to develop more rigorous findings.

Both internal and external secondary data sources often provide information

more quickly and at a lower cost than primary data sources, and they can

sometimes yield information that a company cannot collect by itself. However, needed information might not exist in secondary sources. Researchers must also evaluate secondary information to ensure that it is relevant, accurate, current and impartial.

Primary research must also be evaluated for these features. Each primary

Learning Objective 1. Explain the importance of information in gaining insights about the marketplace and customers. (pp. 98–102) The marketing process starts with a complete understanding of the marketplace and consumer needs and wants. Thus, the company needs sound information in order to produce superior value and satisfaction for customers. The company also requires information on competitors, resellers, and other actors and forces in the marketplace. Increasingly, marketers are viewing information not only as an input for making better decisions but also as an important strategic asset and marketing tool.

data collection method – observational, survey and experimental – has its own advantages and disadvantages. Similarly, each of the various research contact methods – mail, telephone, personal interview and online – also has its own advantages and drawbacks.

Learning Objective 4. Explain how companies analyse and use marketing information. (pp. 119–21)

Information gathered in internal databases and through marketing intelligence and marketing research usually requires more analysis. This may include advanced statistical analysis or the application of analytical models that will help marketers

make better decisions. To analyse individual customer data, many companies have now acquired or developed special software and analysis techniques –

Learning Objective 2. Define the marketing information system and discuss its parts. (pp. 102–5)

called customer relationship management (CRM) – that integrate, analyse and apply the mountains of individual customer data contained in their databases.

The marketing information system (MIS) consists of people and procedures for assessing information needs, developing the needed information and helping decision makers to use the information to generate and validate actionable customer and market insights. A well-designed information system begins and ends with users. The MIS first assesses information needs. The marketing information system primarily serves the company’s marketing and other managers, but it may also provide information to external partners. Then, the MIS develops information from internal databases, marketing intelligence activities and marketing research. Internal databases provide information on the company’s own operations and departments. Such data can be obtained quickly and cheaply but often needs to be adapted for marketing decisions. Marketing intelligence activities supply everyday information about

Marketing information has no value until it is used to make better marketing

decisions. Thus, the marketing information system must make the information available to the managers and others who make marketing decisions or deal

with customers. In some cases, this means providing regular reports and

updates; in other cases, it means making non-routine information available for special situations and on-the-spot decisions. Many firms use company intranets

and extranets to facilitate this process. Thanks to modern technology, today’s marketing managers can gain direct access to the information system at any time and from virtually any location.

Learning Objective 5. Discuss the special issues some marketing researchers face, including public policy and ethics issues. (pp. 121–24)

Unsought products: Many young people do not reach out to get the help they need with their mental wellbeing. Headspace’s Big Stigma campaign aimed to change attitudes and to encourage young people to get the help they need.

developments in the external marketing environment. Market research consists

Some marketers face special marketing research situations, such as those

of collecting information relevant to a specific marketing problem faced by the

conducting research in small business, not-for-profit or international situations.

company. Lastly, the MIS helps users in their marketing analytics whereby they

Marketing research can be conducted effectively by small businesses and non-

Headspace

analyse and use the information to develop customer insights, make marketing

profit organisations with limited budgets. International marketing researchers

decisions and manage customer relationships.

follow the same steps as domestic researchers, but often face more and different

M04_ARMS1841_07_SE_C04.indd 125

M07_ARMS1841_07_SE_C07.indd 206

Chapter 7 Products, services and brands: Offering customer value

227

Appendix

1

Learning Objective 3

service intangibility (p. 213)

Learning Objective 4

co-branding (p. 222)

interactive marketing (p. 216)

service perishability (p. 214)

brand equity (p. 218)

line extension (p. 223)

internal marketing (p. 215)

service variability (p. 214)

brand extension (p. 223)

store brand (private brand) (p. 221)

service inseparability (p. 214)

service–profit chain (p. 215)

Mini cases 7.1 Industrial products

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6/1/17 8:40 PM

Case studies

Marketing is much more than the sum of its parts. The case studies in this appendix

Realestate.com.au explores the journey of two Australian entrepreneurs who

show how the various marketing activities come together to shape businesses’

grew their online property business from its start in their garage to a publicly listed

direction and performance. A brief overview of each case study is presented here,

Australian company with an annual turnover of $500 million, in less than 20 years.

along with a table showing how these case studies are linked to and integrated

The entrepreneurs leveraged an understanding of changes in the technological

with the chapters in the book.

environment, together with insights into how to create value for their real-estate

Patagonia designs and sells high-quality outdoor clothing, with stores in

Opening doors with Grifco

for their customers to market that property. Launching this business when the internet was relatively new, Google was just starting and YouTube did not exist, presented a

also offers after-sales support for installers and customers, both online and competitive outdoor-clothing market by understanding its target in the incredibly

door open and close – and they have been doing so for over 50 years.

in person.

The first openers were mechanical, and today Grifco make some of the best

❶ What type of industrial good are Grifco’s door openers? What factors

highlights how future success will come from continued engagement with property

mission and marketing strategy, segmentation and differentiation of this successful

buyers. The final case takes you to Tasmania and an eco-walking business.

business. The company has strong corporate social-responsibility goals and the

did you consider in classifying this good? (Learning Objective 1) how having such goals can be a differentiating and value-creating case illustrates

the different places industrial businesses might need door openers: from

(AACSB: Communication; Application of Knowledge)

door openers need to be fire-proof, others need to be ignition-proof and

massive challenge. The case explores the challenges of new product adoption, and

market and their needs. The case takes you on a journey through the company’s

electronic door-opening systems in the world. Think for a moment about all manufacturing plants to shop fronts, warehouses and fire stations. Some

business customers – the website does not sell property but, instead, provides a space

Queensland, New South Wales and Victoria as well as throughout the United States. The case study shows how Patagonia is able to create and capture value

Grifco makes industrial door openers – those gadgets that make a

marketing feature – and not just something good to do.

The business offers unique holiday experiences for their customers in Tasmania’s World Heritage-listed national park. The case shows the importance of

The case study ‘Supermarket Wars’ takes you into the challenging marketing

understanding the target market, positioning and socially responsible product

battleground of fast-moving consumer goods. The case explores how Woolworths

decisions to create and capture customer value. Insights about the customer allow

❷ An industrial product is a complex bundle of benefits in much the same

way as a consumer product is. Marketers must identify the coreand customer Coles have responded to changes in the marketing environment, with not the

the company owners to develop a digital and direct integrated communication

still others need to be able to handle very heavy use. Grifco sell them all.

value, create an actual product and choose how to augment least ofthat these changes being increased competition – both from new entrants,

strategy that reaches out to customers and which enables the business to enrich

They also promise their customers personalised sales service, reliable and

such as ALDI, and from older competitors, such as IGA (Independent Grocers of product. Identify the core value, as well as the actual and augmented

the customer experience from before they arrive for their holiday to well after

efficient products of exceptional quality, and a huge array of spare parts

product, for Grifco door openers (see ). company (Learning responses as well as the responses themselves, from product assortment,

Australia). The case highlights the importance of marketing information to shape

Objective 1) (AACSB: Communication; Application of Knowledge) to pricing, sales promotion and distribution.

Chapter number

7.2 Packaging Vote 1 for ‘The Original’

1 2

they return home. The following table outlines how these four case studies link with the content of the chapters.

Chapter title Marketing: Creating and capturing customer value

✓

Company and marketing strategy: Partnering to build customer engagement, value and relationships

✓

Farmers Union Iced Coffee brand was launched in 1977. It is one of

❶ Involving loyal customers in packaging decisions seems like a good 3

the largest-selling brands in the category and Australia’s only national

idea, but it could also be a problem for the brand manager if there 4

Marketing analytics: Gaining customer insights

iced-coffee brand. Brand owner Lion Pty Limited has asked its loyal Iced

is no clear favourite package design. What are the advantages 5and

Buyer behaviour: Understanding consumer and business buyers

✓

Coffee brand customers to join them in redesigning the packaging for the

6 disadvantages of involving customers in package design decisions?

Customer-driven marketing strategy: Creating value for target customers

✓ ✓

market-leading brand. Brand devotees have been asked to vote for their favourite package design – choosing between ‘The Original’, ‘The Real

✓ ✓

✓

7

Products, services and brands: Offering customer value New products: Developing and managing innovation

9

Pricing: Capturing customer value

✓

Placement: Customer value fulfilment

✓

McCoy’, ‘The Straight-Shooter’ and ‘The Wild Card’ – with the design varying

❷ Iced coffee is a convenience good. Customers purchase such items 10

progressively from the original. In branding and packaging, consistency

often and may have well-established preferences so they do not need 11 to

is crucial so each of the package alternatives is the same shape and size,

Communicating customer value: Advertising and public relations

12 expend a great deal of effort when choosing a brand. Customers often

Personal selling and sales promotion: Creating value in relationships

uses the same colours (teal and brown) and retains the same Farmers

use the package design to quickly locate their favourite brand in13the

Direct and digital marketing: Interactivity and fulfilment

Union trademark. After voting for their favourite package design on a

confusion of products on a supermarket shelf. Industrial goods also have

custom-made website, customers can follow progress of the vote on the

packaging. Do you think industrial buyers are influenced in the same

brand’s Facebook page. Changing packaging, its layout and design is not

way by a product’s packaging? Explain your answer. What might be the

something a brand manager does lightly. This is because the package is

considerations in designing packaging for industrial buyers? (Learning

often the last and best chance to attract a buyer’s attention.45

Objectives 1 and 2) (AACSB: Communication; Application of Knowledge) Z01_ARMS1841_07_SE_APP1.indd 471

14

Sustainable marketing: Social responsibility, ethics and legal compliance

✓

✓

8

(Learning Objective 2) (AACSB: Communication; Application of Knowledge; Analytical Thinking)

The marketplace and customers: Analysing the environment

Tasmanian Walking Company

and accessories. The service does not stop with the sale – the company

Realestate. com.au

Mini cases These short application cases at the end of each chapter address current issues and company situations. Questions are linked to the chapter’s learning objectives.

6/1/17 8:31 PM

Supermarket wars

Marketing in action Additional examples and important information are presented in marketing highlight exhibits throughout the book, together with questions for class and individual use.

Highlighted definitions and key terms Throughout each chapter, definitions in colour are provided in the margin adjacent to where each key term is discussed in the text.

6/1/17 8:09 PM

Patagonia

xviii

✓

✓

✓

✓

✓

✓

✓

✓ ✓ ✓

✓

✓ ✓

Case studies Appendix 1 sets out case studies that highlight key ideas, stories and marketing strategies. Cases involve small- and medium-sized enterprises, as well as large firms.

6/1/17 10:00 PM

7.3 Marketing analytics at work Just one more cereal Kellogg’s, maker of All-Bran, Special K and Kellogg’s Corn Flakes, has

flavour to Kellogg’s Ultimate Spiderman cereal, and gluten-free versions

more than 10 established cereal brands on the market in Australia

of its iconic Special K and Corn Flakes brands. When launching a new

as well as many new cereals – everything from Nutri-Grain Ice Break

brand, the company must consider a number of key brand strategy

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A valuable learning package MyLab Marketing for Armstrong/Adam/Denize/ Volkov/Kotler Principles of Marketing, 7th edition A guided tour for students and educators

Auto-generated tests and assignments Each MyLabTM comes with pre-loaded assignments, all of which are automatically graded.

Assignable content Educators can select content from the Study Plan and/or Test Bank and assign to students as homework or quizzes.

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A valuable learning package

MyLab Marketing www.pearsonmylabandmastering.com

Learning resources To further reinforce understanding, Study Plan problems link to additional learning resources, such as relevant sections of the eText. Videos and simulations are also available for students.

Study Plan A personalised Study Plan is generated from each student’s results on assignments or sample tests. The Study Plan indicates learning objectives where students need more practice, and helps them work towards mastery.

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Resources for educators and students A full suite of additional supplementary materials is provided with this book to assist teaching and learning. The educator resources contain a variety of useful features including: A test bank of questions. Each chapter has a bank of multiple choice, true/false, short-answer and essaytype questions featuring problems of varying complexity. These are structured by learning objective for the educator’s convenience, with questions for every learning objective. The Test Bank has been tagged by topic, AACSB standards and also by difficulty level. It is now also available in Word as well as in Blackboard and Moodle compatible formats. The solutions manual has been fully revised and updated by leading subject-matter experts to include the answers to all the questions contained in the book. For each chapter, the solutions manual provides the learning objectives, solutions to all end-of-chapter discussion questions, critical thinking exercises and mini cases, together with suggested answers for the Marketing in action questions and additional class activities. The PowerPoint slides have been updated to match the new edition. In response to market demand, they now include additional teaching tips, illustrating key concepts to enhance the learning experience and engage students. Digital image PowerPoint slides provide the full set of images, figures and tables from the book, together with the new edition’s branded PowerPoint template, enabling the personalisation of the lecturer’s presentation.

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About the authors As a team, the authors Gary Armstrong, Stewart Adam, Sara Denize, Michael Volkov and Philip Kotler provide a blend of skills and experience uniquely suited to writing the seventh edition of this widely acclaimed marketing textbook. Together, they make the complex world of marketing come alive.

Gary Armstrong is Crist W Blackwell Distinguished Professor Emeritus of Undergraduate Education in the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill. He holds undergraduate and master’s degrees in business from Wayne State University in Detroit, and he received his PhD in marketing from Northwestern University in Illinois. Dr Armstrong has contributed numerous articles to leading business journals. As a consultant and researcher, he has worked with many companies on marketing research, sales management and marketing strategy. But Professor Armstrong’s first love has always been teaching. His long-held Blackwell Distinguished Professorship is the only permanent endowed professorship for distinguished undergraduate teaching at the University of North Carolina at Chapel Hill. He has been very active in the teaching and administration of Kenan-Flagler’s undergraduate program. His administrative posts have included Chair of Marketing, Associate Director of the Undergraduate Business Program, Director of the Business Honors Program, and many others. Through the years, he has worked closely with business student groups and has received several UNC campus-wide and Business School teaching awards. He is the only repeat recipient of the school’s highly regarded Award for Excellence in Undergraduate Teaching, which he received three times. Most recently, Professor Armstrong received the UNC Board of Governors Award for Excellence in Teaching, the highest teaching honour bestowed by the 16-campus University of North Carolina system.

Stewart Adam is Honorary Associate Professor of Marketing in the Faculty of Business and Law at Deakin University, Melbourne, and managing partner with Melbourne-based marketing consultancy Fontech Pty Ltd, which was formed in Sydney in 1984. He was Australasia’s first professorial appointment in electronic marketing in 2001, where his research interests concerned use of digital tools and technologies in marketing, and their impact on non-financial and financial organisational performance. Of particular interest was the social and economic impact of communities of interest/practice. Dr Adam has co-authored 10 of Australasia’s most widely adopted marketing textbooks and has been lead author of two electronic-marketing textbooks in a publishing career spanning more than 25 years. He has been a regular contributor to academic and professional journals, and a keynote speaker at academic conferences and industry events on the subject of digital marketing and organisational performance. He was involved with Google’s Online Marketing Challenge, firstly in beta testing the student learning exercise in search engine marketing, and then in engaging his postgraduate Online Marketing students in the challenge. His most recent achievement in learning and teaching involved spearheading the implementation of the flipped classroom model coupled with continuous peer-reviewed assessment in marketing management, with resultant greater student engagement.

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About the authors

Dr Adam has extensive industry experience, having held positions ranging from advertising agency executive to marketing manager of manufacturing and service firms, and on to general manager of an operating division of an unlisted public company, which he led from development of a green-field site to its takeover by a major investor. His industry experience was gained in both Australia and Europe.

Sara Denize is Professor and Deputy Dean in the School of Business at the University of Western Sydney. She holds a Bachelor of Commerce (honours) degree in marketing from the University of Otago, New Zealand, and followed up with a Master of Commerce by research a few years later. After moving to Australia, she completed her PhD at the University of Technology, Sydney. With over 30 years of experience as an educator, Professor Denize oversees teaching and learning in business at the University of Western Sydney. Her most recent accomplishments include the complete redesign of undergraduate business programs to include opportunities for students to equip themselves for future work, to practise innovation and to prepare to be the job-makers of the future. This work included the development of flipped classrooms, hours of green-screen and screen-cast lecture pods, interviews with executives and location filming, as well as the development of exciting and active in-class learning opportunities. Professor Denize loves teaching and is keen to make all aspects of marketing and business education accessible and meaningful. Her teaching accomplishments have been recognised in national teaching citations. Also a keen researcher, she continues to develop her interest in collaboration and information exchange in business marketing and innovation contexts.

Michael Volkov is the Director of Teaching and Learning in the Department of Marketing, Faculty of Business and Law, Deakin University, Melbourne, and has over 15 years’ experience in teaching and learning within the tertiary environment. He loves teaching and is passionate about student learning and developing student-centred learning environments. He is an award-winning and recognised leader in the field of teaching and learning, having been awarded numerous international, national and institutional awards, most recently including the 2015 Australia and New Zealand Marketing Academy ANZMAC Distinguished Educator Award; 2015 Deakin University Award for Teaching Excellence (Highly Commended); 2014 Deakin University, Faculty of Business and Law Award for Effectiveness, Excellence and Exemplar Practice in Teaching and Learning; 2013 Australian Award for University Teaching Office for Learning and Teaching Citation for Outstanding Contribution to Student Learning; 2013 Deakin University Award for Teaching Excellence; 2011 Deakin University, Faculty of Business and Law Award for Individual Teaching Excellence; and the 2010 Deakin University Commendation for Teaching Excellence. Michael’s research focus is in the fields of both consumer behaviour and education. In the areas of teaching and learning, Michael has addressed investigations including best practice in teaching and learning, the ingredients for student engagement, student success, student teamwork, stakeholder perception of graduates, student academic misconduct and student approaches to learning. His research has been published in a number of international journals including Education + Training; International Journal of Pedagogies and Learning; Information Technology, Education and Society; Australasian Journal of Educational Technology; European Journal of Marketing; Journal of Marketing Management; Journal of Consumer Marketing; Journal of Marketing Communication, Marketing Intelligence and Planning; and the Australasian Marketing Journal.

Philip Kotler is the SC Johnson & Son Distinguished Professor of International Marketing at the Kellogg School of Management, Northwestern University, in the United States. He received his master’s degree at the University of Chicago and his PhD at MIT, both in economics. Dr Kotler is author of Marketing Management (Pearson Prentice Hall), now in its 14th edition and the most widely used marketing textbook in graduate schools of business worldwide. He has authored dozens of other successful books and has written more than 100 articles in leading journals. He is the only three-time winner of the coveted Alpha Kappa Psi award for the best annual article in the Journal of Marketing.

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xxiv

About the authors

Professor Kotler was named the first recipient of two major awards: the Distinguished Marketing Educator of the Year Award given by the American Marketing Association, and the Philip Kotler Award for Excellence in Health Care Marketing presented by the Academy for Health Care Services Marketing. His numerous other major honours include the Sales and Marketing Executives International Marketing Educator of the Year Award; the European Association of Marketing Consultants and Trainers Marketing Excellence Award; the Charles Coolidge Parlin Marketing Research Award and the Paul D Converse Award, given by the American Marketing Association to honour ‘outstanding contributions to science in marketing’. In a recent Financial Times poll of 1000 senior executives across the world, Professor Kotler was ranked as the fourth ‘most influential business writer/guru’ of the 21st century. Dr Kotler has served as chairman of the College on Marketing of the Institute of Management Sciences, a director of the American Marketing Association and a trustee of the Marketing Science Institute. He has consulted with many major US and international companies in the areas of marketing strategy and planning, marketing organisation and international marketing. He has travelled and lectured extensively throughout Europe, Asia and South America, advising companies and governments about global marketing practices and opportunities.

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The development story No book is the work only of its authors. We greatly appreciate the valuable contributions of several people who helped make this new edition possible. Since the sixth edition of Principles of Marketing was published, a rigorous review and revision has taken place. The content was developed and reviewed by members of the Australian marketing field. Pearson Australia and the authors are indebted to the many known, as well as anonymous, academics who were surveyed or interviewed, and provided feedback in the planning, development and production stages of this new edition. Dr David Bednall, managing partner, Heatherdale Consulting Group, Melbourne, and Honorary Associate Professor of Marketing, Deakin University Alexandria Cantali, Australian Catholic University Alvin Chan, Western Sydney University Ms Yolanda de Groot, co-founder and co-CEO, de Groots Media Rohan De Pallant, The University of Queensland David Fleishman, University of the Sunshine Coast Maureen Griffiths, Monash University Ellen McArthur, Griffith University Zlatko Muhvic, RMIT Raju Mulye, RMIT Owen Seamons, The University of Queensland Tania Von der Heidt, Southern Cross University Jeaney Yip, The University of Sydney We would also like to thank the contributors who wrote the following case studies set out in Appendix 1: • Case 1: ‘Patagonia: Hiking a value trail of marketing responsibility’ – Dr David Fleischman, University of the Sunshine Coast • Case 2: ‘Supermarket wars: The battle continues!’ – Jan Charbonneau, University of Tasmania • Case 3: ‘Realestate.com.au: From garage start-up to market leader’ – Geoff Fripp, The University of Sydney • Case 4: ‘Tasmanian Walking Company: Balancing luxury and adventure in a sustainable experience’ – Dr Gemma Lewis, University of Tasmania. We also owe a great deal to the people at Pearson Australia who helped develop this book: Anna Carter, for her guidance in bringing the book to completion; Lisa Woodland, who sourced and compiled a diverse range of illustrative and photographic material; and Bernadette Chang for skilfully managing the book

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The development story

through the detailed editorial process such a complex educational publication demands. We would also like to thank lead editor Helen Eastwood for her wonderful editorial skills and for the contribution she made to the overall finish of the book. We are proud to be members of a fraternity of authors who work with such a group of professionals at Pearson Australia. Gary Armstrong Stewart Adam Sara Denize Michael Volkov Philip Kotler

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PA RT

1

email [email protected]

Defining marketing and the marketing process 1 Marketing: Creating and capturing customer value2 2 Company and marketing strategy: Partnering to build customer 36 engagement, value and relationships

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Chapter

1

Marketing: Creating and capturing customer value You are beginning a journey into the science and practice of marketing – a journey that is both exciting and vital in the preparation for the career that awaits you. In this chapter, we start with the question, ‘What is marketing?’. Simply put, marketing is managing profitable customer relationships. The aim of marketing is to create value for customers and to capture value from customers in return. We start with a definition of marketing before proceeding to discuss the five steps in the marketing process – from understanding customer needs, to designing customer-driven marketing strategies and integrated marketing programs, to building customer relationships and capturing value for the firm, as shown in Figure 1.1. Finally, we discuss the major trends and forces affecting marketing in this age of customer relationships. Understanding these basic concepts, and forming your own ideas about what they really mean to you, will give you a solid foundation for all that follows. As you start this chapter, we suggest you pay close attention to the visual representation on the next page, which is designed to give you a ‘helicopter’ view of the main concepts covered. You will find such a visual representation, or concept map, at the start of each chapter.

Learning

Objectives

Learning Objective 1 Define marketing, and outline the steps in the marketing process. What is marketing?  pp. 4–5 Learning Objective 2 Explain the importance of understanding the marketplace and customers, and identify the five core marketplace concepts. Understanding the marketplace and customer needs  pp. 5–9 Learning Objective 3 Identify the key elements of a customer-driven marketing strategy, and discuss the marketing management orientations that guide marketing strategy. Designing a customer-driven marketing strategy  pp. 9–13 Preparing an integrated marketing plan and program  pp. 13–15 Learning Objective 4 Discuss customer relationship management, and identify strategies for creating value for customers and capturing value from customers in return. Engaging customers and managing customer relationships  pp. 15–18 Capturing value from customers  pp. 18–21 Learning Objective 5 Describe the major trends and forces that are changing the marketing landscape in this age of relationships. The changing marketing landscape  pp. 21–28 So, what is marketing? Pulling it all together pp. 28–30

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Chapter 1  Marketing: Creating and capturing customer value

CREATE VALUE FOR CUSTOMERS AND BUILD CUSTOMER RELATIONSHIPS

Define marketing, and outline the steps in the marketing process. (pp. 4–5)

LO 2 Explain the importance of understanding the marketplace and customers, and identify the five core marketplace concepts. (pp. 5–9)

Understand the marketplace and customer needs and wants

Design a customerdriven marketing strategy

Production concept

Build profitable relationships and create customer delight

Selling concept

Societal marketing concept

Marketing concept

Process

e opl Pe

Phy evid sical enc e

Marketing

Pri ce

A an set dd cu

g tin ica e for alu rge la

unication Comm

ent em s ac tic Pl ogis l

ocesses for cre and pr a ions xchanging offerin ting, c t u g t sti and e , partners a s that omm n i s g nd s of erin , client oci have un v s ety eli omer at v st

ion Promot

Product

Products

Industry

Market

(a collection of sellers)

(a collection of buyers)

n r t ai Unce my o econ

M oney In f o r m a ti o n

b glo

Ra al p id is a tio n

M ar

ke t i n g l a n d s c a p e

Con trib perf ution to or m a n ce

of Growth fit ro not-for-p g in t marke

ge

LO 5 Describe the major trends and forces that are changing the marketing landscape in this age of relationships. (pp. 21–30)

Capture value from customers to create profits and customer equity

MARKETING MANAGEMENT ORIENTATIONS (a lens through which managers understand the marketplace and customers)

Identify the key elements of a customer-driven marketing strategy, and discuss the marketing management orientations that guide marketing strategy. (pp. 9–15)

LO 4

Construct an integrated marketing program that delivers superior value

Product concept

LO 3

Discuss customer relationship management, and identify strategies for creating value for customers and capturing value from customers in return. (pp. 15–21)

CREATE VALUE FROM CUSTOMERS IN RETURN

Sus ta ma inable rket ing

LO 1

3

it a Dig

la

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4

Part 1  Defining marketing and the marketing process

What is marketing? (pp. 4–5) Marketing, more than any other business function, deals with customers. Although we will soon explore more-detailed definitions of marketing, perhaps the simplest definition is this one: Marketing is engaging customers and managing profitable customer relationships. The twofold goal of marketing is to attract new customers by promising superior value, and to keep and grow current customers by delivering satisfaction. Marketing comes to you in traditional forms, such as the products you see on supermarket shelves and in the windows of shopping-centre boutiques, as well as in the advertising you see and hear in newspapers and magazines, and on television and radio. However, in recent years, marketers have adopted a host of new marketing approaches, using everything from imaginative websites and social networks to smartphone apps. These new approaches do more than just blast out messages to the masses. They reach you directly and personally. Today’s marketers want to become a part of your life and enrich your experiences with their brands – to help you engage with their brands. When we examine successful marketing organisations, we see that many factors contribute to making a business or other organisational type successful. These factors include great strategy, dedicated employees, good information systems and excellent implementation, among others. However, today’s successful organisations have one thing in common – they have a strong market orientation, which means they are focused on their customers, their competitors and their profits (or surpluses in the case of those not operating for profit), and they have a commitment to sharing this marketing information with all parts of the organisation.1 These organisations share an absolute dedication to understanding and satisfying the needs of customers in well-defined target markets. They motivate everyone in the organisation to produce superior value for their customers, leading to high levels of customer satisfaction. At home, at school, where you work and where you play, you see marketing in almost everything you do. Yet, there is much more to marketing than meets the consumer’s casual eye. Behind it all is a massive network of people, technologies and activities competing for your attention and purchases. This book will give you a complete introduction to the basic concepts and practices of today’s marketing. In this chapter, we begin by defining marketing and the marketing process.

Marketing defined

marketing

The process by which marketing organisations engage customers, build strong customer relationships and create customer value in order to capture value from customers in return.

What is marketing? Many people think of marketing as only selling and advertising. We are bombarded every day with television commercials, catalogues, spiels from salespeople and online pitches. However, selling and advertising are but the tip of the marketing iceberg. Today, marketing must be understood not in the old sense of making a sale – ‘telling and selling’ – but in the new sense of satisfying customer needs. If the marketer engages consumers effectively, understands their needs, develops products that provide superior customer value, and prices, distributes and promotes them well, these products will sell easily. In fact, according to management guru Peter Drucker, ‘The aim of marketing is to make selling unnecessary.’2 Selling and advertising are only a part of a larger marketing mix – a set of marketing tools that work together to engage customers, satisfy customer needs and build customer relationships. Broadly defined, marketing is a social and managerial process by which individuals and organisations obtain what they need and want through creating and exchanging value with others. In a narrower business context, marketing involves building profitable, value-laden exchange relationships with customers. Hence, we define marketing as the process by which marketing organisations engage customers, build strong customer relationships and create customer value in order to capture value from customers in return.3

The marketing process Figure 1.1 presents a simple five-step model of the marketing process. In the first four steps, marketing organisations uncover knowledge about consumers, create customer value and build strong customer relationships. In the final step, companies reap the rewards of creating superior customer value. By creating

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Chapter 1  Marketing: Creating and capturing customer value

CREATE VALUE FOR CUSTOMERS AND BUILD CUSTOMER RELATIONSHIPS

Understand the marketplace and customer needs, wants and demands

Design a customerdriven marketing strategy

Construct an integrated marketing program that delivers superior value

5

CAPTURE VALUE FROM CUSTOMERS IN RETURN

Build profitable relationships and create customer delight

Capture value from customers to create profits and customer equity

Figure 1.1  A simple model of the marketing process

value for consumers, companies, in turn, capture value from consumers in the form of sales, profits and long-term customer equity. In this chapter and the next, we examine the steps in this model of the marketing process. In this chapter, we review each step but focus more on the customer relationship management steps – understanding customers, building customer relationships and capturing value from customers. In Chapter 2, we look more deeply into the second and third steps – designing marketing strategies and constructing marketing programs.

Understanding the marketplace and customer needs (pp. 5–9) As a first step, marketers need to understand customer needs, wants and demands, and the marketplace within which they operate. We now examine five core customer and marketplace concepts: (1) customer needs, wants and demands; (2) market offerings – goods, services and experiences; (3) customer value and satisfaction; (4) exchanges and relationships; and (5) markets. Figure 1.2 shows how these core marketing concepts are linked, with each concept building on the one before. Market offerings are the various product forms we examine in detail in Chapters 7 and 8. We discuss value, satisfaction and quality throughout the book. We begin our discussion of customer needs, wants and demands in this chapter, and examine them further in Chapters 4 and 5. The nature of exchange, transactions, relationships and markets is examined in this chapter and throughout the book.

Customer needs, wants and demands

The most basic concept underlying marketing is that of human needs. Human needs are states of felt deprivation. Humans have many complex needs. These include basic physical needs for food, clothing, warmth and safety; social needs for belonging and affection; and individual needs for knowledge and self-expression. While marketers may stimulate these needs, they do not create them for they are a basic part of human makeup. Wants are the form taken by human needs as they are shaped by culture and individual personality. A hungry person in Australia, Singapore or Hong Kong might want a rice or noodle dish for a quick lunch, accompanied by green tea. A hungry person in the South Pacific might want mangoes, suckling pig and beans. Wants are described in terms of objects that will satisfy needs. As a society evolves, the wants of its members expand. As people are exposed to more objects that arouse their interest and desire, producers try to provide more want-satisfying goods and services.

needs

States of felt deprivation.

wants

The form human needs take, as shaped by culture and individual personality.

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Needs, wants and demands

Market offerings

CORE MARKETING CONCEPTS

Value, satisfaction and quality

Markets

Exchange, transactions and relationships

Figure 1.2  Five core customer and marketplace concepts

demands

Human wants that are backed by buying power.

market offering

Some combination of goods, services, information or experiences offered to a market to satisfy a need or want.

People have almost unlimited wants but limited resources. Thus, they want to choose products that provide the most value and satisfaction for their money. When backed by buying power, wants become demands. A simple way to look at needs, wants and demands is that a person needs water to survive (thirst). The person may want a carbonated beverage to satisfy his or her thirst. If the person has the resources, he or she may demand a particular brand of carbonated beverage, such as Coca-Cola, Pepsi or another local brand. Outstanding marketers, whether profit-oriented companies, citizen-focused government or not-forprofit organisations, go to great lengths to learn about and understand their customers’ needs, wants and demands. They conduct qualitative research, such as small focus groups and customer clinics, to ascertain if there are unmet needs, wants and demands. They conduct quantitative research on a larger scale to ascertain the magnitude of the unmet needs, wants and demands. They seek customer insights when they examine their databases for patterns hidden in purchase data, customer complaints, inquiries, warranty claims and service performance data. They train salespeople and other frontline personnel to be on the lookout for unfulfilled customer needs. They observe customers using their own and competing products, and interview them in depth about their likes and dislikes. They conduct consumer research, analyse mountains of customer data and observe customers as they shop and interact, offline and online. Understanding customer needs, wants and demands in detail provides important input for designing marketing strategies. People at all levels of the company – including top management – stay close to customers.4

Market offerings: Goods, services and experiences

Consumers’ needs and wants are fulfilled through market offerings – some combination of goods, services, information or experiences offered to a market to satisfy a need or a want. Usually, the word product suggests a physical object such as a car, an iPad or a bar of soap. However, the concept of product is not

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limited to physical objects; anything capable of satisfying a need can be called a product. The importance of products that are physical objects lies not so much in owning them as in the benefits they provide. We buy food not to look at, but because it satisfies our hunger. We buy a microwave not to admire its utility, but because it defrosts or cooks our food. Marketers often use the expressions goods and services/ experiences to distinguish between products that have physical form and those that do not – that is, those that are intangible. However, in Chapter 9 we show that there is a continuum involved and not a clear-cut dichotomy. Consumers also obtain benefits through experiences, people, places, organisations, activities and ideas, and so we call these products, too. Consumers decide which entertainers to watch at the movies and on television, which places to visit on holiday, which organisations to support through contributions and which ideas to adopt. Thus, the term product covers physical goods, services, experiences and a variety of other offerings that satisfy consumers’ needs and wants. If at times the term seems not to fit, we could substitute words such as satisfier, resource or offer. In  the broadest sense, market offerings also include other entities, such as persons, places, organisations, information and ideas. Many sellers make the mistake of paying more attention to the attributes of the products they offer than to the benefits produced by these products. They see themselves as selling a Product offerings: Social causes are products . . . Often product, rather than providing a solution to a need. demarketing is involved. Department of Health A manufacturer of drill bits may think that the customer wants a 6 mm drill bit, but what the customer really wants is a 6 mm hole. These sellers suffer from marketing myopia.5 They are so taken with their products that they focus only on existing wants and lose sight of underlying customer marketing myopia needs. They forget that a product is only a tool to solve a consumer’s problem and they will have trouble if The mistake of paying more attention to the a new product comes along that serves the need better or less expensively. The customer with the same need specific products a will, all things being equal, want the new product. company offers than Smart marketers look beyond the attributes of the products and services they sell. By orchestrating to the benefits and several services and products, they create brand experiences for consumers. For example, you do not just experiences produced by these products. watch a V8 Supercar or MotoGP motorcycle race; you immerse yourself in the exhilarating, high-octane experience that the many on-board mini-cameras now provide.

Customer value and satisfaction Consumers usually face a broad array of products and services that might satisfy a given need. How do they choose among these many market offerings? Customers form expectations about the value and satisfaction that various market offerings will deliver, and buy accordingly. Satisfied customers buy again and tell others about their good experiences. Dissatisfied customers often switch to competitors and disparage the original product to others. Marketers must be careful to set the right level of expectations. If they set expectations too low, they may satisfy those who buy but may fail to attract enough buyers. If they set expectations too high, buyers will be disappointed. Customer value and customer satisfaction are key building blocks for developing and managing customer relationships. We revisit these core concepts later in the chapter.

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Exchanges, transactions and relationships

exchange

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

transaction

A trade between two parties that involves at least two things of value, agreed-upon conditions, and a time and place of agreement.

market

Marketing occurs when people decide to satisfy needs and wants through exchange relationships. Exchange is the act of obtaining a desired object from someone by offering something in return. In the broadest sense, the marketer tries to bring about a response to some market offering. The response may be more than simply buying or trading products and services. A political candidate, for instance, wants votes; a golf club wants members; an orchestra wants an audience; an online community of practice, such as BimmerPost (BMW owners), wants subscribers who help each other; and a social action group, such as Amnesty Australia, wants idea acceptance. Whereas exchange is the core concept of marketing, a transaction is marketing’s unit of measurement. A transaction consists of a trade of values between two parties. In a transaction, we must be able to say that one party gives X to another party and gets Y in return. For example, if you pay $1650 for a television set to Harvey Norman in Sydney or Singapore, you are engaged in a classic monetary transaction. Marketing consists of actions taken to build and maintain desirable exchange relationships with target audiences involving a product, service, idea or other object. Beyond simply attracting new customers and creating transactions, the company wants to retain customers and grow their business. Marketers want to build strong relationships by consistently delivering superior customer value. We expand on the important concept of managing customer relationships later in this chapter.

Markets

The set of all actual and potential buyers of a product or service.

The concepts of exchange and relationships lead to the concept of a market. A market is the set of actual and potential buyers of a product. These buyers share a particular need or want that can be satisfied through exchange relationships. Marketing means managing markets to bring about profitable customer relationships. However, creating these relationships takes work. Sellers must search for buyers, identify their needs, design good market offerings, set prices for those offerings, promote them, and store and deliver them. Activities such as consumer research, product development, communication, distribution, pricing and service are core marketing activities. Although we normally think of marketing as being carried out by sellers, buyers also carry out marketing. Consumers market when they search for products, interact with companies, obtain information and make their purchases. In fact, today’s digital technologies, from websites and online social networks to tablets and smartphones, have empowered consumers and made marketing a truly interactive affair. Thus, in addition to customer relationship management, today’s marketers must also deal effectively with customer-managed relationships. Marketers are no longer asking only, ‘How can we reach our customers?’ but also, ‘How can our customers reach us?’ and even, ‘How can our customers reach each other?’. Figure 1.3 shows the main elements in a marketing system. Marketing involves serving a market of final consumers in the face of competitors. The company and competitors research the market and interact with consumers to understand their needs. They then create and send their market offerings and messages to consumers, either directly or through marketing intermediaries. All of the parties in the system are affected by major environmental forces (demographic, economic, physical, technological, political/legal and social/cultural). Each party in the system adds value for the next level. In the figure, the arrows represent relationships that must be developed and managed. Thus, a company’s success at building profitable relationships depends not only on its own actions but also on how well the entire system serves the needs of final consumers. Coles Supermarkets cannot fulfil its promise of everyday low prices unless its suppliers provide

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Company (marketer) Marketing intermediaries

Suppliers

Consumers

Competitors

Major environmental forces

Figure 1.3  Elements of a modern marketing system

merchandise at low costs. And Toyota cannot deliver a high-quality car-ownership experience unless its dealers provide outstanding sales and service.

Designing a customer-driven marketing strategy (pp. 9–13) Once marketing management fully understands consumers and the marketplace, it can design a customerdriven marketing strategy. We define marketing management as the art and science of choosing target markets and building profitable relationships with them. The marketing manager’s aim is to attract, engage, keep and grow target customers by creating, delivering and communicating superior customer value. To design a winning marketing strategy, the marketing manager must answer two important questions: (1) What customers will we serve? (Who is our target market?) and (2) How can we serve these customers best? (What is our value proposition?). We introduce these aspects of marketing strategy here, and discuss them further in Chapters 2 and 6.

marketing management

The art and science of choosing target markets and building profitable relationships with them.

Selecting customers to serve Marketing management first decides who the organisation will serve. This is done by examining the various segments into which the market naturally falls, based on the appropriate factors that can be used to analyse a market. We discuss this aspect in depth in Chapter 6. Marketers know they cannot serve all customers in every way with a single market offering. They know it is necessary to select customers they can serve well and profitably. This may not involve continuously seeking increasing market demand; at times, it may be necessary to seek fewer customers and reduce demand. Most people think of marketing management as finding enough customers for the company’s current output, but this is too limited a view. The organisation has a desired level of demand for its products. At any point in time there may be no demand, adequate demand, irregular demand or too much demand, and marketing management must find ways to deal with these different demand states. (See Table 1.1 for a demand management ready-reckoner.) Marketing management is concerned not only with finding and increasing demand but also with changing or even reducing it. For example, Uluru (Ayers Rock) might have too many tourists wanting to climb it, and Daintree National Park in North Queensland can become

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Table 1.1  Demand management ready-reckoner 1 Negative demand A market is in a state of negative demand if a major part of the market dislikes the product and may even pay a price to avoid it. Examples include vaccinations, dental work and gall-bladder operations.

2 No demand Target consumers may be unaware of or uninterested in the product. The marketing task is to find ways to connect the benefits of the product with the person’s natural needs and interests.

3 Latent demand Many consumers may share a strong need that cannot be satisfied by any existing product. Examples include safer communities and more fuel-efficient cars. The marketing task is to measure the size of the potential market and develop effective products and services that would satisfy the demand.

4 Declining demand Every organisation, sooner or later, faces declining demand for one or more of its products. The marketing task is to reverse the declining demand through creative remarketing of the product.

5 Irregular demand Many organisations face demand that varies on a seasonal, daily or even hourly basis, causing problems of idle or overworked capacity. Examples include public transport, museums and hospital operating theatres. Supermarkets may be less frequented early in the week and understocked after heavy weekend trading. The marketing task is to find ways to alter the same pattern of demand through flexible pricing (e.g. early-bird specials), promotion and other incentives.

6 Full demand Organisations face full demand when they are satisfied with their volume of business. The marketing task is to maintain the current level of demand in the face of changing consumer preferences and increasing competition.

7 Overfull demand Some organisations face a demand level that is higher than they can, or want to, handle. Examples include a national park that is ­carrying more tourists than the facilities can handle. The marketing task, called demarketing, requires finding ways to reduce the ­demand temporarily or permanently. Demarketing aims not to destroy demand but only to reduce its level, temporarily or permanently.

8 Unwholesome demand Unwholesome products will attract organised efforts to discourage their consumption. The marketing task is to get people who like something to give it up, using such tools as fear messages, price hikes and reduced availability. Sources: For a fuller discussion, see Philip Kotler, ‘The major tasks of marketing management’, Journal of Marketing, October 1973, pp. 42–9; and Phyllis Berman & Katherine Bruce, ‘Make-up gets a make-over’, BRW, 7 May 1999, pp. 56–7.

demarketing

Marketing in which the task is to temporarily or permanently reduce demand.

overcrowded in the tourist season. Power companies sometimes have trouble meeting demand during peak usage periods. In these and other cases of excess demand, the needed marketing task, called demarketing, is to reduce demand temporarily or permanently. The aim of demarketing is not to completely destroy demand, but only to reduce or shift it to another time or even to another product. Thus, marketing management seeks to affect the level, timing and nature of demand in a way that helps the organisation achieve its objectives. A marketing organisation’s demand comes from two groups: new customers and repeat customers. Beyond designing strategies to attract new customers and create transactions with them, marketing organisations go all out to retain current customers and build lasting relationships. Simply put, marketing management is customer management and demand management.

Choosing a value proposition The marketing organisation must also decide how it will serve targeted customers – how it will differentiate and position itself in the marketplace. A marketing organisation’s value proposition is the set of benefits or values it promises to deliver to consumers to satisfy their needs.

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Such value propositions differentiate one brand from another. They answer the customer’s question, ‘Why should I buy your brand rather than a competitor’s?’. Marketing organisations must design strong value propositions that give them the greatest advantage in their target markets. For example, Telstra’s value positioning in 2016 was ‘It’s how we connect’. The company’s value propositioning is more easily identified in its WiFi advertising, which used tennis and humour to make it stand out and finished with the statement ‘Telstra Air is how’ – how to stay in touch using thousands of WiFi hotspots.

Marketing management orientations We have seen that marketing managers carry out tasks to achieve desired behaviour in defined target markets and to build profitable relationships with target customers. Questions arise in this regard. For  example, what philosophy should guide these marketing efforts? What weight should be given to the interests of the organisation, the customers and the society? Very often, these interests conflict with each other. There are five alternative concepts under which organisations may conduct their marketing activities: (1) production, (2) product, (3) selling, (4) marketing and (5) societal marketing. We discuss each of these below.

The production concept The production concept holds that consumers will favour products that are available and highly affordable. Therefore, management should focus on improving production and distribution efficiency. This concept is one of the oldest philosophies that guide sellers. The production concept is still a useful philosophy in some situations. For example, both personalcomputer maker Lenovo and home-appliance maker Haier dominate the highly competitive, price-sensitive Chinese market through low labour costs, high production efficiency and mass distribution. However, although useful in some situations, the production concept can lead to marketing myopia. Companies adopting this orientation run a major risk of focusing too narrowly on their own operations and losing sight of the real objective – satisfying customer needs and building customer relationships.

production concept

The idea that consumers will favour products that are available and highly affordable, and that the organisation should therefore focus on improving production and distribution efficiency.

The product concept Another major concept guiding sellers, the product concept, holds that consumers will favour products that offer the most quality, performance and innovative features. Thus, an organisation should devote energy to making continuous product improvements. Some manufacturers believe that if they can build a better mousetrap the world will beat a path to their door.6 But they are often rudely shocked. Buyers may well be looking for a better solution to a mouse problem, but not necessarily for a better mousetrap. The solution might be an electronic deterrent, an exterminating service or even a house cat, or something that works better than a mousetrap. Furthermore, a better mousetrap will not sell unless the manufacturer designs, packages and prices it attractively, places it in convenient distribution channels, brings it to the attention of people who need it and convinces buyers that it is a better product. The product concept can also lead to marketing myopia. For instance, railways management once thought that users wanted trains, rather than transportation, and overlooked the growing challenge from airlines, buses, trucks and cars. FTA-TV (free-to-air television) station management who target narrow segments overlook the fact that, in general, younger people watch less television in favour of interaction with each other via mobile devices, instant messaging and email, interactive games and social networking on the web, and even watch sporting events on YouTube after the fact.

The selling concept Many companies follow the selling concept, which holds that consumers will not buy enough of the firm’s products unless the firm undertakes a large-scale selling and promotion effort. The selling concept is

product concept

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

selling concept

The idea that consumers will not buy enough of the firm’s products unless the firm undertakes a large-scale selling and promotion effort.

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typically practised with unsought goods – those that buyers do not normally think of buying, such as insurance. These industries must be effective at tracking down prospects and selling them on product benefits. Such aggressive selling, however, carries high risks. It focuses on creating sales transactions rather than on building longterm, profitable customer relationships. The aim often is to sell what the company makes, rather than making what the market wants. It assumes that customers who are coaxed into buying the product will like it. Or, if they do not like it, they will possibly forget their disappointment and buy it again later. These are usually poor assumptions.

The marketing concept The marketing concept holds that achieving organisational goals depends on determining the needs and wants of target markets and delivering the desired satisfaction more effectively and efficiently than competitors do. The marketing concept has often been stated in colourful ways: ‘Finger lickin’ good’ (KFC), ‘Beanzmeanz Heinz’ (Heinz), ‘You are 24 hours of sun!’ (Fronius solar energy) and ‘Where do you want to go today?’ (Microsoft). The selling concept and the marketing concept are sometimes confused. Figure 1.4 compares the two concepts. The selling concept takes an inside-out perspective. It starts with the factory, focuses on the company’s existing products, and calls for heavy selling and promotion to obtain profitable sales. It focuses primarily on customer conquest – getting short-term sales with little concern about who buys or why. In contrast, the marketing concept takes an outside-in perspective. As Herb Kelleher, Southwest Airlines’ colourful co-founder, puts it, ‘We don’t have a marketing department; we have a customer department.’ The marketing concept starts with a well-defined market, focuses on customer needs and integrates all the

The marketing concept: KFC colourfully proclaims how it delivers satisfaction – ‘It’s finger lickin’ good’. Bloomberg via Getty Images

marketing concept

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

Starting point

Focus

Means

Ends

THE SELLING CONCEPT

Factory

Existing products

Selling and promoting

Profits through sales volume

THE MARKETING CONCEPT

Market

Customer needs

Integrated marketing

Profits through customer satisfaction

Figure 1.4  The selling and marketing concepts contrasted

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marketing activities that affect customers. In turn, it yields profits by creating lasting relationships with the right customers based on customer value and satisfaction. Implementing the marketing concept often means more than simply responding to customers’ stated desires and obvious needs. Customer-driven companies research current customers deeply to learn about their desires, gather new product and service ideas, and test proposed product improvements. Such customer-driven marketing usually works well when a clear need exists and when customers know what they want. In many cases, however, customers do not know what they want or even what is possible. As Henry Ford once remarked, ‘If I’d asked people what they wanted, they would have said faster horses.’7 For example, even 20 years ago, how many consumers would have thought to ask for now-commonplace products such as tablet computers, smartphones, digital cameras, 24-hour online buying and satellite navigation systems (GPS) in their cars? Such situations call for customer-driven marketing – understanding customer needs even better than customers themselves do and creating products and services that meet existing and latent needs, now and in the future. As an executive at 3M puts it, ‘Our goal is to lead customers where they want to go before they know where they want to go.’

The societal marketing concept The societal marketing concept questions whether the pure marketing concept overlooks possible conflicts between consumer short-run wants and consumer long-run welfare. Is a firm that satisfies the immediate needs and wants of target markets always doing what is best for consumers in the long run? The societal marketing concept holds that marketing strategy should deliver value to customers in a way that maintains or improves both the consumer’s and society’s wellbeing. It calls for sustainable marketing – socially and environmentally responsible marketing that meets the present needs of consumers and businesses while also preserving or enhancing the ability of future generations to meet their needs. Even more broadly, many leading business and marketing thinkers are now preaching the concept of shared value, which recognises that societal needs, not just economic needs, define markets.8 The concept of shared value focuses on creating economic value in a way that also creates value for society. A growing number of companies known for their hard-nosed approaches to business – such as GE, Dow, Google, IBM, Intel, Johnson & Johnson, Nestlé, Unilever and Walmart – are rethinking the interactions between society and corporate performance. They are concerned not just with short-term economic gains but with the wellbeing of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers and the economic wellbeing of the communities in which they operate. One prominent marketer calls this Marketing 3.0. ‘Marketing 3.0 organisations are values-driven,’ he says. ‘I’m not talking about being value-driven. I’m talking about “values” plural, where values amount to caring about the state of the world.’ Another marketer calls it purpose-driven marketing. ‘The future of profit is purpose,’ he says.9

societal marketing concept

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

Preparing an integrated marketing plan and program (pp. 13–15) The company’s marketing strategy outlines which customers the company will serve and how the company will create value for these customers. Next, the marketer develops an integrated marketing program that will actually deliver the intended value to target customers. The marketing program builds customer relationships by transforming the marketing strategy into action. It consists of the firm’s marketing mix – that is, the set of marketing tools the firm uses to implement its marketing strategy.

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While the ultimate aim may be to modify people’s behaviour – to drive more carefully, drink less alcohol, use less energy or water, think favourably of a political party, give more to a charitable organisation or buy a particular brand – marketing managers have a defined set of tools they can use. The set of tools most marketers employ, in varying combinations, has developed most recently from the knowledge gained in business-to-business marketing (formerly industrial marketing) and in marketing services. We refer to these tools (see Figure 1.5) as the extended marketing mix and their blending in a strategic manner is discussed in Chapter 2. Each of the main marketing mix tools (product, price, placement logistics and promotion) is discussed in more detail in the chapters forming Part 2. It should be noted at the outset that the three remaining marketing mix tools (people, process and physical evidence) are discussed throughout the book for reasons which should become clear as the story unfolds. To deliver on its value proposition, the marketing organisation must first create a need-satisfying market offering (product). It must decide how much it will charge for the offer (price) and where it will make the offer available to target customers (placement). It must communicate with target customers about the offer and persuade them of its merits (promotion). It must decide how relationships will be developed and maintained and who will do this (people). It must decide on how customer satisfaction will be delivered and recorded (technologies) – whether a service/experiential product or after-sales service (process). And, lastly, it must manage customer expectations and relative service quality, thereby ensuring that customers have realistic expectations which the marketing organisation can meet (physical evidence). The marketing organisation must blend all these marketing mix tools into a comprehensive, integrated marketing program that communicates and delivers the intended value to chosen customers. We explore marketing programs and the marketing mix in much more detail in later chapters.

PRODUCT: GOODS, SERVICES and EXPERIENCES Variety Quality Design Features Brand name

Packaging Sizes Add-ons Warranties Returns

PRICE

PEOPLE

List price Discounts Allowances Settlement and credit terms

‘People interacting with people’ is how many service experiences might be described. Relationships are important in marketing.

TARGET CUSTOMERS INTENDED POSITIONING

PLACEMENT LOGISTICS

PROMOTION

PROCESS

PHYSICAL EVIDENCE

Demand chain management Logistics management Channel management

Advertising Personal selling Direct marketing Online marketing

In the case of ‘high-contact’ services, customers are often involved in the process of creating and enjoying experiences. Increasingly, so is technology.

Services are mostly intangible. The meaning of other tools and techniques used in measures of satisfaction is important.

Figure 1.5  The extended marketing mix

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Linking the concepts Stop here for a moment and stretch your mind. What have you learned so far about marketing? Set aside the more formal definitions we have examined and try to develop your own understanding of marketing. ● In your own words, what is marketing? Write down your definition. Does your definition include such key concepts as customer value, engagement and relationships?

● What does marketing mean to you? How does it affect your daily life? ● What brand of athletic shoes did you last purchase? Describe your relationship with Nike, adidas, New Balance, Asics, Reebok, Puma, Converse or whatever brand of shoes you purchased.

Engaging customers and managing customer relationships (pp. 15–18) The first three steps in the marketing process – understanding the marketplace and customer needs, designing a customer-driven marketing strategy and constructing marketing programs – all lead to the fourth and most important step: building profitable customer relationships. We first discuss the basics of customer relationship management. Then we examine how companies go about engaging customers on a deeper level in this age of digital and social marketing.

Customer relationship management Customer relationship management is perhaps the most important concept of modern marketing. In its broadest sense, customer relationship management is the overall process of building and maintaining profitable customer relationships by delivering superior customer value and satisfaction. It deals with all aspects of acquiring, keeping and growing customers. Hence, more specifically, customer relationship management (CRM) is the process of managing detailed information about individual customers and carefully managing customer touch points in order to maximise customer loyalty.

Relationship building blocks: Customer value and satisfaction The key to building lasting customer relationships is to create superior customer value and satisfaction. Satisfied customers are more likely to be loyal customers and to give the marketing organisation a larger share of their business.

Customer value Attracting and retaining customers can be a difficult task. Customers often face a bewildering array of products and services from which to choose. A customer buys from the firm that offers the highest customerperceived value – the customer’s evaluation of the difference between all the benefits and all the costs of a market offering relative to those of competing offers. Importantly, customers often do not judge product values and costs accurately or objectively. They act on perceived value. For example, is a Tesla Model 3 really the most economical choice when buying a motor vehicle? In reality, it might take years to save enough in reduced fuel costs to offset the car’s higher purchase price. However, Tesla Model 3 buyers perceive that they are getting real value. It is all a matter of personal value perceptions. For many consumers, the answer to our question is ‘no’, but – for the target segment of style-conscious, affluent buyers – the answer is ‘yes’.

Customer satisfaction Customer satisfaction depends on the product’s perceived performance relative to a buyer’s expectations. If the product’s performance falls short of expectations, the customer is dissatisfied. If performance matches expectations, the customer is satisfied. If performance exceeds expectations, the customer is highly satisfied or delighted. Outstanding marketing companies go out of their way to keep

customer relationship management (CRM)

Managing detailed information about individual customers and carefully managing customer touch points in order to maximise customer loyalty.

customerperceived value

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

customer satisfaction

The extent to which a product’s perceived performance matches or exceeds a buyer’s expectations.

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important customers satisfied. Most studies show that higher levels of customer satisfaction lead to greater customer loyalty, which in turn results in better company performance. Smart companies aim to delight customers by promising only what they can deliver, then delivering more than they promise. Delighted customers not only make repeat purchases; they also become willing marketing partners and ‘customer evangelists’ who spread the word about their good experiences to others.10 For companies interested in delighting customers, exceptional value and service become part of the overall company culture. For example, year after year, Ritz-Carlton ranks at or near the top of the hospitality industry in terms of customer satisfaction. The company’s passion for satisfying customers is summed up in its credo, which promises that its luxury hotels will deliver a truly memorable experience – one that ‘enlivens the senses, instils well-being, and fulfils even the unexpressed wishes and needs of our guests’.11 Although a customer-centred firm seeks to deliver high customer satisfaction relative to competitors, it does not attempt to maximise customer satisfaction. A company can always increase customer satisfaction by lowering its price or increasing its services. But this may result in lower profits. Thus, the purpose of marketing is to generate customer value profitably. This requires a very delicate balance: the marketer must continue to generate more customer value and satisfaction but not ‘give away the house’.

Customer relationship levels and tools Marketing organisations can build customer relationships at many levels, depending on the nature of the target market. At one extreme, a company with many low-margin customers may seek to develop basic relationships with them. For example, Lever-Rexona does not phone or call on all of its Sunsilk consumers to get to know them personally. Instead, the company creates relationships through brand-building advertising, websites and social media presence. At the other extreme, in markets with few customers and high margins, sellers want to create full partnerships with key customers. For example, Lever-Rexona teams work closely with Coles, Woolworths and other large retailers. In between these two extremes, other levels of customer relationships are appropriate. Beyond offering consistently high value and satisfaction, marketers can use specific marketing tools to develop stronger bonds with consumers. For example, many companies offer frequency marketing programs that reward customers who buy frequently or in large amounts. Airlines offer frequent-flyer programs, hotels give room upgrades to their frequent guests, and supermarkets – for example, Woolworths – give patronage discounts to their customers via such tools as their Woolworths Rewards card which enables customers to get money off their weekly shopping bills. Other companies sponsor club marketing programs that offer members special benefits and create member communities. For example, Harley-Davidson sponsors the Harley Owners Group (HOG), which gives Harley riders a way to share their common passion of ‘making the Harley-Davidson dream a way of life’. HOG membership benefits include a quarterly HOG magazine, the H.O.G. Touring Handbook, a roadside assistance program, a specially designed insurance program, theft reward service, a travel centre and a ‘Fly & Ride’ program enabling members to rent Harleys while on holiday. The worldwide club now numbers more than 1500 local chapters and more than a million members.12

Engaging customers Profound changes continue to occur in the ways in which companies are relating to their customers. Yesterday’s marketing organisations focused on mass marketing to all customers at arm’s length. Today’s companies build deeper, more direct and lasting relationships with more carefully selected customers. We now examine some of the important trends in the way companies are relating to their customers.

Customer engagement and today’s digital and social media The digital age has spawned a dazzling set of new customer relationship-building tools, from websites, online ads and videos, mobile ads and apps, and blogs to online communities and the major social media, such as Twitter, Facebook, YouTube, Instagram and Pinterest.

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Yesterday’s companies focused mostly on mass marketing to broad segments of customers at arm’s length. By contrast, today’s companies are using online, mobile and social media to refine their targeting and to engage customers more deeply and interactively. The old marketing involved marketing brands to consumers. The new marketing is customer-engagement marketing – fostering direct and continuous customer involvement in shaping brand conversations, brand experiences and brand community. Customerengagement marketing goes beyond just selling a brand to consumers. Its goal is to make the brand a meaningful part of consumers’ conversations and lives. The burgeoning internet and social media have given a huge boost to customer-engagement marketing. Today’s consumers are better informed, more connected and more empowered than ever before. Newly  empowered consumers have more information about brands and they have a wealth of digital platforms for airing and sharing their brand views with others. Thus, marketers are now embracing not only customer relationship management but also customer-managed relationships, in which customers connect with companies and with each other to help forge their own brand experiences. Greater consumer empowerment means that companies can no longer rely on marketing by intrusion. Instead, they must practise marketing by attraction – creating market offerings and messages that engage consumers rather than interrupt them. Hence, most marketers now combine their mass-media marketing efforts with a rich mix of online, mobile and social media marketing that promotes brand–consumer engagement and conversation. Many companies post their latest ads and videos on social media sites, hoping they will go viral. They maintain an extensive presence on Twitter, YouTube, Facebook, Google +, Pinterest, Instagram, Vine and other social media to create brand buzz. They launch their own blogs, mobile apps, online microsites and consumergenerated review systems, all with the aim of engaging customers on a more personal, interactive level. Take Twitter, for example. Organisations ranging from computer giant, Dell, and news media to politicians and government departments have created Twitter pages and promotions. They use ‘tweets’ to start conversations with and between Twitter’s more than 317 million monthly active users, to address customer service issues, to research customer reactions and to drive traffic to relevant articles, web and mobile marketing sites, contests, videos and other brand activities.13 Similarly, almost every marketing organisation has something going on Facebook these days. Starbucks has more than 38 million Facebook ‘fans’; Coca-Cola has more than 94 million.14 And every major marketer has a YouTube channel where the brand and its fans post current ads and other entertaining or informative videos. Instagram, LinkedIn, Pinterest, Snapchat, Vine – all have exploded onto the marketing scene, giving brands more ways to engage and interact with customers. Skilled use of social media can get consumers involved with and talking about a brand. The key to engagement marketing is to find ways to enter consumers’ conversations with engaging and relevant brand messages. Simply posting a humorous video, creating a social media page or hosting a blog is not enough. Successful engagement marketing means making relevant and genuine contributions to consumers’ lives and interactions.

Consumer-generated marketing

Whether invited by marketers or not, consumer-generated marketing has become a significant marketing force. Through a profusion of consumer-generated videos, blogs and websites, consumers are playing an increasing role in shaping their own brand experiences and those of other consumers. Beyond creating brand conversations, on their own or by invitation, customers are having an increasing say in everything from product design, usage and packaging, to pricing and distribution and reviewing product quality and satisfaction.15 Some companies ask consumers for new product and service ideas, while others invite customers to play an active role in shaping ads. Despite the many successes, however, harnessing consumer-generated content can be a time-consuming and costly process, and companies may find it difficult to glean even a little gold from all the garbage.

consumergenerated marketing

Brand exchanges created by consumers themselves – both invited and uninvited – by which consumers are playing an increasing role in shaping their own brand experiences and those of other consumers.

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Part 1  Defining marketing and the marketing process

Moreover, because consumers have so much control over social media content, inviting their input can sometimes backfire. For example, McDonald’s famously launched a Twitter campaign using the hashtag #McDStories, hoping it would inspire heart-warming stories about Happy Meals. Instead, the effort was hijacked by Twitter users, who turned the hashtag into a ‘bashtag’ by posting less-than-appetising messages about their bad experiences with the fast-food chain. McDonald’s pulled the campaign within only two hours, but the hashtag was still churning weeks, even months, later.16 As consumers become more connected and empowered, and as the boom in digital and social media technologies continues, consumer brand engagement – whether invited by marketers or not – will be an increasingly important marketing force. Through a profusion of consumer-generated videos, shared reviews, blogs, mobile apps and websites, consumers are playing a growing role in shaping their own and other consumers’ brand experiences. Engaged consumers are now having a say in everything from product design, usage and packaging to brand messaging, pricing and distribution. Brands must embrace this new consumer empowerment and master the new digital and social media relationship tools – or risk being left behind.

Partner relationship management partner relationship management

Working closely with partners in other company departments and outside the company to jointly bring greater value to customers.

When it comes to creating customer value and building strong customer relationships, today’s marketers know they cannot go it alone. They must work closely with a variety of marketing partners. In addition to being good at customer relationship management, marketers must also be good at partner relationship management – working closely with others inside and outside the company to jointly bring more value to customers.

Partners inside the organisation Traditionally, marketers have been charged with understanding customers and representing customer needs to different company departments. The old thinking was that marketing is done only by marketing, sales and customer-support people. However, in today’s more connected world, every functional area can interact with customers, especially electronically. The new thinking is that – no matter what your job is in a company – you must understand marketing and be customer-focused. Rather than letting each department go its own way, firms must link all departments in the cause of creating customer value.

Partners outside the organisation Marketers must also partner with suppliers, channel partners and others outside the company. Marketing channels consist of distributors, retailers and others who connect the company to its buyers. The supply chain describes a longer channel, stretching from raw materials to components to final products that are carried to final buyers. Through supply chain management, companies today are strengthening their connections with partners all along the supply chain. They know that their fortunes rest on more than just how well they perform. Success at delivering customer value rests on how well their entire supply chain performs against competitors’ supply chains.

Capturing value from customers (pp. 18–21) The first four steps in the marketing process outlined in Figure 1.1 involve building customer relationships by creating and delivering superior customer value. The final step involves capturing value in return, in the form of current and future sales, market share and profits. By building superior customer value, the firm creates highly satisfied customers who remain loyal and buy more. This, in turn, means greater long-run returns for the marketing organisation. Here, we discuss the outcomes of creating customer value: customer loyalty and retention, share of market, share of customer and customer equity.

Creating customer loyalty and retention Good customer relationship management creates customer satisfaction. In turn, satisfied customers remain loyal and talk favourably to others about the company and its products. Studies show big differences in the

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loyalty of customers who are less satisfied, somewhat satisfied and completely satisfied. Even a slight drop from complete satisfaction can create an enormous drop in loyalty. Thus, the aim of customer relationship management is to create not only customer satisfaction but also customer delight. Keeping customers loyal makes good economic sense. Loyal customers spend more and stay around longer. Research also shows that it is five times cheaper to keep an old customer than to acquire a new one. Conversely, customer defections can be costly. Losing a customer means losing more than a single sale. It means losing the entire stream of purchases that the customer would make over a lifetime of patronage. Here is a classic illustration of customer lifetime value: Stew Leonard, who operates a highly profitable four-store supermarket in Connecticut and New York, once said that Customer lifetime value: To keep customers coming back, the US he sees $50,000 flying out of his store every time he sees supermarket chain Stew Leonard’s has created the ‘Disneyland of a sulking customer. Why? Because his average customer dairy stores’. Rule #1 – The customer is always right. Rule #2 – If the customer is ever wrong, reread Rule #1. spends about $100 a week, shops 50 weeks a year, and Courtesy of Stew Leonard’s remains in the area for about 10 years. If this customer has an unhappy experience and switches to another supermarket, Stew Leonard’s has lost $50,000 in lifetime revenue. The loss can be much greater if customer lifetime value the disappointed customer shares the bad experience with other customers and causes them to defect. The amount by which revenues from a To keep customers coming back, Stew Leonard’s has created what has been called the ‘Disneyland customer over time of Dairy Stores’, complete with costumed characters, scheduled entertainment, a petting zoo, and exceed the company’s costs of attracting, animatronics throughout the store. From its humble beginnings as a small dairy store in 1969, Stew selling and servicing that Leonard’s has grown at an amazing pace. It’s built 30 additions onto the original store, which now customer. The value serves more than 300,000 customers each week. This legion of loyal shoppers is largely a result of the of the entire stream store’s passionate approach to customer service. ‘Rule #1: The customer is always right. Rule #2: If the of purchases that the customer would make customer is ever wrong, reread rule #1.’17 over a lifetime of Stew Leonard is not alone in assessing customer lifetime value. Lexus, for example, estimates that a patronage. single satisfied and loyal customer is worth more than $600 000 in lifetime sales, and the estimated lifetime value of a Starbucks customer is more than $14 000.18 In fact, a company can lose money on a specific transaction but still benefit greatly from a long-term relationship. This means that companies must aim high in building customer relationships. Customer delight creates an emotional relationship with a brand, not just a rational preference. And that relationship keeps customers coming back.

Growing share of customer Beyond simply retaining good customers to capture customer lifetime value, good customer relationship management can help marketers increase their share of customer – the share they get of the customer’s purchasing in their product categories. Thus, banks want to increase ‘share of wallet’. Supermarkets and restaurants want to get more ‘share of stomach’. Car companies want to increase ‘share of garage’, and airlines want greater ‘share of travel’. To increase share of customer, firms can offer greater variety to current customers. Or they can train employees to cross-sell and up-sell in order to market more products and services to existing customers. For example, Amazon.com is highly skilled at leveraging relationships with its 244 million customers to increase its share of each customer’s purchases. Originally an online bookseller, Amazon.com now also

share of customer The portion of the customer’s purchasing that a company gets in its product categories.

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offers customers music, videos, gifts, toys, consumer electronics, office products, home improvement items, lawn and garden products, apparel and accessories, jewellery and an online auction. Based on its system, which relies on each customer’s purchase history, the company recommends related products that might be of interest. In this way, Amazon.com captures a greater share of each customer’s spending budget. In the United States, Amazon has what it terms its Prime two-day shipping program, which has also helped boost its share of customers’ wallets. For an annual fee of $99, Prime members receive delivery of all their purchases within two days, whether it is a single paperback book or a 60-inch high-definition television. According to one analyst, the ingenious Amazon Prime program ‘converts casual shoppers, who gorge on the gratification of having purchases reliably appear two days after the order, into Amazon addicts’. As a result, Amazon’s 40 million Prime customers now account for more than half of its US sales. On average, a Prime customer spends 2.4 times more than a non-Prime customer does.19

Building customer equity We can now see the importance of not just acquiring customers, but also keeping and growing them. One marketing consultant puts it this way: ‘The only value your company will ever create is the value that comes from customers – the ones you have now and the ones you will have in the future. Without customers, you do not have a business.’20 Customer relationship management takes a long-term view. Companies want not only to create profitable customers, but to ‘own’ them for life, earn a greater share of their purchases and capture their customer lifetime value.

What is customer equity? customer equity

The total combined customer lifetime values of all of the company’s customers.

The ultimate aim of customer relationship management is to produce high customer equity.21 Customer equity is the total combined customer lifetime values of all of the company’s current and potential customers. As such, it is a measure of the future value of the company’s customer base. Clearly, the more loyal the company’s profitable customers, the higher the company’s customer equity. Customer equity may be a better measure of a company’s performance than current sales or market share. Customer equity is one reason why upmarket car brands, such as BMW, have focused on younger customers (average age about 40), and why communities of practice, such as Bimmerpost.com and BabyBMW.net, are so important to the company’s long-term sales and profitability. There, those younger users communicate with one another across the full range of BMWs and also with companies across the world that supply original equipment accessories and more.

Building the right relationship with the right customers Companies should manage customer equity carefully. They should view customers as assets that need to be managed and maximised. But not all customers, not even all loyal customers, are good investments. Surprisingly, some loyal customers can be unprofitable, and some disloyal customers can be profitable. Which customers should the company acquire and retain? The company can classify customers according to their potential profitability and manage its relationships with them accordingly. Customers can be classified into one of four relationship groups, according to their profitability and projected loyalty.22 Each group requires a different relationship management strategy. Strangers show low potential profitability and little projected loyalty. There is little fit between their needs and the company’s offerings. The relationship management strategy for these customers is simple: do not invest anything in them; make money on every transaction. Butterflies are potentially profitable but not loyal. There is a good fit between their needs and the company’s offerings. However, like real butterflies, we can enjoy them for only a short while and then they are gone. An example is stock market investors who trade shares often and in large amounts but who enjoy hunting out the best deals without building a regular relationship with any single brokerage company. Efforts to convert butterflies into loyal customers are rarely successful. Instead, the company should enjoy

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the butterflies for the moment. It should create satisfying and profitable transactions with them, capturing as much of their business as possible in the short time during which they buy from the company. Then the company should move on and cease investing in them until the next time around. True friends are both profitable and loyal. There is a strong fit between their needs and the company’s offerings. The company wants to make continuous relationship investments to delight these customers and nurture, retain and grow them. It wants to turn true friends into true believers, who come back regularly and tell others about their good experiences with the company. Barnacles are highly loyal but not very profitable. There is a limited fit between their needs and the company’s offerings. An example is smaller bank customers who bank regularly but do not generate enough returns to cover the costs of maintaining their accounts. Like barnacles on the hull of a ship, they create drag. Barnacles are perhaps the most problematic customers. The company might be able to improve their profitability by selling them more, raising their fees or reducing service to them. However, if they cannot be made profitable, they should be ‘fired’. The point here is an important one: different types of customers require different engagement and relationship management strategies. The goal is to build the right relationships with the right customers.

Linking the concepts We have covered a lot of ground. Again, pause for a moment and develop your own thoughts about marketing. ● In your own words, what is marketing and what does it seek to accomplish? ● Select a company that you last purchased from. How well does that company manage its relationships with customers? What

customer relationship management strategy does it use? Do you think this relationship management strategy differs from other companies you buy from? ● Are you a ‘true friend’ of any company? What strategy does this company use to manage its relationship with you?

The changing marketing landscape (pp. 21–28) Marketing operates within a dynamic global environment. Every decade calls on marketing managers to think in a fresh way about their marketing objectives and practices. Rapid changes can quickly make yesterday’s winning strategies out of date. As management thought leader Peter Drucker once observed, a marketing organisation’s winning formula for the last decade will probably be its undoing in the next decade. Marketing does not take place in a vacuum. Now that we have discussed the five steps in the marketing process, let us examine how the ever-changing marketplace affects both consumers and the marketers who serve them. We look more deeply into these and other marketing environment factors in Chapter 3. In this section, we examine the major trends and forces that are changing the marketing landscape and challenging marketing strategy. We look at six major developments: (1) the digital age; (2) the challenging economic environment; (3) measuring marketing’s contribution to organisational performance; (4) the growth of notfor-profit marketing; (5) rapid globalisation; and (6) the call for more corporate social responsibility.

The digital age: Online, mobile and social media marketing The information revolution has reached a critical point where a new information-based infrastructure is unfolding as we witness the convergence of telecommunications, media and technology (TMT) in the form of computer systems, information services and consumer/professional electronics. The new digital infrastructure is creating major shifts in markets and competition. As a result, traditional company and industry structures are being transformed into alliance networks. This IT explosion is accelerating the rate of change and the emergence of new global competitors as various markets become attractive due to the lower costs offered to many industries by technology such as the internet.

internet

A vast public web of computer networks that connects users of all types all around the world to each other and to an amazingly large information repository.

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digital and social media marketing The use of digital marketing tools, such as websites, social media, mobile ads and apps, online video, email, blogs and other digital platforms, to engage consumers anywhere, anytime via their computers, smartphones, tablets, internet-ready TVs and other digital devices.

The explosive growth in digital technology has fundamentally changed the way we live – how we communicate, share information, access entertainment and shop. More than 3 billion people – 42 per cent of the world’s population – are now online; over 80 per cent of Australians own smartphones. These numbers will only grow as digital technology rockets into the future.23 Most consumers are totally smitten with all things digital. For example, many smartphone users keep their mobile phone next to them when they sleep – they say it is the first thing they touch when they get up in the morning and the last thing they touch at night. In just the past few years, people averaged more time per day with digital media than they did viewing traditional television, with many using their mobile device while they watch television.24 The consumer love affair with digital and mobile technology makes it fertile ground for marketers trying to engage customers. So it is no surprise that the internet and rapid advances in digital and social media have taken the marketing world by storm. Digital and social media marketing involves using digital marketing tools, such as websites, social media, mobile ads and apps, online video, email, blogs and other digital platforms, to engage consumers anywhere, anytime via their computers, smartphones, tablets, internet-ready TVs and other digital devices. These days, it seems that every company is reaching out to customers with multiple websites, newsy tweets and Facebook pages, viral ads and videos posted on YouTube, rich-media emails and mobile apps that solve consumer problems and help them shop. At the most basic level, marketers set up company and brand websites that provide information and promote the company’s products. Many companies also set up branded community sites, where customers can congregate and exchange brand-related interests and information. For example, the Pettalk site, , is a place where pet lovers can communicate via discussion boards dedicated to various types of pets. Patient, , offers moderated forums where people from all over the world can register and share their medical experiences, and the research they have found for various ailments and remedies. And Sony’s GreatnessAwaits.com site serves as a social hub for PlayStation PS4 game enthusiasts. It is a place where fans can follow social media posts about PS4, watch the latest PS4 videos, discover which PS4 games are trending on social networks, share content and interact with other fans – all in real-time. To date, GreatnessAwaits.com has earned more than 4.5 million page views, curated more than 3.3 million pieces of social content and featured 75 000 fans.25 Beyond brand websites, most companies are also integrating social and mobile media into their marketing mixes.

Social media marketing It is difficult to find a brand website, or even a traditional media ad, that does not feature links to the brand’s Facebook, Twitter, Google +, LinkedIn, YouTube, Instagram, Pinterest or other social media sites. Social media provide exciting opportunities to extend customer engagement and get people talking about a brand. More than 90 per cent of all US companies now use social media as part of their marketing mixes, and 71 per cent believe that social marketing is core to their business.26 Some social media are huge – Facebook has more than 1.2 billion active monthly members. Twitter has more than 317 million monthly active users; Pinterest draws in 53 million users; and Instagram racks up an estimated 300 million active monthly visitors. Reddit, the online social news community, has nearly 174 million unique visitors each month from 185 countries. But more-focused social media sites are also thriving, such as XDA-Developers, an online global community of many millions of smartphone users who exchange advice, discuss entertainment and share software development via phone at the community’s online, Facebook, Swappa, Twitter, YouTube, Google + and mobile sites such as Tapatalk. Online social media provide a digital home where people can connect and share important information and moments in their lives. As a result, they offer an ideal platform for real-time marketing, by which marketers can engage consumers in the moment by linking brands to important trending topics, real-world events, causes, personal occasions or other important happenings in consumers’ lives.

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Using social media might involve something as simple as a contest or promotion to garner Facebook likes, tweets or YouTube postings. But more often these days, large organisations of all kinds use a wide range of carefully integrated social media. For example, space agency NASA uses a broad mix of social media to educate the next generation of space explorers on its mission to ‘boldly go where no man has gone before’. In all, NASA has more than 480 social media accounts, spanning various topics and digital platforms. The agency has more than 10 million Facebook fans, 9 million Twitter followers, 2.5 million Instagram followers and 30 000 YouTube subscribers. One of NASA’s largest-ever social media campaigns supported the recent test launch of the Orion spacecraft, which will eventually carry humans to deep-space destinations, such as Mars or an asteroid.27

Mobile marketing Mobile marketing is perhaps the fastest-growing digital marketing platform. Four out of five smartphone users use their phones to access their bank account for online transfers and payments, browse product information through apps or the mobile web, make in-store price comparisons, read online product reviews, find and redeem coupons, and a lot more.28 Smartphones are ever-present, always on, finely targeted and highly personal, and for one-third of Australians, their only means of telephone communication.29 This makes smartphones ideal for engaging customers anytime, anywhere as they move through the buying process. For example, Starbucks customers can use their mobile devices for everything from finding the nearest Starbucks and learning about new products to placing and paying for orders. We investigate the exciting use of digital technologies in marketing in the chapters ahead, particularly in Chapter 13.

The challenging world economy From 2008 to 2009, the United States experienced a stunning economic meltdown, mainly due to questionable bank-lending practices. This Global Financial Crisis (GFC) was unlike anything experienced since the Great Depression of the 1930s. As a result, most world economies experienced major economic upheavals, requiring implementation of government stimulus packages. Stock markets plunged and trillions of dollars of market value simply evaporated. The financial crisis left shell-shocked US consumers short of both money and confidence as they faced losses in income, a severe credit crunch, declining home values and rising unemployment. The stimulus packages introduced by the leading economies had a beneficial effect, particularly in Australia and New Zealand. These countries were less affected by the GFC due, in part, to mineral exports and to tighter regulation of the financial services sector. However, a subsequent downturn in trade with China in 2015–16 caused concerns in both countries. The faltering and uncertain economy caused many consumers to rethink their spending priorities and to cut back on their buying. More than just a temporary change, the economic downturn has affected consumer attitudes and spending behaviour and will continue to do so for many years to come – and in many countries. In Australia and New Zealand, consumer confidence fell due to the collective impact on their economies of a number of challenges occurring internationally: first, the US crisis, then the sovereign debt issues of a number of southern European countries, followed by mass migration out of war-torn sectors of the Middle East into these countries and further into Europe, coupled with a downturn in China’s exports. In today’s post-recession era, consumer incomes and spending are again on the rise. However, even as the economy has strengthened in the United States, rather than reverting to their old free-spending ways, Americans are now showing an enthusiasm for frugality not seen in decades. Sensible consumption has made a comeback, and it appears to be here to stay. The new consumer spending values emphasise simpler living and more value for the dollar. Despite their rebounding means, consumers continue to buy less, clip more coupons, swipe their credit cards less and put more in the bank. Companies in all industries – from discounters to luxury brands – have tightened their budgets and aligned their marketing strategies with the new economic realities. More than ever, marketers are

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Part 1  Defining marketing and the marketing process

emphasising the value in their value propositions. They are focusing on value-for-the-money, practicality and durability in their product offerings and marketing pitches. In adjusting to the new economy, companies might be tempted to cut marketing budgets deeply and to slash prices in an effort to coax jittery customers into opening their wallets. Although cutting costs and offering selected discounts can be important marketing tactics in a slowing economy, smart marketers understand that making cuts in the wrong places can damage long-term brand images and customer relationships. The challenge is to balance the brand’s value proposition with the current times while also enhancing its long-term equity. Thus, rather than slashing prices in uncertain economic times, many marketers hold the line on prices and instead explain why their brands are worth it.

Measuring marketing’s contribution to organisational performance Businesses exist to create wealth for their owners, while not-for-profit organisations seek to survive in order to continue satisfying those who depend on them. While some researchers initially took the view that profits are an element of market orientation, we join others in taking the view that profit is the objective of business and surpluses the objective of not-for-profit organisations.30 As performance measurement has increasingly become the domain of marketing management, one key question facing each type of organisation is which objective (independently reported from such sources as company reports) and subjective (selfreported by managers) performance measures to use in assessing performance. In one review of 150 prior studies covering the period 1991–95, it was found that the three most widely used measures were sales (and growth) (22 per cent of all measures), market share (17 per cent) and profit contribution (11 per cent).31 Such financial measures as sales revenue and profits dominated (67 per cent). Another study extended this by examining a further 46 empirical performance studies published between 1992 and Marketing a social cause: Open Family Australia provides 2003 (nearly all of them published between 1996 and 2003). They outreach support and services to homeless and at-risk young found that while the majority of measures were still financially people. Open Family Australia oriented (54 per cent of indicators used), non-financial measures were increasingly being favoured.32 The seminal US studies by researchers Narver and Slater and by Kohli and Jaworski employed subjective performance measures whereby managers self-reported their market orientation and the organisation’s performance.33 A later UK study by Harris is one of very few that employed both subjective and objective measures in assessing organisational performance.34 A meta-analysis by Ellis took these and many other similar studies and reporting methods into account and concluded that, on balance, there is a positive relationship between an organisation holding a market orientation whereby it focuses on both customer needs and competitor activities, and the organisation’s performance using a variety of financial and marketing measures or metrics.35 Marketing in action 1.1 begins our examination of marketing metrics in this book. It should be evident from this commentary on measuring marketing’s performance that, to date, most studies have used the performance indicated by management, rather than turning to more objective sources such as company reports. There are conflicting findings on the connection between holding a market orientation and organisational performance from studies in different parts of the world. Further studies are needed to provide an unequivocal answer as to which measures to use and what value-adding contribution marketing makes to both profit-oriented and not-for-profit organisations.

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Marketing in Action 1.1

25

Are marketers really that ‘lousy at selling marketing’?

A former Australian marketing commentator, Neil Shoebridge, often commented

For Tim Ambler, Roger Best and the many firms they have influenced, the

on the issue of why marketing management seem to find it difficult to sell the

most important aspect is ‘pan-company marketing’. These firms have adopted

benefits of marketing to the financial management of organisations – particularly

a market-oriented approach, which ensures that, from top to bottom, thanks

to top management. He went so far as to indicate that, ‘Marketers might be good

to effective internal marketing, their employees see the only reason for the

at selling their companies’ products, but they have done a lousy job of selling

organisation’s existence as satisfying customers. How? They are market-oriented

marketing.’ Why this might be so, and how the matter is being addressed, is the

because they repeatedly add value at every point of contact – what Jan Carlzon

subject of this Marketing in action box.

of Scandinavian Airways referred to as ‘moments of truth’ – and at every purchase and post-purchase situation. This market-oriented approach is also vital for not-for-profit organisations, such as the Red Cross and the Australian Cancer

Why the difficulty in measuring marketing effectiveness?

Council, and indeed for all levels of government, political and administrative. Not adopting this approach may result in moments of misery for customers and a falling-away in repeat business.

One difficulty is that, quite apart from the fact that even marketing academics

The aspect of marketing referred to throughout this book, even when

and practitioners use the same words (e.g. brand equity, product innovation),

examining a marketing metric that seems applicable at the budgetary level,

individually they ascribe different meanings to the words. This makes it difficult

is the pan-company marketing perspective. Why? The simple answer is that,

to talk with certainty to others within their organisations. Another problem is

while businesses might depend on shareholder satisfaction to have the funds

that, while those who continually ‘count the beans’ within these organisations

to continue and expand the scope of their operations, all facets of the business

recognise the costs of marketing, they do not yet include such aspects as

– including shareholder wealth – depend on customers and their repeated

‘brand equity’ on the assets side of the published financial statements of

satisfaction. This means that all employees should see it as their duty to know

the organisation. To do so would, at the outset, require agreement on what

how they contribute to customer satisfaction.

forms such an asset. To be fair, many sophisticated organisations do utilise a ‘dashboard’ approach to decision making and predicting the future of their business, and marketing performance measures, or metrics (metrics is here taken

Which marketing metrics?

to indicate a measuring system), such as ‘brand share’, ‘brand equity’ and ‘share

The key to developing a metrics system is to identify a group of indicators (Ambler

of voice’, are indeed monitored and used along with other financial and non-

recommends ‘a dozen or so’) that aid in managing the business and enable

financial measures.

accurate cashflow predictions into the future. As with marketing research, we

Another important issue is that, when referring to marketing, we need

can ask every question imaginable, but the answers to relatively few questions

to be clear about which aspect of marketing is being referred to. Shoebridge

will indicate whether the customer will come back and spend more money on

is clearly suggesting that marketing managers are looking to measure a

our product offering. Sometimes the answer to one question indicates they will

return on marketing expenditure at the ‘budgetary level’, and he cites the

never come back. A non-financial marketing metric, such as ‘share of voice’

Australian Marketing Institute’s (AMI) ‘metrics tool kit’, which was developed

(which includes social media word of mouth), is important to long-term ‘brand

with the assistance of a grant from the Australian Research Council. Often,

attitude’, and both – in time – impact on financial measures such as profitability

this can simply mean trying to measure the return on integrated marketing

and cashflow. The critical feature is to establish the leads and lags between the

communication (IMC), or perhaps on a single element such as advertising,

indicators. As we see in Appendix 3’s Spotlight 7, the link is more solid and the

if that is the only communication tool used. There is a ‘functional’ aspect to

effect more immediate for the direct and digital marketer – which knows its

marketing that sees practitioners in different types of organisations using

customers by name – than for the FMCG marketer which stands removed from

different metrics and having different responsibilities. For example, marketing

individual customers by a supply chain that includes wholesalers and retailers

management of a service firm such as Qantas uses different metrics and is

(see Appendix 3’s Spotlight 4). All such market-oriented companies depend on

responsible for different facets of the business than those in a service firm such

innovation for their life’s blood and continually need to develop new products

as the ANZ Banking Group. And both service firms differ in their metrics and

that truly add value for customers (see Appendix 3’s Spotlight 6).

responsibilities from those involved in the manufacturing and marketing of fast-moving consumer goods (FMCG), such as Lever-Rexona.

We begin by referring to a ranking of performance measures (or analytic measures) in Spotlight 1 in Appendix 3.

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Part 1  Defining marketing and the marketing process

The journey has begun We address this matter by presenting a marketing analytics spotlight – a mini case study – in Appendix 3 to introduce you to the many measures that are employed in assessing the performance that results from effective marketing. The marketing analytics spotlights should therefore be seen as the start of a journey that will continue throughout your marketing studies and into your business life. As Farris and colleagues succinctly put it, ‘Being able to “crunch the numbers” is vital to success in marketing. Knowing which numbers to crunch, however, is a skill that develops over time.’ And so we ask you to work through the examples provided at the end of each chapter and begin your journey into the effective use of marketing metrics. In particular, you will find mini case studies entitled ‘Marketing analytics at work’, which are designed to allow you to work through the various marketing performance measures faced by marketing management. A word of caution: Research studies conducted at different points in time, and in various locations, are not always able to support the findings of earlier studies. It is therefore wise to read as widely as possible and to remain openminded when confronted with conflicting evidence. Marketing has adopted the scientific approach, and researchers continually seek to support or refute the findings of earlier studies in the knowledge that ‘iron laws’ are unlikely to be developed, even with continuous empirical investigation.

Sources: Quotation from Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006; Shoebridge quotation from Neil Shoebridge, ‘Marketers’ measure’, BRW, 1–7 December 2005, p. 63. The term pan-company marketing is from Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003. See also T Ambler & F Kokkinaki, ‘Measures of marketing success’, Journal of Marketing Management, 13(7), 1997, pp. 665–79; T Ambler, F Kokkinaki & S Puntoni, ‘Assessing marketing performance: Reasons for metrics selection’, Journal of Marketing Management, 20, 2004, pp. 475–98; T Ambler, F Kokkinaki, S Puntoni & D Riley, ‘Assessing market performance: The current state of metrics’, Centre of Marketing, London Business School, Working Paper, 2001, pp. 1–68; Roger J Best, Market-Based Management, 4th edn, Pearson Prentice Hall: Upper Saddle River, NJ, 2005; Competitive Fitness of Global Firms report, available at , accessed 9 January 2007; J-C Larréché, The Test of Business Capabilities? Highlights from Measuring the Competitiveness of Global Firms 2002, Financial Times Prentice Hall: London, 2002, available at , accessed 30 August 2003.

Questions ❶ What does the term marketing analytics refer to? ❷ List and describe the three aspects of marketing at the budgetary level that can influence the measures used. (Hint: One is the functional aspect of marketing.) ❸ What is the sole reason for the company’s existence put forward in this Marketing in action box? Do you agree? ❹ Which (if any) one marketing performance measure do you believe is the most important?

The growth of not-for-profit marketing not-for-profit marketing

Marketing as practised by a variety of organisations whose aim is to make surpluses so as to continue their operations, but that do not seek to make profits for shareholders.

Over the years, marketing has been most widely applied in the business sector. In more recent times, however, not-for-profit marketing has also become a major component in the strategies of many philanthropic organisations, universities, hospitals, museums, symphony orchestras, zoos and even churches. Similarly, many private schools and, increasingly, universities, facing fluctuating domestic and international enrolments, rising costs and global competitors, are using marketing to compete for students and funds, both at home and abroad. They are redefining target markets, improving their communication and promotion, and responding more effectively to student needs and wants. Many performing arts groups face huge operating deficits that they must cover by more aggressive donor marketing, particularly from the corporate sector. Finally, many long-standing not-for-profit organisations – the YMCA, the Salvation Army, the Red Cross and the Scouts – have lost members and are now modernising their missions and ‘products’ to attract more members and donations.36 Even government agencies have shown an increased interest in marketing. For example, the armed services in many countries have marketing plans to attract recruits. And various government agencies are now designing social marketing campaigns to reward and encourage energy conservation and concern for the environment, to stimulate good corporate behaviour or to discourage smoking, excessive drinking and drug use. The continued growth of not-for-profit and public-sector marketing presents exciting challenges for marketing managers.

Rapid globalisation The world economy has undergone radical change during the past three decades. Geographical and cultural distances have shrunk with the advent of jet airliners, telephone links (such as Japan’s DoCoMo iMode interactive mobile phones), digital satellite-television broadcasting (such as Britain’s BSkyB and Japan’s

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Chapter 1  Marketing: Creating and capturing customer value

27

PERFECTV), internet email and instant messaging, social networking and other technical advances, such as internet-capable smartphones (iPhone and Android phones) and Video-over-IP phone services (such as Google Hangouts and Microsoft’s Skype). These technological advances have allowed companies to expand significantly their geographical market coverage, purchasing and manufacturing. The result is a vastly more complex marketing environment for both companies and consumers. Today, almost every marketing organisation, large or small, is touched in some way by global competition. From the American florist that buys its flowers from Dutch nurseries, to the Melbourne clothing designer and Sydney retailer that each source merchandise in China, to the American Telecommunications, media and technology (TMT): In this digital electronics manufacturer competing with giant Japanese age, for better or worse, technology has become an indispensable rivals in its home markets, to the Australian consumer-goods part of our lives. The technology boom provides exciting new producer introducing new products into emerging markets opportunities for marketers. abroad – companies are not only trying to sell more of their David Sacks/The Image Bank/Getty Images locally produced goods in international markets, but are also buying more components and supplies abroad. For example, an American fashion designer may choose cloth woven from Australian wool with printed designs from Italy. The designer designs a dress and electronically transmits the drawing to a factory in mainland China. Finished dresses are airfreighted to New York where they are distributed to department and specialty stores around the country. Many domestically purchased goods and services are ‘hybrids’, with design, materials purchases, manufacturing and marketing taking place in several countries. Australians who want to ‘Buy Australian’ might reasonably decide to avoid a Honda Civic or a Mitsubishi Lancer and purchase a Ford Focus. Imagine their surprise when they learn the Focus is actually a German-made vehicle that sells in great quantities in Europe. Imagine their further surprise at finding that Ford is an American company that also has part ownership of Mazda, or that the Jaguar, Daimler, Rover and Land Rover brands are owned by Indian car maker Tata, or that Zhejiang Geeley Holding Group of China owns Volvo. Consumers in many other nations suffer similar surprises. Australian car marketer General Motors Holden is owned by US giant General Motors. Iconic UK confectionery company Cadbury is now owned by US food giant Kraft. Quintessentially American McDonald’s now serves 68 million customers daily in more than 36 000 local restaurants in over 100 countries worldwide – nearly 70 per cent of its corporate revenues come from outside the United States. Similarly, Nike markets in 190 countries, with non-US sales accounting for about half of its worldwide sales. Even MTV Networks has joined the elite of global brands – its 150 channels worldwide deliver localised versions of its pulse-thumping fare to 419 million homes in 164 countries around the globe. And it reaches millions more daily via the more than 5000 mobile, console and online games and virtual worlds that it shares on its more than 300 websites worldwide.37 Thus, managers in countries around the world are asking: Just what is global marketing? How does it differ from domestic marketing? How do global competitors and forces affect our business? To what extent should we ‘go global’? Many companies are forming strategic alliances with foreign companies, even competitors, who serve as suppliers or marketing partners. The past few years have produced some surprising alliances between competitors, such as Ford and Mazda, General Electric and Matsushita, Telstra and News Corporation, Nokia and Microsoft, and Ericsson and Sony. Winning companies in the 21st century may well be those that have built the best global networks.38 There is continued resistance from various groups to perceived negatives in the process of globalisation. We examine these further in the next section.

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Part 1  Defining marketing and the marketing process

Sustainable marketing: T   he call for more environmental and social responsibility A further factor in today’s marketing environment is the increased call for companies to take responsibility for the social and environmental impact of their actions. Corporate ethics have become an important matter in almost every business arena, from the corporate boardroom to the business-school classroom. Global companies, with widely adopted brands, cannot ignore the problems they cause by moving operations from one country to the next in search of lower labour costs. Such companies, and governments, can no longer ignore the disruptions caused by the anti-globalisation movement, even if they do not agree with the sentiments of this vociferous group. And few companies can disregard the well-organised and very demanding environmental movement, spearheaded by organisations such as Greenpeace. While Tesla leads the way with their fully electric vehicles, Audi, BMW, General Motors, Honda, Mercedes-Benz, Mitsubishi, Peugeot and Toyota, like others, are putting forward an environmentally friendly face with their semielectric cars and other hybrids, showing their commitment to the environment via the web, including providing support for local communities in this regard.39 Ethics and environmental movements are placing even stricter demands on companies as time passes. No wonder, when in many eastern European countries the air is fouled, the water is polluted, the rivers and the soil are poisoned by chemical dumping, and the effects of global warming are becoming evident. Intensive farming in Australia has caused land salination, algal bloom (from pesticides and reduced water flow in river systems) and general degradation of the waterways, and is destroying the Great Barrier Reef. Worldwide, the outpouring of human effluent has affected the sea, and unfettered car-exhaust emissions have degraded air quality and are contributing to changed weather patterns. In 1992, 20 years after the United Nations Conference on Human Environment, representatives from more than 100 countries attended the inaugural Earth Summit in Rio de Janeiro to consider how to handle such problems as the destruction of rainforests, global warming, endangered species and other environmental threats. [The Summit] brought environment and development issues firmly into the public arena. Along with the Rio Declaration and Agenda 21 it led to agreement on two legally binding conventions: Biological Diversity and the Framework Convention on Climate Change. It also produced a Statement of Forest Principles.40 The second Earth Summit was held in 2002 in Johannesburg, and the third in Brussels in 2005, the Copenhagen Climate Summit was held in late 2009, while the fourth Earth Summit was held in Rio de Janeiro in 2012.41 Global warming and other environmental issues make it imperative that marketing organisations examine the best use of resources, in both inputs and outputs. However, as the Climate Summit resolutions illustrate, getting individual countries to agree to carbon dioxide emission reductions remains difficult. Some companies, such as Patagonia, Timberland, Method, Ben & Jerry’s and others, practice caring capitalism, setting themselves apart by being civic-minded and responsible. They build social and environmental responsibility into their company value and mission statements. For example, Ben & Jerry’s, a division of Unilever, has long prided itself on being a ‘values-led business’, one that creates ‘linked prosperity’ for everyone connected to the brand – from suppliers to employees to customers and communities.42

So, what is marketing? Pulling it all together (pp. 28–30) In Figure 1.1, we presented a simple model of the marketing process. Now that we have discussed all the steps in the process, Figure 1.6 presents an expanded model that will help you pull it all together. What is marketing? Simply put, marketing is the process of building profitable customer relationships by creating value for customers and capturing value in return.

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Chapter 1  Marketing: Creating and capturing customer value

CREATE VALUE FOR CUSTOMERS AND BUILD CUSTOMER RELATIONSHIPS

CAPTURE VALUE FROM CUSTOMERS IN RETURN

Understand the marketplace and customer needs and wants

Design a customerdriven marketing strategy

Construct an integrated marketing program that delivers superior value

Build profitable relationships and create customer delight

Capture value from customers to create profits and customer equity

Research customers and the marketplace

Select customers to serve: market segmentation and targeting

Product and service design: build strong brands

Customer relationship management: build strong relationships with chosen customers

Create satisfied, loyal customers

Pricing: create real value Manage marketing information and customer data

Decide on a value proposition: differentiation and positioning

Distribution: manage demand and supply chains

Capture customer lifetime value

Partner relationship management: build strong relationships with marketing partners

Increase share of market and share of customer

Promotion: communicate the value proposition

Harness marketing technology

Manage global markets

Ensure ethical and social responsibility

Figure 1.6  An expanded model of the marketing process

The first four steps of the marketing process focus on creating value for customers. The marketing organisation first gains a full understanding of the marketplace by researching customer needs and managing marketing information. It then designs a customer-driven marketing strategy based on the answers to two simple questions. The first question is: ‘What consumers will we serve?’ (market segmentation and targeting). Successful marketing companies know they cannot serve all customers in every way. Instead, they need to focus their resources on the customers they can serve best and most profitably. The second marketing strategy question is: ‘How can we best serve targeted customers?’ (differentiation and positioning). Here,

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30

Part 1  Defining marketing and the marketing process

the marketer outlines a value proposition that spells out what values the company will deliver in order to win target customers. With its marketing strategy chosen, the company now constructs an integrated marketing program, consisting of a blend of the marketing mix elements as shown in Figure 1.5, which transforms the marketing strategy into real value for customers. The company develops market offerings (products) and creates strong brand identities for them. It prices these offers to create real customer value and distributes the offers to make them available to target consumers. Finally, the company designs promotion programs that communicate the value proposition to target consumers and persuade them to act on the market offering. Perhaps the most important step in the marketing process involves building value-laden, profitable relationships with target customers. Throughout this process, marketers practise customer relationship management to create customer satisfaction and delight. In creating customer value and relationships, however, the company cannot go it alone. It must work closely with marketing partners both inside the company and throughout the marketing system. Thus, beyond practising good customer relationship management, firms must also practise good partner relationship management. The first four steps in the marketing process create value for customers. In the final step, the company reaps the rewards of its strong customer relationships by capturing value from customers. Delivering superior customer value creates highly satisfied customers who will buy more and will buy again. This helps the company to capture customer lifetime value and greater share of customer. The result is increased long-term customer equity for the firm. Finally, in the face of today’s changing marketing landscape, companies must take into account three additional factors. In building customer and partner relationships, they must harness marketing technology, take advantage of global opportunities and ensure they act in an ethical and socially responsible way. Figure 1.6 provides a good road map to future chapters of the book. Chapters 1 and 2 introduce the marketing process, with a focus on building customer relationships and capturing value from customers. Chapters 3 to 6 address the first step of the marketing process – understanding the marketing environment, managing marketing information and understanding consumer and business buyer behaviour. In Chapter 6, we look more deeply into the two main marketing strategy decisions: selecting which customers to serve (segmentation and targeting) and deciding on a value proposition (differentiation and positioning). Chapters 7 to 13 discuss the marketing mix variables. Chapter 14 brings the book to a close with a discussion on ethics, social responsibility and marketing compliance.

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Student Learning Centre

31

To design a winning marketing strategy, the company must first decide who it will serve. It does this by dividing the market into segments of customers (market segmentation) and selecting which segments it will cultivate (target marketing). Next, the company must decide how it will serve targeted customers (how it will differentiate and position itself in the marketplace). Marketing management can adopt one of five competing market orientations.

Reviewing the learning objectives

The production concept holds that management’s task is to improve production efficiency and bring down prices. The product concept holds that consumers

Today’s successful marketing organisations – whether large or small, for-profit

favour products that offer the most in quality, performance and innovative

or not-for-profit, domestic or global – share a strong customer focus and a

features; thus, little promotional effort is required. The selling concept holds

heavy commitment to marketing. The goal of marketing is to build and manage

that consumers will not buy enough of the organisation’s products unless it

customer relationships.

undertakes a large-scale selling and promotion effort. The marketing concept

Learning Objective 1. Define marketing, and outline the steps in the marketing process. (pp. 4–5)

holds that achieving organisational goals depends on determining the needs and wants of target markets and delivering the desired satisfactions more effectively and efficiently than competitors do. The societal marketing concept calls for

Marketing is the process by which companies create value for customers and

generating customer satisfaction and long-run societal wellbeing through

build strong customer relationships in order to capture value from customers

sustainable marketing strategies keyed both to achieving the company’s goals

in return.

and to fulfilling its responsibilities.

The marketing process involves five steps. The first four steps create value for

step, marketers construct a marketing program that actually delivers superior

Learning Objective 4. Discuss customer relationship management, and identify strategies for creating value for customers and capturing value from customers in return. (pp. 15–21)

value. All these steps form the basis for the fourth step, building profitable

Broadly defined, customer relationship management is the process of

customer relationships and creating customer delight. In the final step, the

engaging customers and building and maintaining profitable customer

company reaps the rewards of strong customer relationships by capturing value

relationships by delivering superior customer value and satisfaction. Customer-

from customers.

engagement marketing aims to make a brand a meaningful part of consumers’

customers. First, marketers need to understand the marketplace and customer needs and wants. Next, marketers design a customer-driven marketing strategy with the goal of getting, keeping and growing target customers. In the third

Learning Objective 2. Explain the importance of understanding the marketplace and customers, and identify the five core marketplace concepts. (pp. 5–9)

conversations and lives through direct and continuous customer involvement in shaping brand conversations, experiences and community. The aim of customer relationship management and customer engagement is to produce high customer equity, the total combined customer lifetime values of all of the

Outstanding marketing companies go to great lengths to learn about and

company’s customers. The key to building lasting relationships is the creation

understand their customers’ needs, wants and demands. This understanding

of superior customer value and satisfaction. In return for creating value for

helps them to design want-satisfying market offerings and to build value-laden

targeted customers, the company captures value from customers in the form of

customer relationships by which they can capture customer lifetime value and

profits and customer equity.

greater share of customer. The result is increased long-term customer equity for

offerings (products, services and experiences); value and satisfaction; exchange

Learning Objective 5. Describe the major trends and forces that are changing the marketing landscape in this age of relationships. (pp. 21–30)

and relationships; and markets. Wants are the form taken by human needs when

Dramatic changes are occurring in the marketing arena. The digital age has

shaped by culture and individual personality. When backed by buying power,

created exciting new ways to learn about and relate to individual customers.

wants become demands. Companies address needs by putting forth a value

As a result, advances in digital and social media have taken the marketing world by

proposition, a set of benefits they promise to consumers to satisfy consumers’

storm. Online, mobile and social media marketing offer exciting new opportunities

needs. The value proposition is fulfilled through a market offering, which delivers

to target customers more selectively and engage them more deeply. The key is to

customer value and satisfaction, resulting in long-term exchange relationships

blend the new digital approaches with traditional marketing to create a smoothly

with customers.

integrated marketing strategy and mix.

Learning Objective 3. Identify the key elements of a customer-driven marketing strategy, and discuss the marketing management orientations that guide marketing strategy. (pp. 9–15)

and bring their consumption back in line with their incomes. Even as the post-

the firm. The core marketplace concepts are needs, wants and demands; market

The Great Recession caused consumers to rethink their buying priorities recession economy has strengthened, people are now showing an enthusiasm for frugality not seen in decades. The challenge is to balance a brand’s value proposition with current times while also enhancing its long-term equity.

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Part 1  Defining marketing and the marketing process

In recent years, marketing has become a major part of the strategies for

single markets seems to be giving way to many such strategic alliances.

many not-for-profit organisations, such as universities, hospitals, museums, zoos,

Can you identify other markets where this process is evident? What are

symphony orchestras, foundations and even churches. Also, in an increasingly

the implications for marketing science and practice? (Learning Objective 4)

smaller world, many marketers are now connected globally with their customers,

(AACSB: Communication; Reflective Thinking)

marketing partners and competitors. Finally, today’s marketers are also re-

❺ Societal marketing concept. If this term means that the organisation should

examining their ethical and societal responsibilities. Marketers are being called

determine the needs, wants and interests of target markets, then surely this

upon to take greater responsibility for the social and environmental impacts of

is the same thing as the marketing concept? Is this not simply duplication?

their actions.

Justify your answer. (Learning Objective 5) (AACSB: Communication;

Pulling it all together, as discussed throughout the chapter, the major new

Reflective Thinking)

developments in marketing can be summed up in a single concept: engaging

❻ Change management. A number of enterprises – large (HIH Insurance),

customers and creating and capturing customer value. Today, marketers of

medium (One.Tel, Impulse Airlines, Ansett Airlines) and small – have

all kinds are taking advantage of new opportunities for building value-laden

achieved notoriety by their spectacular failures. There seems to be a number

relationships with their customers, their marketing partners and the world

of reasons, including systems failure and management failure. Using such

around them.

sources as the financial press and magazines, identify how marketing may or may not contribute to such failures and to other difficulties that businesses

Discussion questions ❶ Telling and selling. Is marketing practice little more than ‘telling and selling’, while marketing science is really just a matter of carrying out experiments, tests, surveys and other research to help organisations sell

are experiencing. (Learning Objective 5) (AACSB: Communication; Reflective Thinking)

Critical thinking exercises ❶ Form a small group of three or four fellow students. Discuss a need or

more? Or is marketing practice truly concerned with satisfying customer

want you have that is not adequately satisfied by any offerings currently

needs and wants by interacting and working with the customer, and marketing

in the marketplace. Think of a product or service that will satisfy that need

science concerned with furthering this aim? One way of discussing this is

or want. Describe how you will differentiate and position your offering in

to form class syndicates taking each position, armed with examples from

the marketplace and develop the marketing program for your offering.

the marketplace. (Learning Objective 1) (AACSB: Communication; Reflective

Present your ideas to the other groups. (Learning Objective 2) (AACSB:

Thinking)

Communication; Reflective Thinking)

❷ Customer satisfaction. If it is true that smart companies aim to completely

❷ Consider a product that you use or a retailer where you shop frequently.

satisfy customers by promising only what they can deliver, and then

Estimate how much you are worth to the retailer or manufacturer of the

delivering more than they promise, does this mean that those who follow

brand you prefer if you remain loyal to that marketer for the rest of your

this dictum are market leaders and the most profitable in their industry

life (your customer lifetime value). What factors should you consider when

sector? This very topical issue is a matter for individual research using

deriving an estimate of your lifetime value to the company? How can the

academic journals; the findings might then be pooled in class. Be aware that

company increase your lifetime value? (Learning Objective 4) (AACSB:

there is no simple answer. (Learning Objective 2) (AACSB: Communication; Reflective Thinking)

Communication; Reflective Thinking; Analytic Reasoning) ❶ In a small group, create a presentation about careers in marketing. Search

❸ Market orientation or marketing orientation. At a recent academic

the internet for information regarding the different career options available

conference, a presenter was discussing the literature he had followed in

in marketing, and the skills, education and experience necessary to advance

devising his study of the connection between respondent organisations’

in the field of marketing. Then select a company and describe the marketing

market orientation and their sales performance. During the presentation,

career opportunities available there. (Learning Objectives 1–4) (AACSB:

he inadvertently used the term marketing orientation. Some of the

Communication; Reflective Thinking)

audience became quite vocal at this point. Why might this be the case? Surely the two terms mean the same thing? (Learning Objective 3) (AACSB: Communication; Reflective Thinking) ❹ Globalisation. As a response to globalisation, organisations such as airlines are partnering with foreign organisations, even competitors, to form strategic alliance networks (such as the oneworld® alliance of airberlin, American

Navigating the key terms Learning Objective 1

marketing myopia (p. 7)

marketing (p. 4)

needs (p. 5) transaction (p. 8)

Airlines, British Airway, Cathay Pacific Airlines, Finnair, Iberia, LAN Airlines,

Learning Objective 2

Japan Airlines, Malaysia Airlines, Qantas Airways, Qatar Airlines, Royal

demands (p. 6)

Jordanian, S7 Airlines, TAM, SriLankan Airlines – see )

exchange (p. 8)

Learning Objective 3

that compete with other networks (such as Star Alliance – see ). The older notion of single companies competing in

market offering (p. 6)

marketing concept (p. 12)

wants (p. 5)

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Chapter 1  Marketing: Creating and capturing customer value

marketing management (p. 9)

Learning Objective 4

customer satisfaction (p. 15)

Learning Objective 5

product concept (p. 11)

consumer-generated marketing (p. 17)

customer-perceived value (p. 15)

digital and social media marketing 

production concept (p. 11)

customer equity (p. 20)

partner relationship management 

selling concept (p. 11)

customer lifetime value (p. 19)

societal marketing concept 

customer relationship

(p. 13)

(p. 18) share of customer (p. 19)

(p. 22) internet (p. 21) not-for-profit marketing (p. 26)

management (CRM) (p. 15)

Mini cases 1.1  Digital technologies in marketing Publishing: To unbundle the app or not? Newspaper and magazine publishers the world over are in a quandary.

subscriptions separately. And while this has been taking place, hardcopy

Digital tablets such as Apple’s iPad, and a myriad of Google Android tablets

readership has been dropping.

such as Samsung’s range, now bristle with apps which their owners have

The Economist has a similar strategy that unbundles tablet editions from

downloaded courtesy of publishers such as Australasia’s Fairfax Media

print. Pricing strategy is as one might expect in that the price for a print

Limited. Fairfax Media publish, among other assets, the Australian Financial

subscription is more expensive than for a digital subscription, while print

Review (AFR) and BRW.

plus digital costs more again. These publishers appear to be ready for the

Subscribe to the AFR on a five- or six-day basis and you get access,

steady decline in print readers that every publisher is experiencing.43

through the AFR iPad app, to various newspaper features online. Fee-

❶ Thinking about your own reading habits, do you still read print versions

paying digital subscribers have free access to the app. In a similar strategy

of newspapers and magazines? Why, or why not? (Learning Objectives

to that adopted by Time Inc., called ‘All Access’, the AFR gives its print

1, 2 and 4) (AACSB: Communication; Use of IT; Reflective Thinking)

subscribers access to tablet and smartphone apps and also provides

❷ Do you think the strategy adopted by The Economist reflects the

separate access to its digital editions and subscriber content from its

needs, wants and demands of readers? (Learning Objectives 1, 2

website. Competitors, such as Hearst and Condé Nast, also sell app

and 5) (AACSB: Communication; Reflective Thinking)

1.2  Customer-driven marketing strategy Apple and Adobe Flash clash: Customer-driven? Apple’s iDevices – iPods, iPhones and iPads – are globally popular.

next chapter of the web’, and bloggers exclaim this is not just an ‘Adobe/

But where’s the flash? Adobe Flash, that is. Adobe’s Flash, the long-standing

Apple problem . . . but an Apple/World problem’.

multimedia platform behind approximately 75 per cent of the animated and

❶ Does Apple appear to embrace the marketing concept? (Learning

streaming audio and video on the internet, is not supported by Apple’s

Objectives 3, 4 and 5) (AACSB: Communication; Use of IT; Reflective

devices. Many purchasers were disappointed after spending hundreds of

Thinking; Technology)

dollars on iPads and iPad Minis only to realise they could not play their

❷ Research the controversy surrounding this issue and debate whether

favourite online game or watch videos on their device. And they still cannot,

Apple did the right thing for its customers by not including the

even with the latest-generation devices. Why not? It seems Apple’s late

ubiquitous Adobe Flash software on Apple’s products. Is there a way

founder and CEO, Steve Jobs, did not like Flash and would not support it on

around the dilemma for those wanting to watch Flash movies and play

Apple’s devices. Instead, app developers must conform to Apple’s operating

Flash games on their iPhones? (Learning Objectives 1 and 5) (AACSB:

system, and existing applications on the web must convert to HTML5 to play

Communication; Reflective Thinking)

on an Apple product. Adobe’s co-founders claim Apple is ‘undermining the

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34

Part 1  Defining marketing and the marketing process

1.3  Marketing analytics at work Transport for NSW: Customer satisfaction index Every mode of transport stands or falls by its ability to satisfy customers.

Having read the November CSI report, and examined Appendix 3 for

The New South Wales government has a vision that promotes better outcomes

any similar marketing analytics spotlights you could draw on for inspiration,

for customers of its integrated public transport system. In meeting this goal,

consider the following questions:

it tracks the views of over 17 000 randomly selected customers over time.

❶ Do you think that each of the satisfaction parameters mentioned

For example, the Customer Satisfaction Index (CSI) published in November

(e.g. timeliness) would be of equal importance to customers? If not,

2015 covered seven surveys from November 2012 to November 2015.

how would you calculate an overall CSI for Transport for NSW, taking

Customers were asked to rate their experience of their most recent trip or

account of such differences? (Learning Objectives 2 and 3) (AACSB: Communication; Reflective Thinking; Sustainability)

experience.44 The customer surveys used a seven-point scale (‘very dissatisfied’ to ‘very

❷ Might there be differences in the importance level for each parameter

satisfied’) to gather satisfaction levels for such parameters as timeliness,

by transport mode? If so, how would you calculate an overall CSI for

safety and security, ticketing, convenience, accessibility, comfort, cleanliness,

Transport for NSW, taking account of such differences? (Learning

information and customer service. Customer satisfaction for each transport

Objectives 2 and 3) (AACSB: Communication; Reflective Thinking)

mode was monitored: train, bus, ferry, light rail and the urban taxi network.

1.4  Ethical reflection The security of customer details The football club, the Mighty Emus, has approached a marketing research

questionnaire website. Barry sent the list of email addresses at the behest of

firm, FastAsk, to undertake a membership satisfaction survey. The club wants

the club’s directors, even though he objected to this action because the email

FastAsk to send an email to each of its members with an email address and

list includes subscribers who asked that their details not be given to third

to call the remainder using a computer-aided telephone system, inviting

parties. Barry is fully aware of the amendments to the Australian Privacy Act

them to complete a web form (questionnaire accessed with a web browser)

that came into effect on 21 December 2001; he knows that heavy penalties

that seeks their views on various aspects of the club’s performance, both

may be imposed on those who do not comply with the provisions of the Act.

on-field and off-field. As an inducement to respond, the research company

He is also aware of the Spam Act 2003 and the introduction of the Do Not

has suggested that a prize of one year’s free membership be offered to a

Call Register Act 2006.45

winner drawn from a barrel.

❶ What are your views concerning the proposed marketing

The Mighty Emus’ marketing officer, Barry Bright, has passed the email

research? (AACSB: Communication; Ethical Reasoning; Reflective

list to the research company so that they can invite members to visit the

Thinking)

References

1 John C Narver & Stanley F Slater, ‘The effect of a market orientation on business profitability’, Journal of Marketing, 54, October 1990, pp. 20–35; for a more embracing perspective on market orientation, see Paul D Ellis, ‘Market orientation and performance: A meta-analysis and cross-national comparisons’, Journal of Management Studies, 43(5), 2006, pp. 1089–107. 2 See Philip Kotler & Kevin Lane Keller, Marketing Management, 15th edn, Pearson Education: Hoboken, NJ, 2016, p. 5. 3 The American Marketing Association offers the following definition: ‘Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.’ See , accessed September 2015. 4 See Daniel P Smith, ‘Keep in touch’, QSR Magazine, July 2013, ; and Phil Wahba, ‘Back on target’, Fortune, 1 March 2015, pp. 86–94. 5 See Theodore Levitt’s classic article, ‘Marketing myopia’, Harvard Business Review, July–August 1960, pp. 45–56. For more recent discussions, see Minette E Drumright & Mary C Gentile, ‘The new marketing myopia’, Journal of Public Policy & Marketing,

6

7

8

9

Spring 2010, pp. 4–11; Roberto Friedmann, ‘What business are you in?’, Marketing Management, Summer 2011, pp. 18–23; and Al Ries, ‘“Marketing myopia” revisited: Perhaps a narrow vision is better business’, Advertising Age, 4 December 2013, . Ralph Waldo Emerson offered this advice: ‘If a man . . . makes a better mousetrap . . . the world will beat a path to his door.’ Several companies, however, have built better mousetraps and yet have failed. ‘The difference in creating companies and categories’, happycustomer, 4 March 2014, . See Michael E Porter & Mark R Kramer, ‘Creating shared value’, Harvard Business Review, January–February 2011, pp. 63–77; Marc Pfitzer, Valerie Bockstette & Mike Stamp, ‘Innovating for shared value’, Harvard Business Review, September 2013, pp. 100–7; ‘About shared value’, Shared Value Initiative, , accessed September 2015; and ‘Shared value’, , accessed September 2015. Michael Krauss, ‘Evolution of an academic: Kotler on marketing 3.0’, Marketing News, 30 January 2011, p. 12; and Simon Mainwaring, ‘Marketing 3.0 will be won

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Chapter 1  Marketing: Creating and capturing customer value

by purpose-driven, social brands’, Forbes, 16 July 2013, . 10 For more on how to measure customer satisfaction, see D Randall Brandt, ‘For good measure’, Marketing Management, January–February 2007, pp. 21–5. 11 See , accessed November 2016. 12 Information about the Harley Owners Group from , accessed January 2013. For further details in Australia, see , accessed 2 April 2016. 13 ‘Number of monthly active Twitter users worldwide from 1st quarter 2010 to 3rd quarter 2016 (millions)’, statista, , accessed November 2016. 14 Data from statista: The Statistics Portal, . 15 For examples, see , accessed September 2015; and ‘Product review’, , accessed 3 April 2016. 16 See ‘#Bashtag: Avoiding user outcry in social media’, WordStream, 8 March 2013, ; and ‘What is hashtag hijacking?’, Small Business Trends, 18 August 2013, . 17 See , accessed September 2015. 18 See Mai Erne, ‘Calculating customer lifetime value’, HaraPartners, , accessed September 2015. 19 See Timothy Stenovec, ‘Amazon prime members spend an astonishing $1,500 a year, survey says’, Huffington Post, 27 January 2015, ; Brad Stone, ‘What’s in the box? Instant gratification’, Bloomberg Businessweek, 29 November–5 December 2010, pp. 39–40; and , accessed September 2015. 20 Lloyd C Harris, ‘Market orientation and performance: Objective and subjective evidence from UK companies’, Journal of Management Studies, 38(1), 2001, pp. 17–43. 21 For more discussions on customer equity, see Roland T Rust, Valerie A Zeithaml & Katherine N Lemon, Driving Customer Equity, Free Press: New York, NY, 2000; Roland T Rust, Katherine N Lemon & Valerie A Zeithaml, ‘Return on marketing: Using customer equity to focus marketing strategy’, Journal of Marketing, January 2004, pp. 109–27; Christian Gronroos & Pekka Helle, ‘Return on relationships: Conceptual understanding and measurement of mutual gains from relational business engagements’, Journal of Business & Industrial Marketing, 27(5), 2012, pp. 344–59; and Peter C Verhoef & Katherine N Lemon, ‘Successful customer value management: Key lessons and emerging trends’, European Management Journal, February 2013, p. 1. 22 Based on Werner Reinartz & V Kumar, ‘The mismanagement of customer loyalty’, Harvard Business Review, July 2002, pp. 86–94. Also see Chris Lema, ‘Not all customers are equal: Butterflies & barnacles’, 18 April 2013, ; Jill Avery, Susan Fournier & John Wittenbraker, ‘Unlock the mysteries of your customer relationships’, Harvard Business Review, July–August 2014, pp. 72–81; and ‘Telling customers “You’re fired!”’, SalesAndMarketing.com, September/October 2014, p. 8. 23 See ‘Internet usage statistics’, Internet World Stats, , accessed April 2016; and ‘Mobile technology fact sheet’, , accessed April 2016. 24 Campbell Simpson, ‘Australians are switching their TV watching to tablets and smartphones’, Gizmodo, , accessed 5 April 2016; and Marla Schimke, ‘Mobile as marketing’s savior’, Adweek, 15 December 2014, p. 19. 25 Chris Gayomali, ‘Brands are wasting their time and money on Facebook and Twitter, report says’, Fast Company,19 November 2014, ; ‘Greatness awaits: Sony PlayStation PS4 launch’, Empowered, , accessed April 2016; Roger Katz, ‘2015 will be the year of the brand community – Here’s why’, ClickZ, 23 January 2015, ; and , accessed April 2016. 26 See Stuart Feil, ‘How to win friends and influence people’, Adweek, 12 September 2013, pp. S1–S7; and Salesforce.com, ‘Just published: 2015 state of marketing report’, 13 January 2015, , accessed 5 April 2016.

35

27 See Calla Cofield, ‘Social media: NASA’s not so secret weapon for the Orion test flight’, Space, 3 December 2014, ; Laura Nichols, ‘NASA soars on social media with Orion spacecraft’, PRWeek, 18 December 2015, ; ‘By the letters EFT: Sesame Street muppets count down to NASA launch’, Collect Space, 24 November 2014, ; and , accessed April 2016. 28 Michael Applebaum, ‘Mobile magnetism’, Adweek, 25 June 2012, pp. S1–S9; and Bill Briggs, ‘M-commerce is saturating the globe’, Internet Retailer, 20 February 2014, . 29 ‘Australians get mobile’, ACMA, 9 June 2015, . 30 See Ajay K Kohli & Bernard J Jaworski, ‘Market orientation: The construct, research propositions and managerial implications’, Journal of Marketing, 54, April 1990, pp. 1–18; and John C Narver & Stanley F Slater, ‘The effect of a market orientation on business profitability’, Journal of Marketing, 54, October 1990, pp. 20–35. 31 Tim Ambler & Flora Kokkinaki, ‘Measure of marketing success’, Journal of Marketing Management, 13(7), 1997, pp. 665–79. 32 Marcin Pont & Robin N Shaw, ‘Measuring marketing performance: A critique of empirical literature’, in R Kennedy (ed.), Proceedings of the Australian and New Zealand Marketing Academy Conference (ANZMAC), Adelaide, 2003, pp. 2064–73. 33 John C Narver & Stanley F Slater, ‘The effect of a market orientation on business profitability’, Journal of Marketing, 54, October 1990, pp. 20–35; and Ajay K Kohli & Bernard J Jaworski, ‘Market orientation: The construct, research propositions and managerial implications’, Journal of Marketing, 54, April 1990, pp. 1–18. 34 Lloyd C Harris, ‘Market orientation and performance: Objective and subjective evidence from UK companies’, Journal of Management Studies, 38(1), 2001, pp. 17–43. 35 Paul D Ellis, ‘Market orientation and performance: A meta-analysis and cross-national comparisons’, Journal of Management Studies, 43(5), 2006, pp. 1089–1107. 36 For other examples, and for a good review of not-for-profit marketing, see Philip Kotler & Alan R Andreasen, Strategic Marketing for Nonprofit Organizations, Prentice Hall: Englewood Cliffs, NJ, 1991; Cyndee Miller, ‘Churches turn to research for help in saving new souls’, Marketing News, 11 April 1994, pp. 1, 2; Philip Kotler & Karen Fox, Strategic Marketing for Educational Institutions, Prentice Hall: Englewood Cliffs, NJ, 1985; Bradley G Morrison & Julie Gordon Dalgleish, Waiting in the Wings: A Larger Audience for the Arts and How to Develop It, ACA Books: New York, NY, 1987; Norman Shawchuck, Philip Kotler, Bruce Wren & Gustave Rath, Marketing for Congregations: Choosing to Serve People More Effectively, Abingdon Press: Nashville, TN, 1993. 37 See Tom Lowry, ‘The game’s the thing at MTV networks’, BusinessWeek, 18 February 2008, p. 51. Additional information from annual reports and other information found at and , accessed April 2016. 38 For more on strategic alliances, see Jordan D Lewis, Partnerships for Profit: Structuring and Managing Strategic Alliances, Free Press: New York, NY, 1990; Peter Lorange & Johan Roos, Strategic Alliances: Formation, Implementation, and Evolution, Blackwell Publishers: Cambridge, MA, 1992; and Frederick E Webster, Jr, ‘The changing role of marketing in the corporation’, Journal of Marketing, October 1992, pp. 1–17. 39 For more on Tesla, see , accessed April 2016. 40 For more on the Rio Earth Summit 1992, see , accessed April 2016. 41 For more on the Rio Earth Summit in 2012, see , accessed April 2016. For further developments, see ‘Sustainable development knowledge platform’, , accessed April 2016. 42 See , and , accessed September 2015. 43 See Nat Ives, ‘Digital subs rising, The Economist unbundles tablet editions from print’, AdAge, 30 November 2012. For more on subscriptions, see , accessed April 2016. 44 Transport for NSW, Customer Satisfaction Index November 2015, NSW Government, , accessed April 2016. 45 For details of the Australian Privacy Act 2001 (Cth), see . See for an overview of the Spam Act 2003 (Cth). See for an overview of the Do Not Call Register Act 2006 (Cth).

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Chapter

2

Company and marketing strategy: Partnering to build customer engagement, value and relationships In Chapter 1, we explored the marketing process by which marketing organisations create value for customers in order to capture value from them in return. In this leg of the journey, we dig deeper into steps 2 and 3 of the marketing process – designing customer-driven marketing strategies and constructing marketing programs. First, we look at the organisation’s overall strategic planning, which guides marketing strategy and planning. Next, we discuss how, guided by the strategic plan, marketers partner closely with others inside and outside the firm to engage customers and create value for them. We then examine marketing strategy and planning – how marketers choose target markets, position their market offerings, develop a marketing mix and manage their marketing programs. Finally, we look at the important step of measuring and managing marketing return on investment (marketing ROI).

For a visual representation of the chapter, please see the concept map on the following page.

Learning

Objectives

Learning Objective 1 Explain company-wide strategic planning and its four steps. Company-wide strategic planning: Defining marketing’s role  pp. 38–41 Learning Objective 2 Discuss how to design business portfolios and develop growth strategies. Designing the business portfolio  pp. 41–45 Learning Objective 3 Explain marketing’s role in strategic planning and how marketing works with its partners to create and deliver customer value. Planning marketing: Partnering to build customer relationships  pp. 45–47 Learning Objective 4 Describe the elements of a customer value-driven marketing strategy and mix, and the forces that influence it. Marketing strategy and the marketing mix  pp. 47–51 Learning Objective 5 List the marketing management functions, including the elements of a marketing plan, and discuss the importance of measuring and managing return on marketing investment. Managing the marketing effort  pp. 51–56 Measuring and managing return on marketing investment  pp. 56–58

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Chapter 2  Company and marketing strategy: Partnering to build customer engagement, value and relationships

CORPORATE LEVEL

LO 1

Setting company objectives and goals

Planning marketing and other functional strategies

Designing the business portfolio

Product/market expansion grid

Growth-share matrix

Discuss how to design business portfolios and develop growth strategies. (pp. 41–45)

ANALYSE THE BUSINESS PORTFOLIO (developing strategies for growth and downsizing)

s arie i d e erm nt

i

Ma rke tin g

Ma an rke al

ce Pri

Peop le

P la c e m e n t lo gis ti c s

pp

rs

Ph v e

rk M a le m p im

s

n

f e r e nti a ti o n

li c

mo et ro in g l

D if

cess Pro

Pro

rk M a ont c

Su

li e

ti o

PROFITABLE CUSTOMER RELATIONSHIPS

Targeting

Product

mentation Seg

LO 4 Describe the elements of a customer value-driven marketing strategy and mix, and the forces that influence it. (pp. 47–51)

M pla arke n

g tin g nin

g tin is ys

rs ito et

LO 3 Explain marketing’s role in strategic planning and how marketing works with its partners to create and deliver customer value. (pp. 45–47)

Co mp

y id s i c a l en ce e en tin g ta tio n

LO 2

Defining the company mission

ion Posit ing

Explain company-wide strategic planning and its four steps. (pp. 38–41)

BUSINESS UNIT

Pu

b

LO 5

EVALUATING RETURN ON MARKETING INVESTMENTS

List the marketing management functions, including the elements of a marketing plan, and discuss the importance of measuring and managing return on marketing investment. (pp. 51–58)

Cost of marketing investments Marketing investments

Return on marketing investment

Marketing returns

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38

Part 1  Defining marketing and the marketing process

Company-wide strategic planning: Defining marketing’s role (pp. 38–41) strategic planning The process of developing and maintaining a strategic fit between the organisation’s goals and capabilities and its changing marketing opportunities.

Each marketing organisation must find the game plan for long-run survival and growth that makes the most sense given its specific situation, opportunities, objectives and resources. This is the focus of strategic planning – the process of developing and maintaining a strategic fit between the organisation’s goals and capabilities and its changing marketing opportunities. Strategic planning sets the stage for the rest of the planning in the firm. Companies usually prepare annual plans, long-range plans and strategic plans. The annual and long-range plans deal with the company’s current businesses and how to keep them going. In contrast, the strategic plan involves adapting the organisation to take advantage of opportunities in its constantly changing environment. At the corporate level, the organisation starts the strategic planning process by defining its overall purpose and mission (see Figure 2.1). This mission is then turned into detailed supporting objectives that guide the whole organisation. Next, headquarters decides what portfolio of businesses and products is best for the company and how much support to give each one. In turn, each business and product develops detailed marketing and other departmental plans that support the company-wide plan. Thus, marketing planning occurs at the business-unit, product and market function levels. It supports company strategic planning with more detailed plans for specific marketing opportunities.

Defining a market-oriented mission

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

An organisation exists to accomplish something, and this purpose should be clearly stated. Forging a sound mission begins with the following questions: What is our business? Who is the customer? What do consumers value? What should our business be? These simple-sounding questions are among the most difficult the company will ever have to answer. Successful companies continuously raise these questions and answer them carefully and completely. Many organisations develop formal mission statements that answer these questions. A mission statement is a statement of the organisation’s purpose – what it wants to accomplish in the larger environment. A clear mission statement acts as an ‘invisible hand’ that guides people in the organisation. Some companies define their missions myopically in product or technology terms (e.g. ‘We make and sell furniture’ or ‘We are a chemical-processing firm’). But mission statements should be market-oriented and defined in terms of satisfying basic customer needs. Products and technologies eventually become outdated, but basic market needs may last forever. For example, social scrapbooking site Pinterest does not define itself as just an online place to post pictures. Its mission is to give people a social media platform for

BUSINESS UNIT, PRODUCT AND MARKET LEVEL

CORPORATE LEVEL

Defining the company mission

Setting company objectives and goals

Designing the business portfolio

Planning marketing and other functional strategies

Figure 2.1  Steps in strategic planning

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39

Table 2.1  Market-oriented business definitions Organisation

Product-oriented definition

Market-oriented definition

Amazon.com

We sell books, videos, CDs, consumer electronics and other products online.

To be Earth’s most customer-centric company for four primary customer sets: consumers, sellers, enterprises and content creators.

BMW

We sell motor vehicles and motorcycles.

To become the world’s leading provider of premium products and premium services for individual mobility.

Facebook

We are an online social network.

We connect people around the world and help them share important moments in their lives.

eBay

We enable online auctions and selling.

We provide a global marketplace where practically anyone can trade practically anything, enabling economic opportunity around the world.

NASA

We explore outer space.

We reach for new heights and reveal the unknown so that what we do and learn will benefit all humankind.

Revlon

We make cosmetics.

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

Village ­Roadshow

We distribute and show movies, and run theme parks.

To build a world-class portfolio of entertainment and media assets in order to generate sound returns, a sustainable competitive advantage and enduring value for all stakeholders.

Virgin Atlantic

We fly people around the world.

To embrace the human spirit and let it fly.

Wesfarmers

We are one of Australia’s largest listed companies with diverse business operations.

To deliver ‘a satisfactory return to shareholders’. (Wesfarmers adheres to four core values: integrity; openness; accountability; and boldness.)

Sources: See , accessed April 2016; , accessed April 2016; , accessed April 2016; , accessed April 2016; , accessed April 2016.

collecting, organising and sharing things they love.1 Likewise, World Vision’s mission is not just to provide aid, but rather ‘to be a Christian organisation that engages people to eliminate poverty and its causes’.2 Table 2.1 provides several other examples of product-oriented versus market-oriented business definitions.3 Mission statements should be meaningful and specific, yet motivating. They should emphasise the organisation’s strengths in the marketplace. Too often, mission statements are written for public relations purposes and lack specific, workable guidelines. Finally, a marketing organisation’s mission should not be stated as making more sales or profits – profits are only a reward for creating value for customers. Instead, the mission should focus on customers and the customer experience the marketing organisation seeks to create. Thus, the mission of McDonald’s is not ‘to be the world’s best and most profitable quick-service restaurant’; rather, it is ‘to be our customers’ favourite place and way to eat and drink’. If McDonald’s accomplishes this customer-focused mission, profits will follow. Marketing in action 2.1 illustrates how BMW has employed strategic planning in the process of reinventing itself from a German aero engine manufacturer into an internationally recognised provider of premium automobile and motorcycle products and services.

Setting company objectives and goals The marketing organisation needs to turn its mission into detailed supporting objectives for each level of management. Each manager should have objectives and be responsible for reaching them. For example, many companies are structured with a number of strategic business units (SBUs) – the key businesses that make up the company – that manufacture and market products in Australia, New Zealand and internationally. The corporate strategy of companies in fast-moving consumer goods (FMCG) tends to focus on the development and maintenance of strengths in technology and placement logistics, and on deepening customer relationships.

strategic business units (SBUs) The key businesses that make up a company.

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40

Part 1  Defining marketing and the marketing process

Marketing in Action 2.1

Strategic planning involves having the right people

With the demise of the local motor-vehicle manufacturing industry in Australia,

Herbert Quandt. Much has been written concerning how the Quandt family

those who might have purchased a General Motors Holden Commodore, Ford

initially acquired its wealth during World War II but, for the purpose of this

Falcon or Toyota Aurion six-cylinder sedan or estate (station wagon) were faced

discussion, we will put that part of history to the side, and turn instead to 1961

with a quandary. While these brands continued as imports, and their product

and the release of the 1500 model at the Frankfurt Motor Show.

lineups at dealerships seemed to grow rather than contract, many people turned

Once again, the kidney grille was used to set BMW and its cars apart from

to European imports made by large global companies, such as Audi, BMW,

the pack. New plant and equipment came to the fore as motor vehicle production

Mercedes-Benz and Volkswagen. Those wanting the ubiquitous ute (utility) either

increased in the 1960s.

could choose a Volkswagen Amarok or otherwise needed to think in terms of one

In 1972, BMW established its motorsport division with a separate subsidiary

of the major Japanese or Chinese brands. By 2015, even the Australian prime

– BMW Motorsport GmbH. The company went on to build new administrative

minister was being ferried about in a BMW 7 Series and an armoured BMW X5

buildings in Munich – four towers now known as ‘the four-cylinder building’ –

(Commonwealth Car Fleet cars (COMCAR)) – no Holden Caprice vehicles were

with the BMW Museum housed next door.

used after 2014. The New Zealand prime minister and ministers of the Crown had already switched to BMW 7 Series sedans.

By 1973, the company’s executive vice president of sales, and a member of the board of management, was the automotive legend Bob Lutz, and he

This introduction provides us with a segue into a more detailed look at BMW

is credited with many developments at BMW that helped lift the brand’s

and its strategic planning. Bayerische Motoren Werke AG (BMW) can trace its

profile. A former US Marine Corps pilot, Lutz was a strong character who had

history back to 7 March 1916 and the manufacture of aero engines in Germany.

honed his skills in executive positions at Ford Motor Company, the former

The BMW emblem began to be used in 1917 and featured the Bavarian state

Chrysler Corporation and General Motors. Some of these developments

colours. The roundel has changed in style but not substance over the intervening

include retaining the kidney grilles that are used to this day; modernising

years. It was not until 1918 that the letters ‘BMW’ were included in the company

the motor vehicle designs (even using General Motors staff behind the

name, when BMW AG was formed (AG indicates a public company, whereas

scenes in the clay-modelling process on the 3 Series); helping in the

GmbH indicates a private limited company).

development of BMW motorcycle strategies; setting up a company-owned

The company began manufacturing motor vehicles in 1928 by purchasing

sales division and setting up separate subsidiary companies to sell BMWs

another company. However, while it made various models under licence,

in many countries – particularly in the United States; bringing the design

it was not until 1932 that the company manufactured cars using its own

of BMWs in-house (from Bertone), starting with the 3 Series; helping to

designs. In  1933, BMW introduced the 303, the first model to use the

tailor the positioning statement ‘The Ultimate Driving Machine’, which the

distinctive kidney grille. The company announced its first complete motorcycle

company still uses today; and turning the company away from its ‘crazy,

in 1932 – BMW Motorrad model R 32 – with its boxer engine. It continues

illogical naming mishmash’ in favour of the 3-5-7 naming strategy, which

to build motorcycles with longitudinally positioned cylinders and drive shaft

the company has since developed into 1-2-3-4-5-6-7-8. Bob Lutz achieved

to this day.

all this in just three years, after which he left BMW as he could not see

From 1933, aircraft construction received German government support, and this aided BMW AG. During World War II, BMW almost exclusively built aircraft engines for the German Air Force and, regrettably, used forced labour in doing so. The company’s plants were dismantled at the end of the war and so too were its machines, which were then stripped and shipped to other countries as war reparations. The first motorcycle to exit a BMW factory after the war was the R 24, which was manufactured from 1945 to 1948. The first post-war motor car was the 501, which used a modified version of the six-cylinder engine used in the 326 before the war. The motorcycle was a success, but the car was not. Daimler-Benz attempted to acquire BMW in 1959. However, small shareholders and the workforce rejected the offer to restructure the business. The government provided some financial assistance, and BMW was restructured under the majority shareholding and management of wealthy industrialist,

himself achieving the position of BMW Chairman. Lutz retired in 2010 as Vice-Chairman of General Motors. It was Bob Lutz’s view that, ‘In the ’50s, ’60s, ’70s, ’80s and ’90s, it [BMW Group] was product-driven, building an impenetrable image of excellence. They have managed the acquired reputation.’ He feared the company was not building on it. He went on to add that ‘they are doing a good job managing it, because I have not heard anyone say they are displeased with their BMW’. As BMW moves into its second century of building cars, Lutz praises the brand for staying true: ‘They do build excellent cars – no question about it. They have very carefully nurtured their brand. They never strayed off the course of being a driver’s car. They have up to now been very true to their ethic and never tried to please everyone.’4

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41

In 1994, BMW AG purchased the UK’s Rover Group, taking on the manufacturing and marketing responsibility for their iconic brands – Land Rover, Rover, MG, Triumph and Mini. They sold off all but the Mini as BMW recognised it could not successfully integrate the BMW and Rover Groups. The company acquired Rolls-Royce in 1998, which it owns to this day as it focuses solely on the premium segment of the international automobile market with the three brands

Courtesy BMW Group

– BMW, Mini and Rolls-Royce – as well as motorcycle brand, BMW Motorrad. In 2007, BMW Group adopted the Strategy Number ONE with its four pillars: ‘Growth’, ‘Shaping the future’, ‘Profitability’ and ‘Access to technology and customers’. It aligns the BMW Group with two targets: to be profitable and to enhance long-term value in times of change. The mission statement up to year 2020 is clearly defined: to become the world’s leading provider of premium products and premium services for individual mobility.5 In 1975, BMW Group completely acquired the South African BMW importer. This became the first production facility for BMW motor cars outside Germany and has produced various models, including some variants of the 3 Series from 1984. BMW AG has gone on to develop many manufacturing operations, including in the United States, and launch many motorcycle and motor car models, which it sells globally. It does so because of its people. For example, it was the first

Source: Much of the historical information in this vignette was sourced from , accessed April 2016; used with the permission of BMW AG.

Questions ❶ Describe the advantages of strategic planning, and discuss how it might be employed by a company with which you are familiar.

automobile manufacturer to establish a research and innovation centre that

❷ What does BMW’s brand image mean to you?

relies on the teamwork of some 7000 scientists, engineers, designers, managers

❸ Are you familiar with any products that compete on the basis of simplicity,

and technicians. The pure electric i3 and hybrid i8 models are the result of this

rather than on the basis of how fully featured the products are? Is this a case

collaboration, with many more developments to follow.

of least-cost positioning versus market differentiation? Explain your answer.

This broad mission leads to a hierarchy of objectives, including business objectives and marketing objectives. Companies have the overall objective of building profitable customer relationships by adding value for their stakeholders. They do this by investing heavily in research and development (R&D). R&D is expensive and requires improved profits to plough back into research programs. So, improving profits becomes another major objective for the companies. Profits can be improved by increasing sales or by reducing costs. Sales can be increased by improving the companies’ share of domestic and international markets. These goals then become the companies’ current marketing objectives. Marketing strategies and programs must be developed to support these marketing objectives. To  increase customer engagement, sales and market share, a company’s SBUs might increase their products’ availability and promotion in existing markets and expand business via acquisitions. Each SBU develops broad marketing strategies that must then be defined in greater detail. For example, increasing the product’s promotion may require more salespeople, advertising and public relations efforts; if so, both requirements will need to be spelled out. In this way, the organisation’s mission is translated into a set of short-term objectives for the current period.

Designing the business portfolio (pp. 41–45) Guided by the marketing organisation’s mission statement and objectives, management now must plan its business portfolio – this is the collection of businesses and products that make up the company. The best business portfolio is the one that best fits the company’s strengths and weaknesses to opportunities in the environment. Business portfolio planning involves two steps. First, the company

business portfolio

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

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must analyse its current business portfolio and decide which businesses should receive more, less or no investment. Second, the company must shape the future portfolio by developing strategies for growth and downsizing. When we examine Goodman Fielder-branded products, we see that they are icons in some of the largest grocery categories and include Meadow Lea, Praise, White Wings, Pampas, Mighty Soft, Helga’s, Wonder White, Vogel’s (under licence), Meadow Fresh, Edmonds and Irvines. The company also supplies edible fats and oils to Australian and New Zealand food manufacturers and wholesalers, and is the largest supplier of flour to New Zealand food industry customers. Thus, Goodman Fielder seeks to add value by leveraging off its strength in the technology used to manufacture and distribute products by a portfolio of SBUs.

portfolio analysis

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

Analysing the current business portfolio

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

The Boston Consulting Group approach growth-share matrix

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

Using the now-classic Boston Consulting Group (BCG) approach, a company classifies all its SBUs according to the growth-share matrix, as shown in Figure 2.2. On the vertical axis, market growth rate provides a measure of market attractiveness. On the horizontal axis, relative market share serves as a measure of company strength in the market. The growth-share matrix defines four types of SBUs: • Stars. Stars are high-growth, high-share businesses or products. They often need heavy investments to finance their rapid growth. Eventually, their growth will slow down, and they will turn into cash cows. • Cash cows. Cash cows are low-growth, high-share businesses or products. These established and successful SBUs need less investment to hold their market share. Thus, they produce a lot of cash that the company uses to pay its bills and to support other SBUs that need investment. • Question marks. Question marks are low-share business units in high-growth markets. They require a lot of cash to hold their share, let alone increase it. Management has to think hard about which question marks it should try to build into stars and which should be phased out. • Dogs. Dogs are low-growth, low-share businesses and products. They may generate enough cash to maintain themselves but do not promise to be large sources of cash. The 10 yellow circles in the growth-share matrix (refer Figure 2.2) represent a company’s 10 current SBUs. The company has two stars, two cash cows, three question marks and three dogs. The areas of the circles are proportional to the SBU’s dollar sales. This company is in fair shape, although not in good shape. It wants to invest in the more-promising question marks to make them stars and to maintain the stars so

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Question mark

Cash cow

Dog

High

Low

High

Star

43

Low

MARKET GROWTH RATE

Chapter 2  Company and marketing strategy: Partnering to build customer engagement, value and relationships

RELATIVE MARKET SHARE

Figure 2.2  The BCG growth-share matrix

that they will become cash cows as their markets mature. Fortunately, the company has two good-sized cash cows. Income from these cash cows will help finance the company’s question marks, stars and dogs. The company should take some decisive action concerning its dogs and its question marks. Once it has classified its SBUs, the company must determine what role each will play in the future. One of four strategies can be pursued for each SBU. The company can (1) invest more in the business unit in order to build its share. Or it can (2) invest just enough to hold the SBU’s share at the current level. It can (3) harvest the SBU, milking its short-term cashflow, regardless of the long-term effect. Finally, the company can (4) divest the SBU by selling it or phasing it out and using the resources elsewhere. As time passes, SBUs change their positions in the growth-share matrix. Many SBUs start out as question marks and move into the star category if they succeed. They later become cash cows as market growth falls, then finally die off or turn into dogs towards the end of their life cycle. The company needs to add new products and units continuously so that some of them will become stars and, eventually, cash cows that will help finance other SBUs.

Problems with matrix approaches While the BCG and other formal methods revolutionised strategic planning, such centralised approaches have limitations: they can be difficult, time consuming and costly to implement. Management may find it difficult to define SBUs and measure market share and growth. In addition, these approaches focus on classifying current businesses, but provide little advice for future planning. Because of such problems, many companies have dropped formal matrix methods in favour of more customised approaches that better suit their specific situations. Moreover, unlike former strategic planning efforts that rested mostly in the hands of senior managers at company headquarters, today’s strategic planning has

Managing the business portfolio: Most people think of Disney as theme parks and wholesome family entertainment. However, over the past two decades, it has become a sprawling collection of media and entertainment businesses that requires big doses of the famed ‘Disney Magic’ to manage. Martin Beddall/Alamy

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product/market expansion grid

A portfolio-planning tool for identifying company growth opportunities through market penetration, market development, product development or diversification.

market penetration

Company growth by increasing sales of current products to current market segments without changing the product.

market development

Company growth by identifying and developing new market segments for current company products.

been decentralised. Increasingly, companies are placing responsibility for strategic planning in the hands of cross-functional teams of divisional managers who are close to their markets. Let us consider The Walt Disney Company. Most people think of Disney as theme parks and wholesome family entertainment. But, in the mid-1980s, Disney set up a powerful, centralised strategic planning group to guide the company’s direction and growth. Over the next two decades, the strategic planning group turned The Walt Disney Company into a huge and diverse collection of media and entertainment businesses. The sprawling Disney grew to include everything from theme resorts and film studios (Walt Disney Pictures, Touchstone Pictures, Hollywood Pictures, Pixar Animation and Marvel Studios) to media networks (ABC plus Disney Channel, ESPN, A&E, History Channel and half a dozen others) to consumer products (from apparel and toys to interactive games) and a cruise line. The newly transformed company proved difficult to manage and performed unevenly. To improve company performance, Disney disbanded the centralised strategic planning unit, decentralising its functions to Disney division managers. For example, although carefully coordinated with other Disney units, in many respects ESPN runs autonomously. As a result of such decisions, The Walt Disney Company retains its position at the head of the world’s media conglomerates. And even through the recently uneven economy, Disney’s sound strategic management of its broad mix of businesses, plus a touch of the famed ‘Disney magic’, has helped it fare better than rival media companies.7

Developing strategies for growth and downsizing Beyond evaluating current businesses, designing the business portfolio involves finding businesses and products the company should consider in the future. Companies need growth if they are to compete more effectively, satisfy their stakeholders and attract top talent. At the same time, an organisation must be careful not to make growth itself an objective. The company’s objective must be to manage ‘profitable growth’. Marketing has the main responsibility for achieving profitable growth for the company. Marketing needs to identify, evaluate and select market opportunities and lay down strategies for capturing them. One useful device for identifying growth opportunities is the product/market expansion grid, shown in Figure 2.3.8 To see how the product/market expansion grid works, let us apply it to fashion house Sass & Bide. As a first step, the company might consider whether it can achieve deeper market penetration – that is, by making more sales without changing its original product lines. It can spur growth through marketing mix improvements – adjustments to its product design, advertising, pricing and distribution efforts. For example, Sass & Bide might offer an ever-increasing range of styles and colours in its original apparel lines. Second, Sass & Bide might consider possibilities for market development – identifying and developing new markets for its current products. Sass & Bide could review new demographic markets. For instance, the company continues to expand internationally, bringing its products to more young women in Japan and Asia and moving further beyond its Australasian and UK markets using its e-Boutique and stockists.

EXISTING PRODUCTS

NEW PRODUCTS

EXISTING MARKETS

Market penetration

Product development

NEW MARKETS

Market development

Diversification

Figure 2.3  The product/market expansion grid

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Third, Sass & Bide could consider product development – offering modified or new products to current markets. For example, Sass & Bide might add vie denims to its current range of vie leggings and T-shirts. Finally, Sass & Bide might consider diversification – starting up or buying businesses outside of its current products and markets. For example, it could move into performance leisurewear or begin making and marketing Sass & Bide shoes. When diversifying, companies must be careful not to overextend their brands’ positioning. Companies must develop strategies not only for growing their business portfolios, but also for downsizing them. There are many reasons that a firm might want to abandon products or markets. The firm may have grown too fast or entered areas where it lacks experience. This can occur when a firm enters too many international markets without the appropriate research, or when it introduces new products that do not offer superior customer value. The market environment might change, making some of the company’s products or markets less profitable. For example, in difficult economic times, many firms prune out weaker, less-profitable products and markets in order to focus their more limited resources on the strongest ones. Finally, some products or business units simply age and die. When a firm finds brands or businesses that are unprofitable or that no longer fit its overall strategy, it must carefully prune, harvest or divest them. Weak businesses usually require a disproportionate amount of management attention. Managers should focus on promising growth opportunities, not fritter away energy trying to salvage fading ones.

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product development

Company growth by offering modified or new products to current market segments

diversification

Company growth through starting up or acquiring businesses outside the company’s current products and markets.

Planning marketing: Partnering to build customer relationships (pp. 45–47) The company’s strategic plan establishes what kinds of businesses the company will operate and its objectives for each. Then, within each business unit, more detailed planning takes place. The main functional departments in each unit – marketing, finance, accounting, purchasing, operations, information systems, human resources and others – must work together to accomplish strategic objectives. Marketing plays a key role in the company’s strategic planning in several ways. First, it provides a guiding philosophy – the marketing concept – which suggests that company strategy should revolve around building profitable relationships with important consumer groups. Second, marketing provides inputs to strategic planners by helping to identify attractive market opportunities and by assessing the firm’s potential to take advantage of them. Finally, within individual business units, marketing designs strategies for reaching the unit’s objectives. Once the unit’s objectives are set, marketing’s task is to help carry them out profitably. Customer engagement and value are the key ingredients in the marketer’s formula for success. However, as we noted in Chapter 1, marketers alone cannot produce superior value for customers. Although marketing plays a leading role, it can be only a partner in attracting, keeping and growing customers. In addition to customer relationship management, marketers must also practise partner relationship management. They must work closely with partners in other company departments to form an effective internal value chain that serves the customer. Moreover, they must partner effectively with other companies in the marketing system to form a competitively superior external value delivery network. We now take a closer look at the concepts of a company value chain and a value delivery network.

Partnering with other company departments

Each company department can be thought of as a link in the company’s internal value chain.9 That is, each department carries out value-creating activities to design, produce, market, deliver and support the firm’s products. The organisation’s success depends not only on how well each department performs its work, but also on how well the various departments coordinate their activities.

value chain

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

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For example, the goal of major grocery and liquor retailers ALDI, Coles and Woolworths is to create customer value and satisfaction by providing shoppers with the products they want at the lowest possible prices. Marketers at these chains play an important role. They learn what customers need and ensure the stores’ shelves are stocked with the desired products at competitively low prices. They prepare advertising and merchandising programs and assist shoppers with customer service. Through these and other activities, the chain stores’ marketers help deliver value to customers. However, the marketing department needs help from the company’s other departments. For instance, Coles Supermarkets’ ability to offer the right products at low prices depends on the skill of its buyers and controllers in developing the needed suppliers and buying from them at low cost. Coles’ information technology (IT) department must provide fast and accurate information about which products are selling in each store. And its operations people must provide effective, low-cost merchandise handling. A company’s value chain is only as strong as its weakest link. Success depends on how well each department performs its work of adding customer value, and on how well the activities of various departments are coordinated. At Coles Supermarkets, if buyers cannot obtain the lowest prices from suppliers, or if operations cannot distribute merchandise at the lowest costs, then marketing cannot deliver on its promise of everyday low prices. Ideally, then, a company’s different functions should work in harmony to produce value for consumers. However, in practice, departmental relations are full of conflicts and misunderstandings. The marketing department takes the consumer’s point of view – but, when marketing tries to develop customer satisfaction, it can cause other departments to do a poorer job in their terms. Marketing department actions can increase purchasing costs, disrupt production schedules, increase inventories and create budget headaches. For example, if a loyalty program proves ineffective, this will impact on customer satisfaction and sales. Thus, the other departments may resist the marketing department’s efforts. Marketers must find ways to get all departments to ‘think consumer’ and to develop a smoothly functioning value chain. One marketing expert puts it this way: ‘True market orientation does not mean becoming marketing-driven; it means that the entire company obsesses over creating value for the customer and views itself as a bundle of processes that profitably define, create, communicate, and deliver value to its target customers . . . Everyone must do marketing regardless of function or department.’10 Thus, whether you are an accountant, operations manager, financial analyst, IT specialist or HR manager, you need to understand marketing and your role in creating customer value.

Partnering with others in the marketing system

value delivery network

The network made up of the company, suppliers, distributors and, ultimately, customers who partner with each other to improve the performance of the entire system.

In its quest to create customer value, the firm needs to look beyond its own internal value chain and into the value chains of its suppliers, distributors and, ultimately, its customers. Consider McDonald’s. People do not swarm to McDonald’s only because they love the chain’s hamburgers. Consumers flock to the McDonald’s system, not just to its food products. Throughout the world, McDonald’s’ finely tuned value delivery system delivers a high standard of QSCV – quality, service, cleanliness and value. McDonald’s is effective only to the extent that it successfully partners with its franchisees, suppliers and others to jointly create ‘our customers’ favourite place and way to eat’. More companies today are partnering with the other members of the supply chain – suppliers, distributors and, ultimately, customers – to improve the performance of the customer value delivery network. Increasingly in today’s marketplace, competition no longer takes place between individual competitors. Rather, it takes place between the entire value delivery networks created by these competitors. Thus, car maker Toyota’s performance against Holden and Ford depends on the quality of Toyota’s overall value delivery network compared to those of its competitors. Despite recalls of various models in recent times, Toyota and Honda have been renowned for making good cars. Toyota’s network provides very customersatisfying sales and service. This, on top of speed to market with innovative products – such as the Prius, and its new sports car, the 86, manufactured in partnership with Subaru – has led to Toyota’s global success.

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Cooperation and competition: The Toyota 86 is a well-reviewed sports car made in conjunction with Subaru, which markets the BRZ. Bloomberg via Getty Images

Linking the concepts Pause here for a moment to apply what you have read in the first part of this chapter. ● Why are we talking about company-wide strategic planning in a marketing book? What does strategic planning have to do with marketing? ● What are the BMW Group’s strategy and mission? What role does marketing play in helping BMW to accomplish its strategy and mission?

● What roles do other BMW Group’s departments play, and how can the company’s marketers partner with these departments to maximise overall customer value? What roles do BMW’s suppliers play?

Marketing strategy and the marketing mix (pp. 47–51) The strategic plan defines the company’s overall mission and objectives. Marketing’s role and activities are shown in Figure 2.4, which summarises the main activities involved in managing a customer-driven marketing strategy and the marketing mix. Customers stand in the centre. The goal is to create value for customers and build profitable customer relationships. Next comes marketing strategy – the marketing logic by which the company hopes to create this customer value and achieve these profitable relationships. The company decides which customers it will serve (segmentation and targeting) and how (differentiation and positioning). It identifies the total market, then divides it into smaller segments, selects the most promising segments, and focuses on serving and satisfying the customers in these segments. Guided by marketing strategy, the company designs an integrated marketing mix made up of factors under its control – product, price, placement logistics, promotion, people, process and physical evidence.

marketing strategy

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

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Part 1  Defining marketing and the marketing process

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Figure 2.4  Managing marketing strategies and the marketing mix

To find the best marketing strategy and mix, the company engages in marketing analysis, planning, implementation and control. Through these activities, the company watches and adapts to the actors and forces in the marketing environment. We now look briefly at each activity. Then, in later chapters, we discuss each one in more depth.

Customer value-driven marketing strategy

market segmentation

Analysing how a market is naturally broken into distinct groups of buyers who have different needs, characteristics or behaviours, and who might require tailored products or marketing programs.

As we emphasise throughout Chapter 1, to succeed in today’s competitive marketplace, companies need to be customer-centred. They must win customers from competitors, then keep and grow them by delivering greater value. But before it can satisfy customers, a company must first understand their needs and wants. Thus, sound marketing requires careful customer analysis. Companies know they cannot profitably serve all consumers in a given market – at least not all consumers in the same way. There are too many different kinds of consumers with too many different kinds of needs. And most companies are in a position to serve some segments better than they can serve others. Thus, each company must divide up the total market, choose the best segments and design strategies for profitably serving chosen segments. This process involves market segmentation, market targeting, differentiation and positioning.

Market segmentation The market consists of many types of customers, products and needs. The marketer has to determine which segments offer the best opportunities. Consumers can be grouped and served in various ways based on geographic, demographic, psychographic and behavioural factors. The process of analysing how a market is naturally broken into distinct groups of buyers who have different needs, characteristics or behaviours, and who might require tailored products or marketing programs, is called market segmentation.

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Every market has segments, but not all ways of segmenting a market are equally useful. For example, Panadol or Herron would gain little by distinguishing between low-income and high-income pain-reliever users if both respond the same way to marketing efforts for paracetamol analgesics. A market segment consists of consumers who respond in a similar way to a given set of marketing efforts. In the car market, for example, consumers who want the best-handling, high-performance car regardless of price make up one market segment. Consumers who care mainly about price and operating economy make up another segment. As became clear in Marketing in action 2.1, it would be difficult to make one car model that was the first choice of consumers in both market segments. Companies are wise to focus their efforts on meeting the distinct needs of individual market segments.

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market segment

A group of consumers who respond in a similar way to a given set of marketing efforts.

Market targeting After a company has defined market segments, it can enter one or many of these segments. Market targeting involves evaluating each market segment’s attractiveness and selecting one or more segments to enter. A company should target segments in which it can profitably generate the greatest customer value and sustain it over time. A company with limited resources might decide to serve only one or a few special segments or ‘market niches’. Such ‘nichers’ specialise in serving customer segments that major competitors overlook or ignore. For example, Ferrari sells fewer than 100 of its four-seater, V8-powered Californias in Australia each year, but at very high prices – at an eye-opening $400 000-plus. Most nichers are not quite so exotic. Yakult, maker of a fermented milk drink containing a beneficial bacterium called Lactobacillus casei Shirota strain, has found its niche as the nation’s market leader of this type of acidophilus that helps get rid of unwanted bacteria in the body. And although Logitech is only a fraction of the size of giant Microsoft, through skilful niching it dominates the PC mouse market, with Microsoft as its runner-up. Alternatively, a company might choose to serve several related segments – perhaps those with different kinds of customers who have the same basic wants. Or a large company, such as Toyota, might decide to offer a complete range of products to serve all market segments. Most companies enter a new market by serving a single segment and, if this proves successful, they add more segments. For example, Nike started with innovative running shoes for serious runners. Large companies eventually seek full market coverage. Nike now makes and sells a broad range of sports products for just about anyone and everyone. It has different products designed to meet the special needs of each segment it serves.

market targeting

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

Market differentiation and positioning Once a company has decided which market segments to enter, it must decide how it will differentiate its market offering for each targeted segment and what positions it wants to occupy in those segments. A product’s position is the place the product occupies relative to competitors’ products in consumers’ minds. Marketers want to develop unique market positions for their products. If a product is perceived to be exactly like others in the market, consumers would have no reason to buy it. Positioning is arranging for a product to occupy a clear, distinctive and desirable place in the minds of target consumers relative to competing products. As one positioning expert puts it, positioning is ‘why a shopper will pay a little more for your brand’.11 Thus, marketers plan positions that distinguish their products from competing brands and give them the greatest advantage in their target markets. Bunnings promises: ‘Lowest prices are just the beginning . . . ’; Kmart says it is: ‘Cutting the cost of living’; Telstra professes: ‘We strive to serve and know our customers better than anyone else’;12 whereas YouTube lets you ‘Broadcast Yourself’. You can ‘Think smarter, act faster’ with Berocca; and with GSK’s Nicabate aid to stop smoking, smokers are encouraged to ‘Pledge to quit’ and to join Facebook for more community support. While at Hungry Jack’s ‘Better Beef makes Better Burgers’, people at McDonald’s say, ‘I’m lovin’ it’. Such deceptively simple statements form the backbone of a product’s marketing strategy.

positioning

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

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differentiation

Differentiating the company’s market offering from that offered by competitors, to create superior customer value.

In positioning its product, a company first identifies possible customer value differences that provide competitive advantages upon which to build the position. The company can offer greater customer value either by charging lower prices than competitors or by offering more benefits to justify higher prices. But  if the company promises greater value, it must then deliver that greater value. Thus, effective positioning begins with differentiation – differentiating the company’s market offering from that offered by competitors so that it gives consumers more value. Once the company has chosen a desired position, it must take strong steps to deliver and communicate that position to target consumers. The company’s entire marketing program should support the chosen positioning strategy. For example, BMW designs its entire integrated marketing campaign – from television and print commercials to its online marketing – around its ‘The Ultimate Driving Machine’ positioning. McDonald’s does this integration on a global basis.

Developing an integrated marketing mix marketing mix

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

After deciding on its overall marketing strategy, the company is ready to begin planning the details of the marketing mix, one of the main concepts in modern marketing. The marketing mix is the set of controllable, tactical marketing tools that the company blends to produce the response it wants in the target market. The marketing mix consists of everything the company can do to influence the demand for its product. The many possibilities can be collected into groups of variables known as ‘the extended marketing mix’, which we touched on in Figure 1.5 in Chapter 1: product, price, placement logistics, promotion, people, process and physical evidence. • Product means the combination of goods and services that the company offers to the target market. Thus, a Ford Focus consists of nuts and bolts, spark plugs, pistons, headlights and thousands of other parts. Ford Motor Company offers several Focus models and dozens of optional features, such as self-assist parking. The car comes fully serviced and with a comprehensive warranty that is as much a part of the product as the tailpipe. • Price is the amount of money customers must pay to obtain the product. Ford calculates suggested retail prices that its dealers might charge for each Focus. But Ford dealers rarely charge the full sticker price. Instead, they negotiate the price with each customer, offering discounts, trade-in allowances and credit terms. These actions adjust prices for the current competitive and economic situations and bring them into line with the buyer’s perception of the car’s value. • Placement logistics includes company activities that make the product available to target customers and end-consumers. Ford partners with a large body of independently owned dealerships that sell the company’s many different models. Ford selects its dealers carefully and supports them strongly. The  dealers keep an inventory of Ford motor vehicles, demonstrate them to potential buyers, negotiate prices, close sales and service the cars after the sale. • Promotion means activities that communicate the merits of the product and persuade target customers to buy it. Ford spends millions each year on advertising in Australia and New Zealand to tell consumers about the company and its many products. Dealership salespeople assist potential buyers and persuade them that the Ford brand is the best car for them. Ford and its dealers offer special promotions – sales, cash rebates, low financing rates – as added purchase incentives. The subject of finance for motor vehicle purchases introduces the notion of financial services. As we discuss more fully in Chapter 7, services are intangible products. As such, they often require a variation in the marketing mix employed by service organisations. It is in this context that we briefly discuss three additional marketing mix variables. • People. Services are often people-based, such as when a service manager attends to a customer’s needs at a Ford service centre. Such service encounters can be highly variable. The variation may be because the organisation’s people lack motivation or have attitudinal issues, in which case the organisation needs to engage in internal marketing and perhaps provide additional training.

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• Process. When Ford Focus owners take their car in for service, or when people check-in or -out of airlines, hotels and motels, the process can be a satisfying experience, or one that causes the customer to vow never to return. Worse still, the latter customers may tell others of their poor experience, thereby negating the positive effects of any brand advertising. Marketers need to be involved in designing and monitoring the processes involved in buying and servicing any type of product. • Physical evidence. Often, it is necessary to manage customer and potential customer expectations, commencing with an explanation of the criteria to use when comparing products. This also applies when buying any major product for the first time. For example, what criteria might young parents adopt in order to compare day-care centres for their young child? Clearly, one cannot ask a very young child if she or he liked the food provided or to provide feedback on other aspects of the daycare centre. Arguably, however, there are many criteria, ranging from the qualifications of the staff to the modernity of the centre, among others. The same young parents must also learn which are the relevant criteria upon which to compare brands when buying their first washing machine and many other such products. We might argue that physical evidence is an important aspect when buying other products, such as decay-prevention toothpaste. But when might we realistically say that a child’s tooth decay has been prevented? It might be a decade or more later when we have the physical evidence to hand, by which time either the product was successful or it is now too late to do anything but visit the dentist for a filling or two. An effective marketing program blends all of the marketing mix elements into an integrated marketing program designed to achieve the company’s marketing objectives by delivering value to consumers. The marketing mix constitutes the company’s tactical tool kit for establishing strong positioning in target markets. There is another concern, however, that is valid. It holds that the focus on marketing mix elements takes the seller’s view of the market, not the buyer’s view. From the buyer’s viewpoint, in this age of customer value and relationships, the various Ps might be better described in terms of Cs, such as these four: customer solution, customer cost, convenience and communication.13 Thus, whereas marketers see themselves as selling products, customers see themselves as buying value or solutions to their problems. And customers are interested in more than just the price; they are interested in the total costs of obtaining, using and disposing of a product. Customers want the product and service to be as conveniently available as possible. Finally, they want two-way communication. Marketers would do well to think through the four Cs first and then build the marketing mix they use accordingly.

Managing the marketing effort (pp. 51–56) In addition to being good at the marketing in marketing management, companies also need to pay attention to the management. Managing the marketing process requires the four marketing management functions shown in Figure 2.5 – analysis, planning, implementation and control. The company first develops company-wide strategic plans and then translates them into marketing and other plans for each division, product and brand. Through implementation, the company turns the plans into actions. Control consists of measuring and evaluating the results of marketing activities and taking corrective action where needed. Finally, marketing analysis provides information and evaluations needed for all of the other marketing activities.

Marketing analysis Managing the marketing function begins with a complete analysis of the marketing organisation’s situation. The marketer should conduct a SWOT analysis, by which it evaluates the company’s overall strengths (S),

SWOT analysis

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

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Part 1  Defining marketing and the marketing process

ANALYSIS

Planning

Implementation

Control

Develop strategic plans

Carry out the plans

Measure results

Evaluate results Develop marketing plans Take corrective action

Figure 2.5  Managing marketing: Analysis, planning, implementation and control

weaknesses (W), opportunities (O) and threats (T) (see Figure 2.6). Strengths include internal capabilities, resources and positive situational factors that may help the company to serve its customers and achieve its objectives. Weaknesses include internal limitations and negative situational factors that may interfere with the company’s performance. Opportunities are favourable factors or trends in the external environment that the company may be able to exploit to its advantage. And threats are unfavourable external factors or trends that may present challenges to performance. The company should analyse its markets and marketing environment to find attractive opportunities and identify environmental threats. It should analyse company strengths and weaknesses, as well as current and possible marketing actions, to determine which opportunities it can best pursue. The goal is to match the company’s strengths to attractive opportunities in the environment, while eliminating or overcoming the

POSITIVE

S O Strengths

INTERNAL

EXTERNAL

NEGATIVE

W T Weaknesses

Internal capabilities that may help a company reach its objectives

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

Opportunities

Threats

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

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

Figure 2.6  SWOT analysis: Strengths (S), weaknesses (W), opportunities (O) and threats (T)

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weaknesses and minimising the threats. Marketing analysis provides inputs to each of the other marketing management functions. We discuss marketing analysis more fully in Chapter 3.

Marketing planning Through strategic planning, the company decides what it wants to do with each business unit. Marketing planning involves deciding on marketing strategies that will help the company attain its overall strategic objectives. A detailed marketing plan is needed for each business, product or brand. What does a marketing plan look like? Our discussion focuses on product or brand marketing plans. Table 2.2 outlines the main sections of a typical product or brand marketing plan. (See Appendix 2 for a sample marketing plan.) The marketing plan begins with an executive summary that briefly reviews major assessments, goals and recommendations. The main section of the plan presents a detailed SWOT analysis of the current marketing situation as well as potential threats and opportunities. The plan next states major objectives for the brand and outlines the specifics of a marketing strategy for achieving them. A marketing strategy consists of specific strategies for target markets, positioning, the marketing mix and marketing expenditure levels. It outlines how the company intends to create value for target customers

Table 2.2  Contents of a marketing plan Section

Purpose

Executive summary

Presents a brief summary of the main goals and recommendations of the plan for management review, helping top management to find the plan’s major points quickly. A table of contents should follow the executive summary.

Current marketing situation

Describes the target market and company’s position in it, including information about the market, product performance, competition and distribution. This section includes: • A market description, which defines the market and major segments, then reviews customer needs and factors in the marketing environment that may affect customer purchasing. • A product review, which shows sales, prices and gross margins of the major products in the product line. • A review of competition, which identifies the main competitors and assesses their market positions and strategies for product quality, pricing, distribution and promotion. • A review of marketing channels and logistics, which evaluates recent sales trends and other developments in the major distribution channels.

Threats and ­opportunities analysis

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

Objectives and issues

States the marketing objectives the company would like to attain during the plan’s term and discusses key issues that will affect their attainment.

Marketing strategy

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

Action programs

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

Budgets

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

Controls

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

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in order to capture value in return. In this section, the planner explains how each strategy responds to the threats, opportunities and critical issues spelled out earlier in the plan. Additional sections of the marketing plan lay out an action program for implementing the marketing strategy along with the details of a supporting marketing budget. The last section outlines the controls that will be used to monitor progress, measure return on marketing investment and take corrective action.

Marketing implementation marketing implementation

The process that turns marketing strategies and plans into marketing actions in order to accomplish strategic marketing objectives.

Planning good strategies is only a start towards successful marketing. A brilliant marketing strategy counts for little if the company fails to implement it properly. Marketing implementation is the process that turns marketing plans into marketing actions in order to accomplish strategic marketing objectives. Whereas marketing planning addresses the what and why of marketing activities, implementation addresses the who, where, when and how. Many managers think that ‘doing things right’ (implementation) is as important as, or even more important than, ‘doing the right things’ (strategy). The fact is that both are critical to success, and companies can gain competitive advantages through effective implementation. One firm can have essentially the same strategy as another, yet win in the marketplace through faster or better execution. Still, implementation is difficult – it is often easier to think up good marketing strategies than it is to carry them out. In an increasingly connected world, people at all levels of the marketing system must work together to implement marketing strategies and plans. At Ryobi, for example, marketing implementation for the company’s power tools, garden tools and other home products requires day-to-day decisions and actions by thousands of people both inside and outside the organisation. Marketing managers make decisions about target segments, branding, packaging, pricing, promoting and distributing. They talk with engineering about product design, with manufacturing about production and inventory levels, and with finance about funding and cashflows. They also connect with outside people, such as advertising agencies to plan ad campaigns and the news media to obtain publicity support. The salesforce urges Bunnings, Mitre 10 and other retailers to advertise Ryobi products, provide ample shelf space and use company displays.

Marketing department organisation Marketing organisations must design a marketing organisation that can carry out marketing strategies and plans. If the company is very small, one person might do all of the research, selling, advertising, customer service and other marketing work. As the company expands, a marketing department emerges to plan and carry out marketing activities. In large companies, this department contains many specialists, comprising product and market managers, sales managers and salespeople, market researchers, advertising experts, web designers and social media specialists, among others. To lead such large marketing organisations, many companies have a chief marketing officer (or CMO) position. The CMO heads up the company’s entire marketing operation and represents marketing on the company’s top management team. The CMO position puts marketing on an equal footing with other C-level executives, such as the chief executive officer (CEO) and the chief financial officer (CFO). As a member of top management, the CMO’s role is to champion the customer’s cause – to be the ‘chief customer officer’. To that end, British Airways even went so far as to rename its top marketing position as Director of Customer Experience.14 Modern marketing departments can be arranged in several ways. The most common form of marketing organisation is the functional organisation. Under this organisation, different marketing activities are headed by a functional specialist – a sales manager, advertising manager, marketing research manager, customer service manager or new product manager. A company that sells across the country or internationally often uses a geographic organisation. Companies with many very different products or brands often create a product management organisation. Using this approach, a product manager develops

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and implements a complete strategy and marketing program for a specific product or brand. Product management first appeared at Procter & Gamble (P&G) in 1929. A new company product, Camay soap, was not doing well and a young P&G executive was assigned to give his exclusive attention to developing and promoting this product. He was successful, and the company soon extended this approach to other products.15 Since then, many firms, especially consumer-products companies, have set up product management organisations. For companies that sell one product line to many different types of markets and customers that have different needs and preferences, a market or customer management organisation Marketing planning: Marketers must continually plan their analysis, might be best. A market management organisation is similar implementation and control activities. to the product management organisation. Market managers © Nyul | 123RF are responsible for developing marketing strategies and plans for their specific markets or customers. This system’s main advantage is that the company is organised around the needs of specific customer segments. Many companies develop special organisations to manage their relationships with large customers. For example, companies such as Procter & Gamble and Black & Decker have large teams, or even whole divisions, set up to serve large customers such as Coles, Woolworths, ALDI or Kmart. Large companies that produce many different products flowing into many different geographic and customer markets usually employ some combination of the functional, geographic, product and market organisation forms. Marketing organisation has become an increasingly important issue in recent years. More and more, companies are shifting their brand management focus towards customer management – moving away from managing only product or brand profitability and towards managing customer profitability and customer equity. They think of themselves not as managing portfolios of brands but as managing portfolios of customers. And rather than managing the fortunes of a brand, they see themselves as managing customer– brand experiences and relationships. This is particularly the case in direct and digital marketing, which we discuss in Chapter 13.

Marketing control Because many surprises occur during the implementation of marketing plans, marketers must practise constant marketing control – evaluating the results of marketing strategies and plans, and taking corrective action to ensure that objectives are attained. Marketing control involves four steps. Management first sets specific marketing goals. It then measures its performance in the marketplace and evaluates the causes of any differences between expected and actual performance. Finally, management takes corrective action to close the gaps between its goals and its performance. This may require changing the action programs or even changing the goals. Operating control involves checking ongoing performance against the annual plan and taking corrective action when necessary. Its purpose is to ensure that the company achieves the sales, profits and other goals set out in its annual plan. It also involves determining the profitability of different products, territories, markets and channels. Strategic control involves looking at whether the company’s basic strategies are well matched to its opportunities. Marketing strategies and programs can quickly become outdated, and each company should periodically reassess its overall approach to the marketplace.

marketing control

Measuring and evaluating the results of marketing strategies and plans and taking corrective action to ensure that objectives are achieved.

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Part 1  Defining marketing and the marketing process

Linking the concepts Let’s take a break at this point and reflect on the contents of a marketing plan. You might like to dig more deeply into the various sections by examining the sample marketing plan in Appendix 2.

The marketing plan set out in Appendix 2 is for SonicaTab – makers of smartphones and tablets.

Measuring and managing return on marketing investment (pp. 56–58)

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

Marketing managers must ensure their marketing dollars are being well spent. In the past, many marketers spent freely on big, expensive marketing programs and flashy advertising campaigns, often without thinking carefully about the financial returns on their spending. Their goal was often a general one – to ‘build brands and consumer preference’. They believed that marketing produces intangible creative outcomes, which do not lend themselves readily to measures of productivity or return. In today’s tighter economic times, however, all that has changed. The free-spending days have been replaced by a new era of marketing measurement and accountability, as the marketing analytics spotlights in Appendix 3 illustrate. More than ever, today’s marketers are being held accountable for linking their strategies and tactics to measurable marketing performance outcomes. One important marketing performance measure is return on marketing investment. Return on marketing investment (or marketing ROI ) is the net return from a marketing investment divided by the costs of the marketing investment. It measures the profits generated by investments in marketing activities. Marketing returns can be difficult to measure. In measuring financial ROI, both the R and the I are uniformly measured in dollars. For example, when buying a piece of equipment, the productivity gains resulting from the purchase are fairly straightforward. But there is as yet no consistent definition of marketing ROI. For instance, returns such as advertising and brand-building impact are not easily put into dollar returns. In one recent survey, 64 per cent of senior marketers rated accountability as a top three concern, well ahead of the 50 per cent who rated the hot topic of integrated marketing communications as a top concern. However, another survey found that only about 36 per cent of chief marketing officers felt able to quantitatively prove the short-term impact of marketing spending on their business; only about 29 per cent felt able to prove long-term impact. Another CMO survey showed that a startling 57 per cent of CMOs do not take ROI measures into account when setting their marketing budgets, and an even more startling 28 per cent said they base their marketing budgets on ‘gut instinct’. Clearly, marketers must think more strategically about the marketing performance returns of their marketing spending.16 A company can assess return on marketing investment in terms of standard marketing performance measures, such as brand awareness, sales or market share. Many companies are assembling such measures into marketing dashboards – meaningful sets of marketing performance measures in a single display used to monitor strategic marketing performance (see Figure 2.7). Just as automobile dashboards present drivers with details on how their cars are performing, the marketing dashboard gives marketers the detailed measures they need to assess and adjust their marketing strategies.17 Increasingly, however, beyond standard performance measures, marketers are using customercentred measures of marketing impact, such as customer acquisition, customer retention, customer lifetime value and customer equity. These measures capture not just current marketing performance but also future performance resulting from stronger customer relationships. Figure 2.8 views marketing expenditures as investments that produce returns in the form of more profitable customer relationships.18 Marketing investments result in improved customer value and satisfaction, which in turn increase

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2,832 $m enterprise value

445 $m brand value

16% BV/EV

Summary

272

Investment % change 3%

Equity % change 3%

279

2756

2832

7.5 $m

$m

7.3 $m

Value % change 3%

Investment Staff investment

Sales & Marketing

Store investment

18

170 % from previous % of budget % of revenue 2016/17

Q2 QUARTERLY

TOTAL

90 $m

177

27 $m

$m

215

18

4% 82% 5%

% from previous % of budget % of revenue q1 q2 q3 q4 quarterly all quarters total central eastern northern western

84 0% 67% 5%

% from previous % of budget % of revenue

total spirits beer wine other all products

0% 93% 5%

Regional summary Estimated enterprise value

Brand value

BV/BBV

Brand strength

678 $m

109 $m

16%

83

653 $m

101 $m

15%

81

Central

Eastern 695 $m

106 $m

15%

86

663 $m

94 $m

14%

81

all regions

TOTAL

84

Northern 745 $m

95 $m

13%

76

761 $m

106 $m

14%

81

Western 714 $m

135 $m

19%

86

679 $m

131 $m

19%

81

Figure 2.7  Brand Finance® dashboard Source: Brand Finance® dashboard, courtesy Brand Finance Plc, with adaptations

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Part 1  Defining marketing and the marketing process

MARKETING INVESTMENTS

MARKETING RETURNS Increased customer attraction

Improved customer value and satisfaction

Increased customer retention

Increased customer lifetime values and customer equity

Cost of marketing investment

RETURN ON MARKETING INVESTMENT

Figure 2.8  Return on marketing investment Source: Adapted from Roland T Rust, Katherine N Lemon & Valerie A Zeithaml, ‘Return on marketing: Using consumer equity to focus marketing strategy’, Journal of Marketing, January 2004, 68(1), Figure 1, p. 112.

customer attraction and retention. This increases individual customer lifetime values and the firm’s overall customer equity. Increased customer equity, in relation to the cost of the marketing investments, determines marketing ROI. Regardless of how it is defined or measured, the concept of return on marketing investment is here to stay. ‘The marketing accountability revolution must continue,’ says one marketer. ‘In today’s demanding business environment, companies must know the impact of their marketing investments.’ Adds another, ‘You gotta be accountable.’19

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Student Learning Centre

59

Marketers alone cannot produce superior value for customers. Marketers must practise partner relationship management, working closely with partners in other departments to form an effective value chain that serves the customer. And they must also partner effectively with other companies in the marketing system to form a competitively superior value delivery network.

In Chapter 1, we defined marketing and outlined the steps in the marketing process.

Learning Objective 4. Describe the elements of a customer value-driven marketing strategy and mix, and the forces that influence it. (pp. 47–51)

In this chapter, we examined organisation-wide strategic planning and the role of

Customer value and relationships are at the centre of marketing strategy

marketing in the organisation. Then, we looked more deeply into marketing strategy

and programs. Through market segmentation, targeting, differentiation and

and the extended marketing mix, and reviewed the main marketing management

positioning, the company divides the total market into smaller segments, selects

functions. So, you have now had a pretty good overview of the fundamentals of

segments it can best serve and decides how it wants to bring value to target

modern marketing. In future chapters, we expand on these fundamentals.

customers in the selected segments. It then designs an integrated marketing mix

Reviewing the learning objectives

Learning Objective 1. Explain company-wide strategic planning and its four steps. (pp. 38–41)

to produce the response it wants in the target market. The marketing mix consists of product, price, place and promotion decisions, and taking account of people, process and physical evidence, particularly in service encounters.

Strategic planning sets the stage for the rest of the company’s planning. Marketing contributes to strategic planning, and the overall plan defines marketing’s role in the company. Strategic planning involves developing a strategy for long-run survival and growth. It consists of four steps: (1) defining the company’s mission, (2) setting objectives and goals, (3) designing a business portfolio and (4) developing functional plans. The company’s mission should be market-oriented, realistic, specific, motivating and consistent with the market environment. The mission is then transformed into detailed supporting goals and objectives, which in turn guide decisions about the business portfolio. Then each business and product unit must develop detailed marketing plans in line with the company-wide plan.

Learning Objective 2. Discuss how to design business portfolios and develop growth strategies. (pp. 41–45) Guided by the company’s mission statement and objectives, management plans its business portfolio, or the collection of businesses and products that make up the company. The firm wants to produce a business portfolio that best fits its strengths and weaknesses to opportunities in the environment. To do this, it must analyse and adjust its current business portfolio and develop growth and downsizing strategies for adjusting the future portfolio. The company might use a formal portfolio-planning method. But many companies are now designing morecustomised portfolio-planning approaches that better suit their unique situations.

Learning Objective 3. Explain marketing’s role in strategic planning and how marketing works with its partners to create and deliver customer value. (pp. 45–47) Under the strategic plan, the main functional departments – marketing, finance,

Learning Objective 5. List the marketing management functions, including the elements of a marketing plan, and discuss the importance of measuring and managing return on marketing investment. (pp. 51–58) To find the best strategy and mix and to put them into action, the company engages in marketing analysis, planning, implementation and control. The main components of a marketing plan are the executive summary, current marketing situation, threats and opportunities, objectives and issues, marketing strategies, action programs, budgets and controls. To plan good strategies is often easier than to carry them out. To be successful, companies must also be effective at implementation – turning marketing strategies into marketing actions. Marketing departments can be organised in one or a combination of ways: functional marketing organisation, geographic organisation, product management organisation or market management organisation. In this age of customer relationships, more and more companies are now changing their organisational focus from product or territory management to customer relationship management. Marketing organisations carry out marketing control, both operating control and strategic control. Marketing managers must ensure their marketing dollars are being well spent. In a tighter economy, today’s marketers face growing pressures to show they are adding value in line with their costs. In response, marketers are developing better measures of return on marketing investment. Increasingly, they are using customer-centred measures of marketing impact as a key input into their strategic decision making.

accounting, purchasing, operations, information systems, human resources and

Discussion questions

others – must work together to accomplish strategic objectives. Marketing

❶ Marketing planning. When preparing marketing plans, some of the

plays a key role in the company’s strategic planning by providing a marketing

components are considered to be more important than others. Given this,

concept philosophy and inputs regarding attractive market opportunities. Within

discuss whether there is justification for leaving out some components

individual business units, marketing designs strategies for reaching the unit’s

from the marketing plan. (Learning Objectives 1, 3 and 4) (AACSB:

objectives and helps to carry them out profitably.

Communication; Reflective Thinking)

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❷ Market turbulence. Sometimes the marketplace and products change so quickly there is no time to develop marketing plans. Businesses, such as

company might use each strategy to grow. (Learning Objective 2) (AACSB: Communication; Analytical Thinking; Reflective Thinking)

BMW (see Marketing in action 2.1), face such market turbulence. Discuss

❷ Marketers are increasingly held accountable for demonstrating the marketing

whether businesses should simply ignore the marketing planning process

success of their companies. Research the various marketing performance

and just get on with meeting their competitors head on in marketing

measures, in addition to those described in this chapter and in Appendix 3,

their offerings. (Learning Objectives 2, 3 and 4) (AACSB: Communication;

used by marketers to measure marketing performance. Write a brief report

Analytical Thinking; Reflective Thinking)

of your findings. (Learning Objective 5) (AACSB: Communication; Analytical

❸ Marketing plans and small businesses. Do you agree or disagree with the

Thinking; Reflective Thinking)

following statement by a marketing commentator: ‘Most small businesses

❸ Explain the role of a chief marketing officer (CMO). Learn more about this

don’t prepare marketing plans because the information needed to complete

C-level executive position and source an article that describes the importance

them is too difficult to gather’? Justify your answer. What other reasons (if

of this position, the characteristics of an effective CMO and any issues

any) could there be why small businesses might not complete marketing

surrounding this position. (Learning Objective 5) (AACSB: Communication;

plans? (Learning Objectives 1, 2 and 3) (AACSB: Communication; Analytical

Analytical Thinking; Reflective Thinking)

Thinking; Reflective Thinking) ❹ Strategic business unit planning. Many organisations are restructuring as smaller SBUs. Does this action make it any easier to develop marketing

Navigating the key terms

plans? Justify your answer. What other reasons (if any) could explain why

Learning Objective 1

value delivery network (p. 46)

mission statement (p. 38)

Learning Objective 4

this is happening? (Learning Objectives 2, 3 and 4) (AACSB: Communication; Analytical Thinking; Reflective Thinking) ❺ Marketing planning process. There is often confusion between the marketing plan and the marketing planning process. Elaborate on each, and discuss why they are important. (Learning Objectives 1, 2 and 3) (AACSB: Communication; Analytical Thinking; Reflective Thinking) ❻ Business plans versus marketing plans. Is there a difference between a business plan and a marketing plan? Be sure to explain the reasoning behind your answer. (Learning Objectives 1, 2 and 3) (AACSB: Communication; Analytical Thinking; Reflective Thinking)

strategic business units (SBUs) (p. 39) strategic planning (p. 38)

❶ In a small group, give an example of how Red Bull energy-drink makers can grow by applying each of the product/market expansion grid strategies. Be  sure to name and describe each strategy and discuss how the

market segment (p. 49)

Learning Objective 2

market segmentation (p. 48)

business portfolio (p. 41)

market targeting (p. 49)

diversification (p. 45)

marketing mix (p. 50)

growth-share matrix (p. 42)

marketing strategy (p. 47)

market development (p. 44)

positioning (p. 49)

market penetration (p. 44)

Learning Objective 5

portfolio analysis (p. 42)

Critical thinking exercises

differentiation (p. 50)

product development (p. 45) product/market expansion grid (p. 44)

Learning Objective 3 value chain (p. 45)

marketing control (p. 55) marketing implementation (p. 54) return on marketing investment (marketing ROI) (p. 56) SWOT analysis (p. 51)

Mini cases 2.1  Marketing strategy Online, mobile and social media marketing: Google’s mission Founded in 1998 as an internet search engine, Google’s mission statement

IoT operating system, dubbed Brillo (after the Brillo scrubbing pad because

remains the same to this day: to ‘organise the world’s information and make

it is a scrubbed-down version of its Android operating system), targeted

it universally accessible and useful’. Google is certainly successful, with

to developers of smart products connected to the internet, such as ovens,

revenues growing from US$3.2 billion in 2002 to US$74.5 billion in 2015,

thermostats and even toothbrushes. It has also developed Weave, the

90 per cent of which comes from advertisers. Google is expanding rapidly

corresponding IoT language that will allow smart products to speak to each

into other areas well beyond its search engine, such as self-driving cars,

other. Perhaps one day you will be sitting in your Google self-driving car,

smart contact lenses that measure a person’s blood sugar levels, internet-

streaming the news, checking your blood sugar and cooling your home by

bearing balloons to create internet hotspots anywhere on Earth, and even

turning down your thermostat on the way home from work.

magnetic nanoparticles to search for disease within the human bloodstream.

❶ Conduct research on Google to learn more about its products and services.

Google has been on a buying frenzy recently, purchasing security, biotech

Some say the time has come for Google to create a new mission statement.

20

and robotic companies in a quest to capitalise on the Internet of Things (IoT)

Do you agree? Explain. (AACSB: Communication; Reflective Thinking)

phenomenon. Experts predict there will be 25 million connected devices in

❷ Create a new mission statement for Google that will take it through the

our homes and workplaces by 2020. Google recently announced its new

rest of this century. (AACSB: Communication; Reflective Thinking)

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2.2  Customer focus Maccas’ mission More than half a century ago, Ray Kroc, a 52-year-old salesman of milkshake-mixing machines, set out on a mission to transform the way Americans eat and, in the process, influenced many people’s eating habits around the world. In 1955, Kroc discovered a string of seven restaurants Helen Sessions/Alamy

owned by Richard and Maurice McDonald. He saw the McDonald brothers’ fast-food concept as a perfect fit for America’s increasingly on-the-go, timesqueezed, family-oriented lifestyles. Kroc bought the small chain for US$2.7 million and the rest is history. From the start, Kroc preached a motto of QSCV – quality, service, cleanliness and value. These goals became mainstays in McDonald’s’ customer-focused mission statement. Applying these values, the company

of its ‘Premium’ salads. The company also launched a multifaceted

perfected the fast-food concept – delivering convenient, good-quality food

education campaign that underscores the importance of eating right and

at affordable prices.

staying active.

McDonald’s grew quickly to become the world’s largest ‘fast-feeder’.

‘Maccas’, as the chain is colloquially known in Australia and New

The fast-food giant’s more than 32 000 restaurants worldwide now serve

Zealand, consistently outperforms its competitors. Updates to its restaurants

64 million customers each day, racking up system-wide sales of more than

and the constant introduction of innovations, such as salads, snack wraps,

US$77 billion annually. Arguably, the ‘golden arches’ are one of the world’s

Angus Burgers, McCafé coffees and smoothies, have customers and the

most familiar symbols and, other than Santa Claus, no character in the world

company alike humming the chain’s catchy jingle, ‘I’m lovin’ it’.

is more recognisable than Ronald McDonald.

❶ Does McDonald’s’ marketing strategy of innovating via its menus

After many ups and downs that saw the company actually losing

differentiate it from (say) Hungry Jack’s? Explain your answer. (Learning

money, in 2003 McDonald’s adopted a new strategic blueprint which

Objectives 3 and 4) (AACSB: Communication; Reflective Thinking)

it called its ‘Plan to Win’. The new mission was ‘to be our customers’

❷ Research the positioning statements for each of the major fast-food

favourite place to eat’. As part of the strategic plan, the restaurants were

chains. In what way do their advertising lines, such as ‘I’m lovin’ it’,

redecorated and, more importantly, the menu was reworked by a well-

position the brands differently? (Learning Objectives 3 and 4) (AACSB:

recognised chef, resulting in many innovations, including the introduction

Communication; Reflective Thinking)

2.3  Marketing analytics at work Dick Smith’s demise: Poor strategy? As anyone who bought electronic components, CB radios and computers in

meaner retail group, stripped the inventory out of the business, which

the 1970s and ’80s knows, Dick Smith was a solid player in that sphere of

Dick Smith management then replaced with the ‘wrong’ stock, comprising

retailing, firstly in Australia and then in New Zealand. Having been founded

many generic house-brand electronic products. Moreover, supplier rebates

for $610 by then-young electronics technician Dick Smith in Sydney in 1968

were used to inflate earnings. This sent the company into a tailspin as the

as a car-radio installation business, the store group went on to become a

company’s bankers and creditors circled ominously.

trusted iconic brand in consumer electronics, with sales revenue of $1.2 billion in the 2014 financial year.

Competitor Gerry Harvey was one critic of the company’s strategy, putting it this way: ‘We virtually don’t do any of that sort of [generic branded]

Woolworths bought a 60 per cent shareholding in the company in

stuff. I think there is room for some of that but if you are out there trying to

1981, then moved to 100 per cent ownership in 1983. The shareholding

establish a brand name with your company, you are better off doing it with

cost Woolworths $25 million. The company set up online access in 2000,

other brand names as your partner . . . When you go to house brands, you are

including an eBay store. However, Woolworths could not seem to wring

basically looking for margin and mostly looking at inferior products and you

shareholder value from their acquisition.

are mostly trying to sell it as being superior product, which it mostly isn’t.’

Woolworths sold Dick Smith to private equity firm, Anchorage Capital,

From holding the wrong stock, Dick Smith issued gift vouchers before

in 2012 for $94 million. Anchorage turned around and floated the company

Christmas 2015 in a fire sale, which they were unable to honour as creditors

on the stock exchange for five times their purchase price in 2014, or

were clamouring for payment. This caused social media outrage among

some $500 million. There are views that Anchorage, in making a leaner,

consumers, which added to the negativity already being expressed in

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Part 1  Defining marketing and the marketing process

2.3  Marketing analytics at work continued leveraging our existing systems and infrastructure, we are in the best position out of any retailer in Australia and New Zealand to run Dick Smith as an online only retailer. The Dick Smith online offering will soon be better

Richard Milnes/Alamy Live News

than ever.’21 ❶ What marketing strategy options existed for Dick Smith when rebuilding the Dick Smith retail brand after being floated by Anchorage Capital in 2014? (Learning Objectives 1, 2, 3 and 4) (AACSB: Communication; Reflective Thinking) ❷ What methods would you have used to assess consumers’ perceptions of Dick Smith’s positioning relative to retail competitors prior to the company’s demise? (Learning Objectives 1, 2, 3 and 4) (AACSB: Communication; Reflective Thinking) ❸ What part does inventory play in the strategy(ies) you put forward consumers’ dissatisfaction with fulfilment from the company’s eBay store. The fire sale did not move the requisite stock levels. Larger suppliers to

for rebuilding the Dick Smith brand? (Learning Objectives 3, 4 and 5) (AACSB: Communication; Reflective Thinking)

the company, such as Apple and Samsung, had already moved to cash-on-

❹ What method would you have used to analyse inventory turns?

delivery terms, but the many smaller suppliers suddenly found themselves

Assuming sales of $1.2 billion in the 2014 financial year (FY), and

as creditors as receivers took control of the company’s 393 outlets at the

a beginning inventory of $400 000 and an end-of-year inventory of

behest of the company’s bankers.

$700 000, calculate the inventory turns in FY 2014. How many days’

In early 2016, online retailer Ruslan Kogan purchased Dick Smith’s

worth of inventory would Dick Smith be holding in this example?

online retail business, including goodwill and brand, for an undisclosed

(Hint: See Appendix 3.) (Learning Objectives 3, 4 and 5) (AACSB:

sum. Kogan commented after the acquisition: ‘We do know that by

Communication; Reflective Thinking)

2.4 Ethical reflection Making the figures tell a story You are chief marketing officer (CMO) of the international division of your

investment in marketing is not usually possible until after three or four years

company. Your division has made a number of unsuccessful attempts to

of operations in that market. You are firmly convinced that your company

penetrate several Asian markets. Your board of directors has asked you to

will achieve very large profits and sales in the Chinese market in the long

submit a new international marketing plan. You know that the plan must

term. As you are the only executive with international experience and your

show a return on marketing investment in year 1 and profit from year 2

reputation is excellent with all the board members, they will accept your

onwards for it to be acceptable to the board. Otherwise, they will close

recommendation.

your division, resulting in the loss of your position and the jobs of your staff.

Would you ‘sweeten’ the figures to show profitability in the short term

Your investigations of the Asian markets clearly identify China as being

to save your division and your job from extinction, or would you present a

by far the best prospect for your company’s products, but the experience of

realistic plan showing losses in the short term and profits in the long term?

almost all companies entering the Chinese market indicates that a return on

References

1 For more on Pinterest, see , accessed April 2016. 2 See World Vision’s mission statement, , accessed April 2016. 3 For many examples of mission statements for various types of organisations, see , accessed April 2016; and , accessed April 2016. 4 Bob Lutz quotations sourced from Diana T Kurylko, ‘Lutz helped create “Driving Machine” tag line’, Automotive News, 7 March 2016.

5 Sourced from ‘Strategy NUMBER ONE’, , accessed April 2016. 6 The following discussion is based in part on information found at , accessed April 2016. 7 See ‘Annual reports’ at , accessed April 2016. 8 H Igor Ansoff, ‘Strategies for diversification’, Harvard Business Review, September– October 1957, pp. 113–24. 9 See Michael E Porter, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press: New York, NY, 1985; and Michael E Porter, ‘What is strategy?’, Harvard Business Review, November–December 1996, pp. 61–78. Also see ‘The value

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Chapter 2  Company and marketing strategy: Partnering to build customer engagement, value and relationships

chain’, , accessed June 2015; and Philip Kotler & Kevin Lane Keller, Marketing Management, 15th edn, Prentice Hall: Hoboken, NJ, 2016, chapter 2. 10 Nirmalya Kumar, ‘The CEO’s marketing manifesto’, Marketing Management, November– December 2008, pp. 24–9; and Tom French, Laura LaBerge & Paul Magill, ‘We’re all marketers now’, McKinsey Quarterly, July 2011, . 11 Jack Trout, ‘Branding can’t exist without positioning’, Advertising Age, 14 March 2005, p. 28. 12 See , accessed April 2016. 13 The four Ps classification was first suggested by E Jerome McCarthy, Basic Marketing: A Managerial Approach, Irwin: Homewood, IL, 1960. The four As are discussed in Jagdish Sheth & Rajendra Sisodia, The 4 A’s of Marketing: Creating Value for Customer, Company and Society, Routledge: New York, NY, 2012; and Philip T Kotler & Kevin L Keller, Marketing Management, 15th edn, Prentice Hall: Hoboken, NJ, 2016, p. 26. For a refreshing view of marketing’s place in marketing strategy, see Robert F Lusch & Stephen L Vargo, The Service-dominant Logic of Marketing: Dialog, Debate, and Directions, Routledge: New York, NY, 2014. 14 Tim Dunn, ‘Is the era of CMO over?’, Adweek, 2 March 2015, p. 14. 15 For more on brand and product management, see Kevin Lane Keller, Strategic Brand Management, 4th edn, Pearson: Upper Saddle River, NJ, 2012. 16 ‘Study finds marketers don’t practice ROI they preach’, Advertising Age, 11 March 2012, ; ‘Accountability remains senior marketers’ top concern’, Marketing Charts, 7 March 2013, ; ‘Quantitative proof of marketing spend’s ROI still eludes CMOs’, Marketing Charts, 21 February 2014, ; and Christine Moorman, ‘From marketing spend to marketing accountability’, Marketing News, May 2014, pp. 24–5. 17 For more on marketing dashboards and financial measures of marketing performance, see Bruce H Clark, Andrew V Abela & Tim Ambler, ‘Behind the wheel’, Marketing Management, May–June 2006, pp. 19–23; Ofer Mintz & Imran S Currim, ‘What drives managerial use of marketing financial metrics and does metric use affect performance of marketing-mix activities?’, Journal of Marketing, March 2013, pp. 17–40; and , accessed September 2015.

63

18 For a full discussion of this model and details on customer-centred measures of marketing return on investment, see Roland T Rust, Katherine N Lemon & Valerie A Zeithaml, ‘Return on marketing: Using customer equity to focus marketing strategy’, Journal of Marketing, January 2004, pp. 109–27; Roland T Rust, Katherine N Lemon & Das Narayandas, Customer Equity Management, Prentice Hall: Upper Saddle River, NJ, 2005; Roland T Rust, ‘Seeking higher ROI? Base strategy on customer equity’, Advertising Age, 10 September 2007, pp. 26–7; Andreas Persson & Lynette Ryals, ‘Customer assets and customer equity: Management and measurement issues’, Marketing Theory, December 2010, pp. 417–36; and Kirsten Korosec, ‘“Toma-to, tomäto”? Not exactly’, Marketing News, 13 January 2012, p. 8. 19 Bob Liodice, ‘Marketers, get serious about accountability’, Advertising Age, 8 September 2008, p. 22; and Gray Hammond, ‘You gotta be accountable’, Strategy, 1 December 2008, , accessed November 2016. 20 ‘Google’s revenue worldwide from 2002 to 2015 (in billion US dollars)’, statista, , accessed November 2016. 21 Gerry Harvey quote from Elizabeth Knight, ‘The anatomy of Dick Smith’s decline’, Sydney Morning Herald, 6 January 2016, . Also see Sue Mitchell, ‘Dick Smith “inflated” profit’, Australian Financial Review, 12 July 2016, pp. 1, 8; Sue Mitchell, ‘Dick Smith trouble began under private equity owners’ and ‘Anchorage started Dick Smith rebate’, Australian Financial Review, 13 July 2016, pp. 1, 13, 16; Michael Smith, ‘Dick Smith’s joyless Christmas’, Australian Financial Review, 6 January 2016, p. 28; Tony Boyd, ‘Dick Smith receivership a lesson for all’, Australian Financial Review, Chanticleer [column], 6 January 2016, p. 40; Editorial & Opinion, ‘Dick Smith just bad shopkeeping’, Australian Financial Review, 7 January 2016, p. 38; Patrick Hatch, ‘Dick Smith’s eBay feedback a sign of oncoming meltdown’, Australian Financial Review, 12 January 2016, p. 15; Catie Low, ‘Dick Smith creditors look for answers’, Australian Financial Review, 14 January 2016, p. 15; and Dick Smith, ‘About us’, , accessed April 2016. Ruslan Kogan quotation from Rae Johnston, ‘Kogan buys Dick Smith’s online store’, Gizmodo, 15 March 2016, .

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Understanding the marketplace and consumers 3 The marketplace and customers: Analysing the environment 66 4 Marketing analytics: Gaining customer insights96 5 Buyer behaviour: Understanding consumer and business buyers 130

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Chapter

3

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

For a visual representation of the chapter, please see the concept map on the following page.

Learning

Objectives

Learning Objective 1 Describe the environmental forces that affect the company’s ability to serve its customers. The marketing environment p. 68 The company’s microenvironment  pp. 68–71 The company’s macroenvironment  pp. 72–90 Learning Objective 2 Explain how changes in the demographic and economic environments affect marketing decisions. Demographic environment  pp. 72–79 Economic environment  pp. 79–80 Learning Objective 3 Identify the main trends in the firm’s natural and technological environments. Natural environment  pp. 80–82 Technological environment  p. 83 Learning Objective 4 Explain the key changes in the political and cultural environments. Political and social environment  pp. 83–87 Cultural environment  pp. 87–90 Learning Objective 5 Discuss how companies can react to the marketing environment. Responding to the marketing environment  p. 90

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67

LO 1 Describe the environmental forces that affect the company’s ability to serve its customers. (pp. 68–90)

Demogra phic

Eco no

LO 2

Act

al

Tech n

io n s

olo gic

i n t h e m i c r o e nv i r o n m e

nt

Pu b e macroenvir h t n o i n s me rce nt Fo

Competit ors

C OECONOMI ENVIRONMEN T MICR

Su

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lie r

s

The company

a

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c liti Po

LO 4 Explain the key changes in the political and cultural environments. (pp. 83–90)

l Cultura

RESPONDING TO THE MARKETING ENVIRONMENT

LO 5 Discuss how companies can react to the marketing environment. (p. 90) Proactive

Reactive

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CONOMIC ENVIRONMEN MACROE T

ing Market iaries inter m ed

LO 3 Identify the main trends in the firm’s natural and technological environments. (pp. 80–83)

s lic

ral Natu

Explain how the changes in the demographic and economic environments affect marketing decisions. (pp. 72–80)

c mi

Customers

Part 2  Understanding the marketplace and consumers

The marketing environment (p. 68) A company’s marketing environment consists of the actors and forces outside of marketing that affect marketing management’s ability to build and maintain successful relationships with target customers. Companies constantly watch and adapt to the changing environment. More than any other group in the company, marketers must be the environmental trend trackers and opportunity seekers. Although every manager in an organisation needs to observe the outside environment, marketers have two special aptitudes. They have disciplined methods – marketing research and marketing intelligence – for collecting information about the marketing environment. They also spend more time in customer and competitor environments. By carefully studying the environment, marketers can adapt their strategies to meet new marketplace challenges and opportunities. The marketing environment is made up of a microenvironment and a macroenvironment. The  microenvironment consists of the actors close to the company that affect its ability to serve its customers  – the company, suppliers, marketing intermediaries, competitors, publics and customer markets. The macroenvironment consists of the larger societal forces that affect the microenvironment – demographic, economic, natural, technological, political and cultural forces. We look first at the company’s microenvironment.

The company’s microenvironment (pp. 68–71) Marketing management’s job is to build relationships with customers by creating customer value and satisfaction. However, marketing managers cannot do this alone. Figure 3.1 shows the main actors in the marketer’s microenvironment. Marketing success will require building relationships with other company departments, suppliers, marketing intermediaries, competitors, various publics and customers that combine to make up the company’s value delivery network.

The company In designing marketing plans, marketing management takes other company groups into account – groups such as top management, finance, research and development, purchasing, operations and accounting.

Compet itors

Pu b

rs lie

s lic

Su pp

keting Mar ediaries rm inte

omers Cust

The com pany

68

MARKETING

Figure 3.1  Actors in the microenvironment

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All  of these interrelated groups form the internal environment. Top management sets the company’s mission, objectives, broad strategies and policies. Marketing managers make decisions within the strategies and plans made by top management. Then, as we discussed in Chapter 2, marketing managers must work closely with other company departments. With marketing taking the lead, all departments – from manufacturing and finance to legal and human resources – share the responsibility for understanding customer needs and creating customer value.

Suppliers Suppliers form an important link in the company’s overall customer value delivery system. They provide the resources needed by the company to produce its goods and services. Supplier problems can seriously affect marketing. Marketing managers must be attentive to supply availability and costs. Supply shortages or delays, labour strikes and other events can cost sales in the short run and damage customer satisfaction in the long run. Rising supply costs may force price increases that can harm the company’s sales volume. Most marketers today treat their suppliers as partners in creating and delivering customer value. In an Australian study, researchers found that strong supplier relationships contributed significantly to business performance, and that when businesses focus on the whole supply chain (customers and suppliers) they will do even better.1

Marketing intermediaries

Marketing intermediaries help the company to promote, sell and distribute its products to final buyers. They include resellers, physical distribution firms, marketing services agencies and financial intermediaries. Resellers are distribution channel firms that help the company find customers or make sales to them. These include wholesalers and retailers who buy and resell merchandise. Selecting and partnering with resellers is not easy. No longer do manufacturers have many small, independent resellers from which to choose. They now face large and growing reseller organisations, such as Woolworths, Target,

marketing intermediaries

Businesses that help the company to promote, sell and distribute its products to final buyers.

Financial intermediaries: Accounting firms, such as Nudge Accounting, which provides services to smallbusiness owners, are among the many financial intermediaries that comprise the broader value network in which a business operates. Managing these relationships is also important. Nudge Accounting

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Part 2  Understanding the marketplace and consumers

The Warehouse, Myer and Kmart. These organisations frequently have enough power to dictate terms or even to shut smaller manufacturers out of large markets. Physical distribution firms help the company to stock and move goods from their points of origin to their destinations (see also Chapter 10). Marketing services agencies are the marketing research firms, advertising agencies, media firms and marketing consulting firms that help the company to target and promote its products to the right markets. Financial intermediaries include banks, credit companies, insurance companies, accountants and other businesses that help finance transactions or manage the risks associated with the buying and selling of goods. Like suppliers, marketing intermediaries form an important component of the company’s overall value delivery system. In its quest to create satisfying customer relationships, the company must do more than just optimise its own performance. It must partner effectively with marketing intermediaries to optimise the performance of the entire system. Thus, today’s marketers recognise the importance of working with their intermediaries as partners rather than simply as channels through which they sell their products. For example, when Coca-Cola signs on as the exclusive beverage provider for a fast-food chain such as McDonald’s or Subway, it provides much more than just soft drinks. It also pledges powerful marketing support.

Competitors The marketing concept states that to be successful a company must provide greater customer value and satisfaction than its competitors do. Thus, marketers must do more than simply adapt to the needs of target consumers. They also must gain strategic advantage by positioning their offerings strongly against competitors’ offerings in the minds of consumers. No single competitive marketing strategy is best for all companies. Each firm should consider its own size and industry position compared to those of its competitors. Large firms with dominant positions in an industry can use certain strategies that smaller firms cannot afford. But being large is not enough. There are winning strategies for large firms, but there are also losing ones. And small firms can develop strategies that give them better rates of return than large firms enjoy.

public

Publics

Any group that has an actual or potential interest in or impact on an organisation’s ability to achieve its objectives.

The company’s marketing environment also includes various publics. A public is any group that has an actual or potential interest in or impact on an organisation’s ability to achieve its objectives. We can identify seven types of publics: 1 Financial publics. This group influences the company’s ability to obtain funds. Banks, investment houses and shareholders are the main financial publics. 2 Media publics. This group carries news, features and editorial opinion. It includes television and radio stations, newspapers, magazines, and blogs and other social media. 3 Government publics. Management must take government developments into account. Marketers must often consult the company’s legal advisers on issues of product safety, truth in advertising and other matters. 4 Citizen-action publics. A company’s marketing decisions may be questioned by consumer organisations, environmental groups, minority groups and others. Its public relations department can help it stay in touch with consumer and citizen groups. 5 Local publics. This group includes local residents and community organisations. Large companies usually appoint a community relations officer to deal with the community, attend meetings, answer questions and contribute to worthwhile causes. For example, mining giant BHP Billiton knows that working alongside the community in which it operates is crucial, and, by making social investments in those communities, it aims to contribute to a resilient and diversified local economy. In one program, the company partners with the Art Gallery of South Australia to present the TARNANTHI Festival of Contemporary Aboriginal and Torres Strait Islander Art, which includes a two-day art fair. In 2015, the fair featured the work of over 1000 Aboriginal and Torres Strait Islander artists and generated nearly half a million dollars in sales for the artists and art centres.2

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Public: BHP Billiton supports Aboriginal and Torres Strait Islander artists through the TARNANTHI Art Fair as part of its commitment to Indigenous peoples. Courtesy Art Gallery of South Australia, Adelaide

6 General public. A company needs to be concerned about the general public’s attitude towards its products and activities. The public’s image of the company affects its buying. 7 Internal publics. This group includes workers, managers, volunteers and the board of directors. Large companies use newsletters, a company website and other means to inform and motivate their internal publics. When employees feel good about their company, this positive attitude spills over to external publics. A company can prepare marketing plans for these major publics as well as for its customer markets. Suppose the company wants a specific response from a particular public, such as goodwill, favourable word of mouth or donations of time or money. The company would have to design an offer to this public that is attractive enough to produce the desired response.

Customers As we have emphasised throughout, customers are the most important actors in the company’s microenvironment. The aim of the entire value delivery system is to serve target customers and create strong relationships with them. The company might target any or all of five types of customer markets. Consumer markets consist of individuals and households that buy goods and services for personal consumption. Business markets buy goods and services for further processing or for use in their production process, whereas reseller markets buy goods and services to resell at a profit. Government markets are made up of government agencies that buy goods and services to produce public services, or to transfer the goods and services to others who need them. Finally, international markets consist of these buyers in other countries, including consumers, producers, resellers and governments. Each market type has special characteristics that call for careful study by the seller (see Chapter 5 for more on consumer and business markets).

Linking the concepts Take a moment to reflect on the complex network of actors that make up a firm’s microenvironment. ● Think about your breakfast McMuffin, the company McDonald’s, and its suppliers, intermediaries, competitors, publics and customers. Draw a diagram showing the microenvironment for McDonald’s restaurants.

● In Chapter 10, we discuss marketing intermediaries involved with physical distribution. Here, we also consider the service intermediaries that are part of the microenvironment. Compile a list of all the different types of service intermediaries and make notes on why they need to be considered as part of the company’s microenvironment.

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72

Part 2  Understanding the marketplace and consumers

The company’s macroenvironment (pp. 72–90) The company and all of the other actors operate in a larger macroenvironment of forces that shape opportunities and pose threats to the company. Figure 3.2 shows the six main forces in the company’s macroenvironment. In the remaining sections of this chapter, we examine these forces and show how they affect marketing plans.

demography

Demographic environment (pp. 72–79)

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

Demography is the study of human populations in terms of size, density, location, age, gender, race, occupation and other statistics. The demographic environment is of major interest to marketers because it involves people, and people make up markets. The world population is growing at an explosive rate. It now exceeds 7.4 billion people and will grow to more than 8.5 billion by the year 2030.3 The world’s large and highly diverse population poses both opportunities and challenges. Changes in the world demographic environment have major implications for business. So, marketers keep close track of demographic trends and developments in their markets, both at home and abroad. They analyse changing age and family structures, geographic population shifts, educational characteristics and population diversity. Here, we discuss the most important demographic trends in Australia and New Zealand.

Changing age structure of the population In 2016, the Australian and New Zealand populations stood at 24.2 million and 4.7 million, respectively, and the combined population may reach around 35 million by the year 2030.4 The single most important demographic trend in Australasia is the changing age structure of the population. Primarily because of falling birthrates and longer life expectancies, the Australian and New Zealand populations are rapidly getting older. In 1980, the median age was 29.4 years (in Australia) and 27.9 years (in New Zealand), and, by 2020, it is estimated to be about 38 years.5 This ageing of the population will have a significant impact on markets and those who service them. The Australian and New Zealand populations contain several generational groups. Here, we discuss the four largest groups – the baby boomers, Generation X, the Millennials and Generation Z – and their impact on today’s marketing strategies.

Po lit

ic om

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Demogr aphi c

Technol ogic al

l ica

Ec on

ral Natu

COMPANY

Figure 3.2  Major forces and the company’s macroenvironment

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The baby boomers The post-World War II baby boom produced 7 million baby boomers in Australia and New Zealand, born between 1946 and 1964. Over the years, the baby boomers have been one of the most powerful forces shaping the marketing environment. The youngest boomers are now in their fifties; the oldest are in their seventies. The baby boomers are the wealthiest generation in Australian history, accounting for about 25 per cent of the Australian Targeting boomers: The name says it all! ‘Fun Over 50’ tap into population but controlling an estimated 53 per cent of the national baby boomers’ desire to experience life to the fullest. wealth. The boomers constitute a lucrative market for financial Fun Over 50 services, new housing and home renovation, new cars, travel and entertainment, dining out, health and fitness products, and just about everything else.6 baby boomers At a recent industry forum, advertising experts advised that brands focusing on younger demographic People born during the period following World groups are missing a big opportunity. Boomers ‘outspend every other generation in every category, yet War II, between 1946 advertisers remain obsessed with extolling youth and targeting young audiences’. Less than 10 per cent and 1964. of the total annual advertising expenditure targets these older Australians. But, with interest in this group growing, it is not surprising to see the launch of a specialist agency, My Generation Advertising, devoted to advertising to baby boomers. The agency is pretty sure it understands the over-50s because they themselves are boomers too.7 It would be a mistake to think of the older boomers as slowing down. Instead, they see themselves as entering new life phases. The more active boomers – sometimes called zoomers – have no intention of abandoning their youthful lifestyles as they age. They travel, they buy luxury products, they are tech-savvy, they shop online and they have money to spend. Thus, although the boomers buy lots of products that help them deal with issues of ageing – from vitamins to blood pressure monitors to Good Grips kitchen tools – they also constitute a lucrative market for products and services that help them to live life to the fullest. For example, Fun Over 50 offers travel in style for older Australians and New Zealanders. Travellers enjoy adventure-packed days, new places and new experiences. The travel business aims to fulfil boomers’ desire to experience life to the fullest. Generation X The baby boom was followed by a ‘birth dearth’, creating another generation of over 4 million people in Australia and New Zealand born between 1965 and 1976. Author Douglas Coupland calls them Generation X because they lie in the shadow of the boomers. Comprising a population considerably smaller than the boomer generation that precedes them and the Millennials who follow, the Generation Xers are a sometimes-overlooked consumer group. Social commentator Mark McCrindle points out that, ‘They have worked hard, are bearing the burden of taxes, done dutiful parenting and haven’t made much of a fuss. They have just [got] on with it.’ Although Gen Xers seek success, they are less materialistic than the other groups; they prize experience, not acquisition. For many of the Gen Xers who are parents, family comes first – both children and their ageing parents – and career second.8 From a marketing standpoint, the Gen Xers are a more sceptical bunch. They tend to research products heavily before they consider a purchase, prefer quality to quantity and tend to be less receptive to overt marketing pitches. They are more likely to be receptive to irreverent ad pitches that make fun of convention and tradition. The first to grow up in the internet era, Generation X is a connected generation that embraces the benefits of new technology. Of the over 80 per cent of Gen Xers online, roughly a third spend more than an hour a day connected. Three-quarters are doing the banking and social networking

Generation X

People born between 1965 and 1976, in the ‘birth dearth’ that followed the baby boom.

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and more than half have bought goods and services online in the last three months, while nearly a fifth are studying.9 A National Australia Bank study showed that younger Gen Xers are spending more money online each month than any other generation. This group makes up almost a quarter of Australian online sales. Not surprisingly, Gen Xers are much more likely to click through online advertising. Despite their spending, they are also savvy consumers who seek out information before they buy. As one expert notes, ‘Generation Xers tend to use information not as a point of pride but as assurance that they are not being taken advantage of by marketers and are getting the best deal possible.’10 The Gen Xers, now middle-aged, have grown up and are taking over. They have increasingly displaced the lifestyles, culture and values of the baby boomers. They are firmly into their careers, and many are proud homeowners with growing families. They are the most-educated generation to date, and they possess hefty annual purchasing power. It is not surprising, then, that many brands and organisations focus on Gen Xers as a prime target segment. For example, the Heart Foundation’s Mums United campaign taps straight into the Gen Xers’ concern for family. The word-of-mouth campaign aimed to ‘get Australian mums to band together and make small lifestyle changes within their families and local communities – with the ultimate goal of improving the shape of Australia’. The successful campaign used a social media company to reach over 1500 mums who all had large social networks. They ran events, and many of the participants blogged, encouraging others to take on ‘one of the “Mums United” healthier living changes’. The Gen X-focused campaign produced over 800 000 offline conversations and nearly 80 000 online ones, roughly twice as many as the target set before the campaign. The companion website offers information to help mums ‘change the shape’ of their families, including suggestions for family fun activities, a family activity tracker, a junk-food swapper and recipes. Links to social media help to maintain the buzz after the initial word-of-mouth campaign.11

Millennials (Generation Y)

The children of baby boomers, born between 1977 and 2000.

Millennials Both the baby boomers and Gen Xers will one day be passing the reins to the Millennials (also called Generation Y). Born between 1977 and 2000, these children of the baby boomers number approximately 9.5 million in Australia and New Zealand combined, a population that dwarfs the Gen Xers and is larger even than the baby boomer segment. Spanning more than 20 years, the youngest are just finishing secondary school and the oldest have established careers. Many have families, homes and debt while others are single with few responsibilities. Compared to the baby boomers and Gen Xers, the Millennials are the most educated, and those who are employed have good jobs with above-average income. But they are also the most financially strapped generation; for some, high unemployment is a factor while others are saddled with debt, ranging from credit cards to loans. Still, because of their numbers, the Millennials make up a huge and attractive market, both now and in the future.12 One characteristic that all Millennials have in common is their comfort with digital technology. They do not just embrace technology; it is a way of life. The Millennials were the first generation to grow up in a world filled with computers, mobile phones, satellite television, iPods and iPads, and online social media. One study found that over 96 per cent of Millennials use the web, making up over 40 per cent of all Australian internet users, with many spending well over two hours per day online. With their high ownership of smartphones, which enable easy access to the mobile web, this is not surprising. Marketers of all kinds now target the Millennials segment, from car makers to political campaigns. More than sales pitches from marketers, Millennials seek authenticity and opportunities to shape their own brand experiences and share them with others. One marketer identifies what she calls ‘universal Millennial truths: being transparent, authentic, immediate and versatile’.13 Reaching these sceptical, message-saturated consumers requires creative marketing approaches. Airbnb and Uber are the quintessential millennial brands – offering the connected millennial consumer authenticity (Airbnb invites users to ‘Get lost in a city with insiders’) and immediacy (Uber offers ‘Your ride, on demand’). Mini is

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targeting Millennials with an Instagram competition: 29 000 likes to win a new Mini Ray. As part of the launch of the Mini Ray in Australia, Instagram users are encouraged to post images, games, gifs, challenges, video and stunts, each with one of the car’s accent colours – pink, green or yellow – and all tagged #MINIRAY29K. The online promotion combines with the outdoor, print and digital advertising. The national marketing manager for Mini explains: ‘Given traditional .  .  . channels don’t typically resonate well with the millennial set, we wanted to find a way to reach them in a medium they engage with every day.’ The car itself taps into the millennial desire to shape the brand experience, with options to personalise each car with the driver’s choice of coloured accents. With its promise of head-turning fun, the campaign and the car speak to the heart of the millennial mindset at a price point that is affordable for this group.14

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Millennials: Mini Ray speaks to the millennial mindset, with its launch campaign on Instagram #MINIRAY29K and the car itself – offering headturning fun! Creative agency: Ogilvy Australia. Media agency: Vizeum

Generation Z Hard on the heels of the Millennials is Generation Z, young people born after 2000 (although many analysts include people born after 1995 in this group). The approximately 6 million Australian and New Zealand Gen Zers make up important children’s, tweens’ and teens’ markets. In Australia, the tweens alone are estimated to be spending $11–$21 per week, with an annual combined spend of over $1 billion. These young consumers also represent tomorrow’s markets – they are now forming brand relationships that will affect their buying well into the future.15 Even more than the Millennials, the defining characteristic of Gen Zers is their utter fluency and comfort with digital technologies. In the words of one researcher, ‘Generation Z are digital integrators, in that they have integrated technology seamlessly into their lives, and having used it from the youngest age, it is almost like the air that they breathe, permeating almost all areas of their lifestyle and relationships.’ Gen Zers do not wear watches because they carry a phone and use that to tell time (as well as checking the weather, getting directions, taking selfies and catching up with friends and family). Gen Zers blend the online and offline worlds seamlessly as they socialise and shop. According to recent studies, despite their youth, more than half of all Generation Z tweens and teens do product research before buying a product or having their parents buy it for them. Of those who shop online, more than half prefer shopping online in categories ranging from electronics, books, music, sports equipment and beauty products to clothes, shoes and fashion accessories. Companies in almost all industries market products and services aimed at Generation Z. For example, many retailers have created special lines or even entire stores appealing to Gen Z buyers and their parents – consider Cotton On Kids, Jacadi and Factorie (for clothing); EB-Games (for gaming); Toys Paradise, Kidzinc and Toys2Learn (for toys); Gymbaroo (for activities) and Smiggle (for stationery); and the large chain stores, such as Target, Myers and Big W, all carry children’s lines. Marketing to Gen Zers and their parents presents special challenges. Traditional media are still important to this group. Magazines such as K-Zone and Girlfriend are popular with some Gen Z segments, as are television channels such as ABC Kids and the Disney Channel. But marketers know they must meet Gen Zers where they hang out and shop. Increasingly, that is in the online and mobile worlds. Although the under-13 set remains barred from social media such as Facebook and Instagram – at least officially – the social media will play a crucial marketing role as the children and tweens grow into teens.

Generation Z

People born after 2000 (although many analysts include people born after 1995) who make up the children’s, tweens’ and teens’ markets.

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Today’s children are notoriously fickle and hard to pin down, and they have short attention spans. The key is to engage these young consumers and let them help to define their brand experiences. Another Generation Z concern involves children’s privacy and their vulnerability to marketing pitches. Companies marketing to this group must do so responsibly or risk the wrath of parents and public policy makers.

Generational marketing Do marketers need to create separate products and marketing programs for each generation? Some experts warn that marketers need to be careful about ‘turning off’ one generation each time they craft a product or message that appeals effectively to another. Others caution that each generation spans decades of time and many socioeconomic levels. For example, marketers often split the baby boomers into three smaller groups – leading-edge boomers, core boomers and trailing-edge boomers – each with its own beliefs and behaviours. Similarly, they split Generation Z into children, tweens and teens. Thus, marketers need to form more precise age-specific segments within each group. More importantly, defining people by their birthdates may be less effective than segmenting them by their lifestyle, life stage or the common values they seek in the products they buy. We discuss many other ways to segment markets in Chapter 6 .

The changing family The ‘traditional household’ consists of a husband, wife and children (and sometimes grandparents). Although two-parent families still make up a very large part of Australian and New Zealand families, this pattern is changing. Today, approximately 40 per cent of all family households in both countries have two parents living at home but, in the next 20 years, this is expected to fall slightly in Australia and closer to 38  per  cent in New Zealand. During the same period, the proportion of single-parent families is expected to stay much the same, at about 17 per cent. What is changing is the steady increase in the number of families with no children living at home – expected to increase from about 38 per cent to 41 per cent of all families in Australia, and to a massive 45 per cent of all New Zealand families in the next 20 years. This big shift is partly due to the ageing population, but also to the fact that some couples are choosing not to have children. As the population ages, there will also be an increasing number of one-person households – from about 24–25 per cent to about 27–28 per cent of all households in the next 20 years. All this means that the average household size in both New Zealand and Australia is expected to decline over the next two decades.16 More people are divorcing or separating, choosing not to marry, marrying later or marrying without intending to have children. Marketers must increasingly consider the needs of non-traditional households, because their numbers are now growing more rapidly compared to traditional households. Each group has distinctive needs and buying habits. The number of women working outside the home has also increased, growing from 52 per cent of all women in the 1990s to 58 per cent today. In many families, both parents are working Changing families: HelloFresh invites time-poor families to ‘Discover the joy of cooking!’ without the hassle of the planning full-time although this does vary, depending on the age of the and shopping. children. Meanwhile, though comprising only a small number, Supplied by HelloFresh Australia more men are staying at home with their children and managing

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the household while their partners go to work.17 The significant number of women in the workforce has spawned the child day-care business and increased consumption of career-oriented women’s clothing, financial services and convenience foods and services. With limited time yet loving to cook, families have responded favourably to the new-to-market subscription food boxes, such as HelloFresh and My Food Bag. Each week, time-poor families receive a delivery of everything they need to prepare between three and five meals. The food is convenient, healthy and home-cooked. HelloFresh invites customers to ‘Discover the joy of cooking!’ without the hassle of the planning and shopping: a perfect solution for the changing Australian family.18

Geographic shifts in population This is a period of great migratory movements between and within countries. Australians, for example, are mobile people, with about 40 per cent of all Australian residents moving every five years. Young and old alike are moving to urban communities, such as Melbourne and Brisbane, and to larger coastal towns, such as Hervey Bay in Queensland and Nelson Bay in New South Wales. At the same time, greater numbers of older people are moving to regional towns and the coast (such as Geelong and the Sunshine Coast). The same types of broad population moves can be seen in New Zealand. New Zealanders tend to live in urban centres (such as Auckland, Wellington and Dunedin); however, larger regional towns are also popular among retirees (for example, Wanaka and Thames or Coromandel). New Zealanders are also moving northward, with a slow but definite increase relative to the South Island. There was a population shift following the 2010 Christchurch earthquake, with people leaving – and more recently returning to – the city. And quite possibly there will be further population shifts following the massive 7.8 Kaikoura earthquake in 2016. People move for many reasons, but employment and social/lifestyle considerations are important factors. Such population shifts interest marketers because people in different regions buy differently. For example, consumers in the north of both Australia and New Zealand are more likely to buy air-conditioning and swimming pools, and window double-glazing is more likely to be in demand in the colder southern regions.19 In both Australia and New Zealand, and for more than a century, there has been a gradual geographic shift of population from rural to metropolitan areas. The metropolitan areas have a faster pace of living, more commuting, higher incomes and a greater variety of goods and services than can be found in the small towns and rural communities that dot the country. The largest cities account for most of the sales of expensive apparel, perfumes, luggage and works of art. These cities also support the opera, ballet and other forms of ‘high culture’. In the 1960s, Australians made an exodus from the inner cities to the suburbs. The larger cities became surrounded by even larger suburbs. Australians living in the suburbs engage in more casual, outdoor living and greater neighbour interaction; they have lower incomes and younger families. Suburbanites buy station wagons, four-wheel-drive recreational vehicles, aluminium and fibreglass boats, home-workshop equipment, garden furniture, lawn and gardening tools, and outdoor cooking equipment. Now, however, many suburban areas, such as Melbourne’s Eastern Suburbs, are undergoing a renewal, with in-fill high-rise apartment blocks dominating the landscape as younger couples, retirees and singles, priced out of the market, look for homes in well-established suburban communities.20 The shift in where people live has also caused a shift in where they work. For example, the migration to suburban areas has resulted in a rapid increase in the number of people who ‘telecommute’ – work from home or in a remote office and conduct their business by phone or via the internet. This trend, in turn, has created a booming SOHO (small office/home office) market. Estimates of the extent of teleworking vary greatly; however, recent studies have reported that as many as one in three employees is involved in some teleworking each week. While most teleworkers work from home, a number report working from clients’ offices and others from cafés.21 Many marketers are actively courting the lucrative telecommuting market. For example, Officeworks provides almost every piece of equipment the serious teleworker could want. From shredders to stationery, smart pens and smartphones, as well as computers and the desks to put them on, Officeworks

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has everything needed to set up a home office. The company even sells complete office furniture collections, promising to ‘create an office environment that is a joy to work in each day’. Technology plays a big role in successful teleworking, so web-meeting services, such as Zoom and GoToMeeting, are part of the essential tool kit for the stay-at-home worker. With such apps, people can meet and collaborate online via computer, tablet or smartphone, no matter what their work location. And companies ranging from Salesforce.com to Google and Dropbox offer Cloud-computing apps that let people collaborate and share documents anywhere and everywhere through the internet and mobile devices.22

A better-educated, more white-collar, more professional ­population Australians and New Zealanders are becoming better educated. Over 40 per cent of the Australian population and 34 per cent of the New Zealand population have attended university. While only 33 per cent of those over age 55 have completed any post-secondary study, the number increases to more than 47 per cent for people aged 25–34. Individuals who achieve higher educational outcomes are often better off in a number of ways; importantly, their lifestyles are different and they earn more. The rising number of educated people will increase the demand for quality products, books, magazines, travel, personal computers, tablet devices and internet services.23 The workforce is also becoming more white-collar. Today, nearly 70 per cent of Australians are employed in white-collar jobs. Job growth is now strongest for community and services workers as well as for professional workers, and weakest for labourers. This trend is expected to continue. The rising number of educated professionals will affect not just what people buy but also how they buy.24

Increasing diversity

Diversity: Link Disability Magazine readership includes people who are living with a disability, their families and carers, and health-care professionals. The magazine provides a way for marketers to speak directly to these audiences.

Countries vary in their ethnic and racial makeup. At one extreme is Japan, where almost everyone living there is Japanese. The populations in both Australia and New Zealand are much more diverse, with nearly one in three people born overseas. In Australia, migrants from the United Kingdom make up the biggest group, but many people living in Australia who were born overseas are from New Zealand, China and India. The mix is a little different in New Zealand, with the largest migrant groups coming equally from the United Kingdom, Ireland and Asia. Pacific Islanders comprise another big cultural group. Aboriginal and Torres Strait Islander peoples in Australia, and Maoˉ ri in New Zealand, are also important groups in both communities. Each national group has specific wants and different buying habits. Many marketers of food, clothing, furniture and other products have targeted specially designed products and promotions to one or more of these groups.25 Diversity goes beyond ethnic heritage. For example, many major companies have recently begun to explicitly target gay and lesbian consumers. One estimate puts the Australian buying power of lesbian, gay, bisexual, transgender and intersex people (LGBTI) at a massive $20 billion per annum.

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According to the Pink Media Group (which represents media owners across g­ ay- and lesbian-focused media channels), gay and lesbian consumer households typically have single or double incomes and often have no children. Consequently, the LGBTI markets tend to have higher disposable incomes and are often trendsetters. They ‘tend to spend more on luxury goods, travel, technology and fashion’, though they buy many of the same brands as do all Australians. They are also brand-loyal – an attractive characteristic for any market segment.26 As a result of television shows such as Modern Family, and openly gay celebrities and public figures such as Ellen DeGeneres, politician Penny Wong and Apple CEO Tim Cook, the LGBTI community has increasingly emerged into the public eye. A number of media now provide companies with access to this market. For example, LOTL and DNA are successful magazines with a combined readership of over 200 000. Melbourne radio station JOY 94.9 also serves this market. Companies in a wide range of industries are now targeting the LGBTI community with gay-specific marketing efforts. For example, Medibank featured same-sex couples in their recent ‘Health care for every kind of family’ television campaign. The inclusive ad shows a diverse mix of families, including same-sex families, and concludes with the phrase, ‘With Medibank, I am better’.27 Another diversity group is the estimated 4.3 million Australians and over 1 million New Zealanders living with a disability. Most individuals with a disability are active consumers. As one expert explains, people with disabilities ‘are getting out and about’ and they ‘have disposable income’. Many marketers now recognise that the worlds of people with disabilities and those without are one and the same. Marketers, such as McDonald’s, have featured people with disabilities in their mainstream advertising. Other companies use specially targeted media to reach this segment. There is a range of websites and print media with a greater proportion of readers who are living with a disability, their families and carers, as well as health-care service providers. For example, Link Disability Magazine advertises a wide range of services for both persons with a disability and those without.28 As the populations in Australia and New Zealand grow more diverse, successful marketers will continue to diversify their marketing programs to take advantage of opportunities in fast-growing segments.

Linking the concepts Pause here and think about how deeply these demographic factors affect all of us and, as a result, marketing strategies. ● Apply these demographic developments to your own life. Discuss some specific examples of how changing demographic factors affect you and your buying behaviour.

Economic environment (pp. 79–80)

● Identify a specific company that has done a good job of reacting to the shifting demographic environment – generational segments (baby boomers, Gen Xers, Millennials or Gen Zers), the changing family and increased diversity. Compare this company with one that has done a poor job.

Markets require buying power as well as people. The economic environment consists of factors that affect consumer purchasing power and spending patterns. Economic factors can have a dramatic effect on consumer spending and buying behaviour. For example, until fairly recently, consumers spent freely, fuelled by income growth, a boom in the stock market, rapid increases in housing values and other economic good fortunes. They bought and bought, seemingly without caution, amassing record levels of debt. However, the free spending and high expectations of those days were dashed by the global economic recession of 2008–09. Consumers have now adopted a back-to-basics sensibility in their lifestyles and spending patterns that will likely persist for years to come. They are buying less and looking for greater value in the things they do buy. In turn, value marketing has become the watchword for many marketers. Marketers in all industries are looking for ways to offer today’s more financially frugal buyers greater value – just the right combination

economic environment

Factors that affect consumer purchasing power and spending patterns.

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of product quality and good service at a fair price. For example, Target promises customers ‘great quality and lower prices every day’ and even marketers of luxury items are emphasising good value. For instance, Australian online jeweller, Sheils, promises ‘the best prices, value and products’ and to ‘deliver service, quality and jewellery unlike any other jeweller in Australia’.29

Changes in income Marketers should pay attention to income distribution as well as to income levels. Over the past several decades, the rich have grown richer, the middle class has shrunk and the poor have remained poor. As shown in Figure 3.3, the top 20 per cent of Australian households earn nearly 50 per cent of the country’s adjusted gross household income. In contrast, the bottom 40 per cent of Australian households earn just 13.3 ­per cent of the country’s adjusted gross household income. This changing pattern of income distribution is similar in many Western countries, including New Zealand.30 This distribution of income has created a tiered market. Many companies, such as Bang & Olufsen and Tiffany & Co., aggressively target the affluent. Others – such as Australian discount retailers The Reject Shop and Crazy Clarks, and The Warehouse in New Zealand – target those with more modest means. Still other companies tailor their marketing offers across a range of markets, from the less affluent to the very affluent. For example, Ford offers cars ranging from the low-priced Ford Fiesta, starting at $19 451, to the luxury Mustang GT convertible, starting at $72 433.31

Changing consumer spending patterns

Engel’s laws

Differences noted more than a century ago by Ernst Engel in how people shift their spending patterns across food, housing, transportation, health care and other goods and services as family income rises.

natural environment

Natural resources that are needed as inputs by marketers or that are affected by marketing activities.

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

Natural environment (pp. 80–82)

The natural environment involves the natural resources that are needed as inputs by marketers or that are affected by marketing activities. At the most basic level, unexpected happenings in the physical environment – anything from weather to natural disasters – can affect companies and their marketing strategies. For example, in early 2016, unseasonably warm El Niño conditions significantly impacted the sales of winter clothing. In fact, retail sales were down across Australia – the milder weather meant that shoppers, who typically head to shopping centres when it is very cold or very hot, stayed away, significantly impacting impulse purchases. In contrast, the milder weather was great news for outdoor entertainment businesses, such as the rooftop bar at the Glenmore Hotel in The Rocks, or the Sydney Bridge climb. Although companies cannot prevent such natural occurrences, they should prepare for dealing with them.32 At a broader level, environmental sustainability concerns have grown steadily over the past three decades. In many cities around the world, air and water pollution have reached dangerous levels. World concern continues to mount about the possibilities of global warming, and many environmentalists fear we soon will be buried in our own rubbish. Marketers should be aware of several trends in the natural environment. The first involves growing shortages of raw materials. Air and water may seem to be infinite resources, but some groups

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Chapter 3  The marketplace and customers: Analysing the environment

INCOME SHARE 1994–95

QUINTILE

INCOME SHARE 2013–14

45.8% 5

Highest (top 20% of households)

48.5% 11.5 × Average weekly household income

$ 24.9%

23.3% 6.5 × Average weekly household income

$

4

16.1%

15.0%

9.4%

8.9%

3.9% 1

Lowest (bottom 20% of households)

$

3.5 × Average weekly household income

2.1 × Average weekly household income

$

2

5.5 × Average weekly household income

4 × Average weekly household income

$

3

11.5 × Average weekly household income

2 × Average weekly household income

4.2% 1 × Average weekly household income

1 × Average weekly household income

Figure 3.3  Economic environment: The changing household income distribution in Australia, 1994–95 and 2013–14 Based on data from Australian Bureau of Statistics, Household Incomes and Wealth, Australia, 2013–14, Cat. No. 6523.0, 4 September 2015, .

see long-term dangers. Air pollution chokes many of the world’s large cities, and water shortages are already a big problem in most of Australia, and in some parts of New Zealand and the world. By 2030, more than one in three of the world’s human beings will not have enough water to drink.33 Renewable resources, such as forests and food, also have to be used wisely. Non-renewable resources, such as

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environmental sustainability

Developing strategies and practices that create a world economy that the planet can support indefinitely.

oil, coal and various minerals, pose a serious problem. Businesses making products that require these scarce resources face large cost increases, even if the materials remain available. A second environmental trend is increased pollution. Industry will almost always damage the quality of the natural environment. Consider the disposal of chemical and nuclear wastes; the dangerous mercury levels in the ocean; the quantity of chemical pollutants in the soil and food supply; and the littering of the environment with non-biodegradable bottles, plastics and other packaging materials. Waste bakery products have been reduced at Goodman Fielder, one of Australia’s leading food companies, by identifying new uses for the waste. Working with a company specialising in animal nutrition, waste bakery products are now converted to pet food.34 A third trend is increased government intervention in natural resource management. The governments of different countries vary in their concern and efforts to promote a clean environment. Some, such as the German government, vigorously pursue environmental quality. Others, especially those of many poorer nations, do little about pollution, largely because they lack the needed funds or political will. Even the richer nations lack the vast funds and political accord needed to mount a worldwide environmental effort. The general hope is that companies around the world will accept more social responsibility, and that lessexpensive devices can be found to control and reduce pollution. Both Australia and New Zealand have organisations established by government to protect the environment: the Environmental Protection Authority (EPA) in New Zealand and various state environmental protection authorities in Australia. The role of each authority varies from state to state and country to country, but their general focus is on protecting the environment. This includes everything from enforcing environmental laws, to conducting environmental impact assessments and maintaining emissions trading schemes. In the future, companies doing business in Australia and New Zealand can expect continued strong controls from government and pressure groups. Instead of opposing regulation, marketers should help develop solutions to the material and energy problems facing the world. Concern for the natural environment has spawned an environmental sustainability movement. Today, enlightened companies go beyond what government regulations dictate. They are developing strategies and practices that create a world economy that the planet can support indefinitely. Environmental sustainability means meeting present needs without compromising the ability of future generations to meet their needs. Many companies are responding to consumer demands with more environmentally responsible products. Others are developing recyclable or biodegradable packaging, recycled materials and components, better pollution controls and more energy-efficient operations. For example, LUSH Australia was recently recognised for its sustainable business practices, reflected in its core values: fighting animal testing, freshest cosmetics online, ethical buying, 100% vegetarian, handmade, and naked packaging. They sell solid shampoos that do not need packaging; unavoidable packaging is recycled or repurposed; and they source sustainably produced raw materials. At the other end of the marketing spectrum, Auckland manufacturer Cemix has developed a new concrete, Envirocrete, which uses 50 per cent recycled materials. A major hardware chain has picked up this product and distributes it throughout New Zealand.35 Companies today are looking to do more than just good deeds. More and more, they are recognising the link between a healthy ecology and a healthy economy. They are learning that environmentally responsible actions can also be good business.

Environmental sustainability: LUSH is committed to producing handmade goods that minimise the impact on the environment. LUSH Fresh Handmade Cosmetics

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Technological environment (p. 83)

The technological environment is perhaps the most dramatic force now shaping our destiny. Technology has released such wonders as antibiotics, robotic surgery, miniaturised electronics, laptop computers and the internet. It also has released such horrors as nuclear missiles, chemical weapons and assault rifles. Additionally, it has given rise to such mixed blessings as the automobile, television and credit cards. Our attitude towards technology depends on whether we are more impressed with its wonders – or with its blunders. New technologies can offer exciting opportunities for marketers. For example, what would you think about having tiny little transmitters implanted in all the products you buy that would allow tracking of the products from their point of production through use and disposal? Or how about a bracelet with a chip inserted that would let you make and pay for purchases, receive personalised specials at retail locations, or even track your whereabouts or those of friends? On the one hand, such technology would provide many advantages to both buyers and sellers. On the other hand, it could be a bit scary for consumers concerned with, for example, invasion of their privacy. Either way, with the advent of radio-frequency identification (RFID) transmitters, it is already happening. Many firms are already using RFID technology to track products and customers at various points in the distribution channel. For example, libraries around Australia and New Zealand are using 3M RFID tracking systems to manage their books. Tags are fixed on each item and then library visitors can check-out their own books; librarians can use a hand-held reader to check the collection and to assist with re-shelving items; and, finally, when a book comes back to the library, the RFID tag is automatically tracked as the book passes into the return bin.36 The technological environment changes rapidly, creating new markets and opportunities. However, every new technology replaces an older technology. Transistors hurt the vacuum-tube industry, digital photography hurt the film business, and digital downloads and streaming are hurting the CD and DVD businesses. When old industries fight or ignore new technologies, their businesses decline. Thus, marketers should monitor the technological environment closely. Companies that do not keep up will soon find their products outdated. If that happens, they will miss new product and market opportunities (see Marketing in action 3.1 for trending technological development that many marketers are currently exploring). Investment in research and development will be crucial for companies and nations. Scientists today are researching a wide range of promising new products and services, ranging from practical solar energy, electric cars, paint-on computer and entertainment video displays, and powerful computers that you can wear or fold into your pocket, to go-anywhere concentrators that produce drinkable water from the air. Many companies are adding marketing people to research and development teams in an effort to obtain a stronger marketing orientation. The challenge in each case is not only technical but also commercial – that is, to make practical, affordable versions of these products. (See also Chapter 8, where we explore newproduct development and innovation in more detail.) As products and technology become more complex, the public needs to know that these are safe. Thus, government agencies investigate and ban potentially unsafe products. In Australia and New Zealand, there is a comprehensive set of laws and guidelines to help businesses develop new products that are safe for all users (especially children). Marketers should be aware of these regulations when applying new technologies and developing new products.

Political and social environment (pp. 83–87)

Marketing decisions are strongly affected by developments in the political environment. The political environment consists of laws, government agencies and pressure groups that influence or limit various organisations and individuals in a given society.

83

technological environment

Forces that create new technologies, creating new products and market opportunities. 

political environment

Laws, government agencies and pressure groups that influence or limit various organisations and individuals in a given society.

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Marketing in Action 3.1

The quite real virtual experience

What is reality? When it comes to some experiences, is virtual reality any less real than – well – real reality? If you attend your marketing lecture online, is it less real than a face-to-face lecture? Let us suppose you enjoyed the lecture in the comfort of your own home (or office) and, because it was delivered using a virtual reality system, you could look around and see your classmates, you could chat with your work group and complete an in-class assessment, but you did not have to go out in the heat (or cold) to get there. You did not have to spend an hour and a half in traffic or on public transport, and you made it to your friend’s party without skipping class on Friday night. That seems pretty real and really useful. This is the promise of the virtual experience – something as real as reality – with all the conveniences, flexibility and even safety of not being there. For example, as part of an event to promote safety, NRMA insurance offered drivers the chance to experience a virtual car accident in two different cars – first in a modern car and then in a car designed 30 years ago. Wearing a virtual reality (VR) headset and inside a car rigged with a hydraulic system to sync with the VR vision, the crash testers experienced the accident and walked away – a bit shaken but not hurt. The promotion really brought home the message of car safety to drivers. RMIT University in Melbourne has a Virtual Experience Laboratory, which has been designed for students and industry to explore how VR can be used in industrial settings. The lab provides opportunities to consider how activities can be transformed to enhance the design and testing of complex systems, to make dangerous jobs safer, to enable access to remote locations and to make many other process and activities easier. This type of tool and other VR systems offer unique opportunities for marketers. For example, Qantas used a virtual destinations tour with first-class travellers, who, wearing VR headsets, had the opportunity to see before they landed, with virtual tours of Kakadu National Park and the Great Barrier Reef. In fact, Hamilton Island’s

Virtual destinations: Hamilton Island used virtual reality to offer visitors at various industry exhibitions around the world a unique and breathtaking experience of the Great Barrier Reef. How better to transport visitors to the beauty on the doorstep of this magnificent island resort? Hamilton Island

luxury resort, qualia, recently made great use of VR at an international travel and accommodation exhibition in Las Vegas. Exhibitors toured the Great Barrier Reef and Hamilton Island by helicopter. At the same exhibition, Business Events Sydney offered an even more knuckle-clenching bridge climb. But it is important to get the content right when using VR for destination marketing. As one visitor to the exhibition noted, ‘content really is key when it comes to virtual reality experiences’ – get it wrong and, instead of a great communication tool, the experience will be ‘dull and flat’ and no marketer manager wants that perception connected with their brand. Virtual reality is not just about creating new and exciting promotional experiences – it offers unique opportunities to create new products. Consider

Sources: Adam Bender, ‘Oculus Rift shows (virtual) reality of car crashes’, Computerworld, 17 March 2014, ; Adam Bender, ‘Qantas tests virtual reality for in-flight entertainment’, Computerworld, 29 January 2015, ; ‘Virtual experiences laboratory’, RMIT University, . Quotes from ‘Integrating virtual reality into the event world’, The Nibbler, 3 November 2016, ; and Daniel Kreps, ‘ABBA plan “previously unimagined” virtual reality experience’, Rolling Stone, 26 October 2016, ; all accessed December 2016.

the last concert ticket you bought – how much did it cost you? It is not unusual

Questions

for tickets to cost in the region of $300–$400. Rolling Stone magazine recently

❶ Virtual reality offers exciting possibilities for marketing communications

shared details of a new project between the iconic 70’s band, ABBA, and music entrepreneur, Simon Fuller. The Swedish band has consistently resisted requests to reform, playing only once in the last 30 years. But, in 2018, that is all to change as

and new product innovation. Choose a brand you know really well – how would you use VR to augment consumer experiences? ❷ The sales team for a mid-sized real-estate business has asked you to

a new generation of fans will get the opportunity to see ABBA perform ‘live’. Details

develop a VR sales strategy for their business. The company is keen to reach

of the project are yet to be revealed but it is said to include both VR and artificial

out to new market segments (both buyers and sellers) with a VR experience.

intelligence technologies to ‘create new forms and entertainment and content’.

What advice would you give to the company and the sales team?

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Legislation regulating business Even the strongest advocates of free-market economies agree that the system works best with at least some regulation. Well-conceived regulation can encourage competition and ensure fair markets for goods and services. Thus, governments develop public policy to guide commerce – sets of laws and regulations that limit business for the good of society as a whole. Almost every marketing activity is subject to a wide range of laws and regulations. Legislation affecting business around the world has increased steadily over the years. Australia and New Zealand have many laws covering issues such as competition, fair trade practices, environmental protection, product safety, truth in advertising, consumer privacy, packaging and labelling, pricing and other important areas. Understanding the public policy implications of a particular marketing activity is not a simple matter. For example, in Australia, there are many laws created at the national, state and local levels, and these regulations often overlap. Moreover, regulations are constantly changing – what was allowed last year may now be prohibited, and what was prohibited may now be allowed. Marketers must work hard to keep up with changes in regulations and their interpretations. Business legislation has been enacted for a number of reasons. The first is to protect companies from each other. Although business executives may praise competition, they sometimes try to neutralise it when it threatens their business. So, laws are passed to define and prevent unfair competition. In Australia, such laws are enforced by the Australian Competition and Consumer Commission (ACCC), an independent authority established by the Commonwealth government. The second purpose of government regulation is to protect consumers from unfair business practices. Some firms, if left alone, would make shoddy products, invade consumer privacy, tell lies in their advertising, and deceive consumers through their packaging and pricing. Unfair business practices have been defined and are enforced by various agencies. The third purpose of government regulation is to protect the interests of society against unrestrained business behaviour. Profitable business activity does not always create a better quality of life. Regulation arises to ensure that firms take responsibility for the social costs of their production or products. International marketers will encounter dozens, or even hundreds, of agencies set up to enforce trade policies and regulations. The Australian and New Zealand governments have established many of these bodies – for example, Food Standards Australia New Zealand (FSANZ) is a statutory body jointly established by the two countries to ensure safe food supply in both Australia and New Zealand. This authority develops and administers the Australia New Zealand Food Standards Code, which sets standards in food production, processing and labelling. Similarly, the ACCC is Australia’s national agency dealing with competition matters and is the agency responsible for enforcing the Competition and Consumer Act 2010 (Cth). This Act covers a wide range of business activities, but most relevant to marketers is Schedule 2, which sets out the Australian Consumer Law (ACL). The ACL deals with deceptive advertising, consumer guarantees and product safety, among other matters. Other agencies are organised at state level – for example, environmental protection authorities are established in each Australian state. These organisations affect business processes and can have a significant impact on marketing performance, and effective managers will keep up with developments and changes in these authorities. New laws and their enforcement will continue to increase. Business executives must monitor these developments when planning their products and marketing programs. Marketers need to know about the main laws protecting competition, consumers and society. They need to understand these laws at the local, state, national and international levels.

Increased emphasis on ethics and socially responsible actions Written regulations cannot possibly cover all potential marketing abuses, and existing laws are often difficult to enforce. However, beyond written laws and regulations, business is also governed by social codes and rules of professional ethics.

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Socially responsible behaviour Enlightened companies encourage their managers to look beyond what the regulatory system allows and simply ‘do the right thing’. These socially responsible firms actively seek out ways to protect the long-term interests of their consumers and the environment. Almost every aspect of marketing involves ethics and social responsibility issues. Unfortunately, because these issues usually involve conflicting interests, well-meaning people can honestly disagree about the right course of action in a given situation. Thus, many industrial and professional trade associations have developed codes of ethics – for example, the Market Research Society of New Zealand (MRSNZ) and the Australian Association of National Advertisers (AANA). Additionally, more companies are now developing policies, guidelines and other responses to complex social responsibility issues. The boom in online marketing has created a new set of social and ethical issues. Critics worry most about online privacy issues. There has been an explosion in the amount of personal digital data available. Users themselves supply some of these data. They voluntarily place highly private information on social networking sites, such as Facebook or LinkedIn, or on genealogy sites that are easily searched by anyone with a computer or smartphone. However, much of the information is systematically developed by businesses seeking to learn more about their customers, often without consumers realising they are under the microscope. Legitimate businesses track consumers’ online browsing and buying behaviour and collect, analyse and share digital data from every move consumers make at their online sites. Critics are concerned that companies may now know too much and that some companies might use digital data to take unfair advantage of consumers. Although most companies fully disclose their internet privacy policies, and most work to use data to benefit their customers, abuses do occur. As a result, consumer advocates and policymakers are taking action to protect consumer privacy. In both Australia and New Zealand, there is legislation regarding what companies are able to do with the personal information they collect about their customers, employees and various publics. Legislation aside, responsible businesses tell their customers and publics how they will use such information. For example, the Australian Broadcasting Corporation (ABC) states that it ‘will be transparent about how and why we collect and use your information’, and makes its privacy policy available on its website.37 In Chapters 4 and 14, we discuss these and other societal marketing issues in greater depth.

Cause-related marketing: Qantas partners with UNICEF with its ‘Change for Good’ campaign. Qantas passengers share their spare change to support UNICEF’s global health, child protection and education programs. Qantas

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Cause-related marketing To exercise their social responsibility and build more positive images, many companies are now linking themselves to worthwhile causes. These days, every product seems to be tied to some cause. Buy fresh daffodils or a daffodil pin from Coles and support the Cancer Council. Or next time you travel with Qantas, put your foreign and local currency in the ‘Change for Good’ envelope and support UNICEF’s global health, child protection and education programs.38 In fact, some companies are founded entirely on causerelated missions. Under the concept of ‘value-led business’ or ‘social enterprise’, their mission is to use business to make the world a better place. Cause-related marketing has become a primary form of corporate giving. It lets companies ‘do well by doing good’ by linking purchases of the company’s products or services with fundraising for worthwhile causes or charitable organisations. Companies now sponsor dozens of cause-related marketing campaigns each year. Many are backed by large budgets and a full complement of marketing activities. Beyond being socially admirable, it also makes good economic sense, for both the company and its customers. Companies can do good in the world while still being profitable.39 Cause-related marketing has stirred some controversy. Critics worry that it is more a strategy for selling than a strategy for giving – that ‘cause-related’ marketing is really ‘cause-exploitative’ marketing. Thus, companies using cause-related marketing might find themselves walking a fine line between increased sales and an improved image, and facing charges of exploitation. However, if handled well, cause-related marketing can greatly benefit both the company and the cause. The company gains an effective marketing tool while building a more positive public image. The charitable organisation or cause gains greater visibility and important new sources of funding and support.

Cultural environment (pp. 87–90)

The cultural environment is made up of institutions and other forces that affect a society’s basic values, perceptions, preferences and behaviours. People grow up in a particular society that shapes their basic beliefs and values. They absorb a world view that defines their relationships with others. The following cultural characteristics can affect marketing decision making.

Persistence of cultural values People in a given society hold many beliefs and values. Their core beliefs and values have a high degree of persistence. For example, most Australians believe in working, getting married, giving to charity and being honest. These beliefs shape more specific attitudes and behaviours found in everyday life. Core beliefs and values are passed on from parents to children and are reinforced by schools, churches, business and government. Secondary beliefs and values are more open to change. Believing in marriage is a core belief; believing that people should get married early in life is a secondary belief. Marketers have some chance of changing secondary values but little chance of changing core values. For example, family-planning marketers could argue more effectively that people should get married later, rather than not getting married at all.

cultural environment

Institutions and other forces that affect a society’s basic values, perceptions, preferences and behaviours.

Shifts in secondary cultural values Although core values are fairly persistent, cultural swings do take place. Consider the impact of popular music groups, movie personalities and other celebrities on young people’s hairstyling and clothing norms. Marketers want to predict cultural shifts in order to spot new opportunities or threats. Several firms offer ‘futures’ forecasts in this connection. For example, Trendwatching.com has tracked consumer value trends for years – its annual Trend Report analyses and interprets the forces that shape consumers’ lifestyles and their marketplace interactions. The main cultural values of a society are expressed in people’s views of themselves and others, as well as in their views of organisations, society, nature and the universe.

People’s views of themselves People vary in their emphasis on serving themselves versus serving others. Some people seek personal pleasure, wanting fun, change and escape. Others seek self-realisation through religion, recreation or the

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avid pursuit of careers or other life goals. Some people see themselves as sharers and joiners; others as individualists. People use products, brands and services as a means of self-expression, and they buy products and services that match their views of themselves. Marketers can target their products and services based on such selfviews. For example, Shoes of Prey appeals to those women who want to express their individualism. The online shoe store invites the designer in everyone to create their perfect shoe by personalising the shape, colour and heel height. Appealing to people’s desires for self-expression and individualism, the website exhorts: ‘Our passion is handcrafting quality, customized shoes that are as unique as you are.’40

People’s views of others People’s attitudes towards, and interactions with, others shift over time. In recent years, some analysts have voiced concerns that the internet age would result in diminished human interaction, as people buried their heads in their computers or emailed and texted rather than interacting personally. Instead, today’s digital technologies seem to have launched an era of what one trend watcher calls mass mingling. Rather than interacting less, people are using online social media and mobile communications to connect more than ever. The more people meet, network, message and socialise online, the more likely they are to eventually meet up with friends and followers in the real world.41 However, these days, even when people are together, they are often ‘alone together’. Groups of people may sit or walk in their own little ‘bubbles’, intensely connected to tiny screens and keyboards. One expert describes the latest communication skill as ‘maintaining eye contact with someone while you text someone else; it’s hard but it can be done,’ she says. ‘Technology-enabled, we are able to be with one another, and also elsewhere, connected to wherever we want to be.’42 Thus, whether the new technologydriven communication is a blessing or a curse is a matter of much debate. This new way of interacting strongly affects how companies market their brands and communicate with customers. Consumers increasingly connect to friends and online brand communities to learn about and buy products and to shape and share brand experiences. As a result, it is important for brands to participate in these networks, too. (See Chapter 13 for more on digital marketing.)

Mass mingling: Rather than diminishing human interaction, today’s social media and mobile communications are causing people to increasingly tap into their networks of friends. © Africa Studio/Shutterstock.com

People’s views of organisations People vary in their attitudes towards corporations, government agencies, trade unions, universities and other organisations. By and large, people are willing to work for major organisations and expect them, in turn, to carry out society’s work. The past two decades have seen a sharp decrease in confidence in and loyalty towards business and political organisations and institutions. In the workplace, there has been an overall decline in organisational loyalty. Company downsizing and restricted hours combined with excessively high senior-management salary packages have bred cynicism and distrust. In just the last decade, rounds of layoffs resulting from the global recession, along with corporate scandals and other unsettling activities, have resulted in a further loss of confidence in big business. Many people today see work not as a source of satisfaction but as a required chore to earn money with which to enjoy their non-work hours. This trend suggests that organisations need to find new ways to win consumer and employee confidence. People’s views of society People vary in their attitudes towards their society – patriots defend it, reformers want to change it, malcontents want to leave it. People’s orientation to their society influences their consumption patterns and attitudes towards the marketplace. Australian attitudes to patriotism became polarised in the 1990s as the debate over whether Australia should become a republic became politicised. And, in the recent decade,

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concerns over terrorism, asylum seekers, refugees, business failures and general disquiet have served to raise the level of patriotism in Australia, sometimes at the expense of other cultural groups. Whichever country we examine, people’s orientation to their society influences their consumption patterns, level of savings and attitudes towards the marketplace. Marketers need to monitor consumers’ changing social orientations and adapt their strategies accordingly. Many companies have responded to renewed consumer patriotism with ‘Made in Australia’ themes and flag-waving promotions. However, marketers must take care when responding to such strong national emotions.

People’s views of nature People vary in their attitudes towards the natural world – some feel ruled by it, others feel in harmony with it and still others seek to master it. A long-term trend has been people’s growing mastery over nature through technology and the belief that nature is bountiful. More recently, however, people have recognised that nature is finite and fragile, and that it can be destroyed or spoiled by human activities. This renewed love of things natural has created a market of consumers who seek out everything from natural, organic and nutritional products to fuel-efficient cars and alternative medicines. These consumers make up a sizable and growing market. For example, Thunderpants, a New Zealand clothing company, produces locally made organic cotton clothing. The company website explains that their business model is based on slow growth principles: ‘family before business and lifestyle over work’. They aim to make quality clothing from organic cotton, locally produced fabric and locally produced garments. The range includes everything from undies, socks, swimwear and leisure wear, and they even have items that can be hand-coloured. Committed to keeping it real, the company has a test kitchen where new product ideas are road-tested by customers. They also support many charities with a special range called ‘Sausage Sizzle Philanthropants’, where $1 from every purchase is donated to the current month’s charity. Customers can pick a condiment to go with their purchase, and so add an extra dollar or ten to the order as a donation: tomato sauce for $1, mustard for $2 – right on up to ‘The Works’ for $10.43 Food producers have also found fast-growing markets for natural and organic products. In Australia, The Raw Food Store sells a range of raw and organic foods and sustainable products. ‘We wanted to share this passion with other families who want to make conscious choices not only for their health, their children but for the planet,’ the company’s website states.44 Research shows that the Australian organic industry is worth over $1.7 billion each year. The market is growing at a phenomenal rate of 15 per cent each year. Today, buyers of organic products are not a great deal different from other consumers – their age, income and education are similar to those of other buyers; what is different, however, is their attitudes. They have strong feelings for the wellbeing of the planet, their communities and themselves. Niche  marketers have sprung up to serve this market, and traditional food chains, such as Woolworths and New World, have added separate natural and organic food sections. Over the next few years, we can expect to see organic produce become increasingly mainstream.45 People’s views of the universe Finally, people vary in their beliefs about the origin of the universe and their place in it. Although most Australians follow a particular set of religious beliefs, religious conviction and practice have been declining through the years and church attendance has fallen steadily. Over 22 per cent of Australians now say they have no religious affiliation.46 However, the fact that

People’s view of nature: Responding to concerns about the health of the planet, Thunderpants produce high-quality, locally made organic clothing. The company sets family before business and lifestyle over work. Thunderpants Ltd

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people are dropping out of organised religion does not mean they are abandoning their faith. Research conducted by the Australian Centre on Quality of Life at Deakin University to investigate quality of life shows a general increasing level of satisfaction with spirituality or religion.47 Some futurists have noted a renewed interest in spirituality, perhaps as a part of a broader search for a new inner purpose. People have been moving away from materialism and ‘dog-eat-dog’ ambition to seek more permanent values – family, community, Earth, faith – and a more certain grasp of right and wrong. This changing spiritualism affects consumers in everything from the television shows they watch and the books they read to the products and services they buy.

Linking the concepts Pause for a moment and consider that, beyond the demographic factors, the other parts of the macroenvironment also affect our lives and shape marketing strategies. ● Take a moment to consider how the economic environment, the natural environment, the technological environment and the political and social environment have shaped the decisions you have made about a recent purchase.

Which part of the macroenvironment most impacted your decision? ● Reflect on your views of yourself, others, organisations, society and nature. How are they shaping your purchasing decisions? What brands most align, and least align, with your views? What marketing strategies seem to particularly resonate with you in relation to these views?

Responding to the marketing environment (p. 90) Someone once observed, ‘There are three kinds of companies: those who make things happen, those who watch things happen, and those who wonder what’s happened.’48 Many companies view the marketing environment as an uncontrollable element to which they must react and adapt. They passively accept the marketing environment and do not try to change it. They analyse the environmental forces and design strategies that will help the company avoid the threats and take advantage of the opportunities the environment provides. Other companies take a proactive stance towards the marketing environment. Rather than assuming that strategic options are bounded by the current environment, these firms develop strategies to change the environment. Companies and their products often create and shape new industries and their structures – products such as Uber’s ride, Apple’s iPad and iPhone, and Google’s search engine. Even more, rather than simply watching and reacting to environmental events, proactive companies take aggressive actions to affect the publics and forces in their marketing environment. Such companies hire lobbyists to influence legislation affecting their industries and stage media events to gain favourable press coverage. They take to the social media and run blogs to shape public opinion. They instigate legal actions and file complaints with regulators to keep competitors in line, and they form contractual agreements to better control their distribution channels. By taking action, companies can often overcome seemingly uncontrollable environmental events. For example, whereas some companies view the seemingly ceaseless online rumour mill as something over which they have no control, others work proactively to prevent or counter negative word of mouth. Marketing management cannot always control environmental forces. In many cases, it must settle for simply watching and reacting to the environment. For example, a company would have little success in trying to influence geographic population shifts, the economic environment or major cultural values. It also pays to remember that the other organisations that make up part of a business’s microenvironment will also be trying to control their own environment – which makes things even more unpredictable and uncontrollable for the marketing business. Despite this unpredictability, smart marketing managers will take a proactive – rather than a reactive – approach to the marketing environment.

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Student Learning Centre Reviewing the learning objectives

91

resource management. Environmental concerns create marketing opportunities for alert companies. The technological environment creates both opportunities and challenges. Companies that fail to keep up with technological change will miss out on new-product and marketing opportunities.

Learning Objective 4. Explain the key changes in the political and cultural environments. (pp. 83–90) The political environment consists of laws, agencies and groups that influence or

In this chapter and in Chapters 4 and 5, we examine the environments of

limit marketing actions. The political environment has undergone three changes

marketing and how companies analyse these environments to better understand

that affect marketing worldwide: increasing legislation regulating business,

the marketplace and consumers. Companies must constantly monitor and manage

strong government agency enforcement and greater emphasis on ethics and

the marketing environment in order to seek opportunities and ward off threats.

socially responsible actions. The cultural environment is made up of institutions

The marketing environment consists of all the actors and forces influencing the

and forces that affect a society’s values, perceptions, preferences and behaviours.

company’s ability to transact business effectively with its target market.

The environment shows trends towards new technology-enabled communication,

Learning Objective 1. Describe the environmental forces that affect the company’s ability to serve its customers. (pp. 68–90)

a lessening trust of institutions, greater appreciation for nature, a changing spiritualism and the search for more meaningful and enduring values.

The company’s microenvironment consists of other actors close to the company

Learning Objective 5. Discuss how companies can react to the marketing environment. (p. 90)

that combine to form the company’s value delivery network or that affect its

Companies can passively accept the marketing environment as an uncontrollable

ability to serve its customers. It includes the company’s internal environment

element to which they must adapt, avoiding threats and taking advantage of

– its several departments and management levels – as it influences marketing

opportunities as they arise. Or they can take a proactive stance, working with

decision making. Marketing channel firms – suppliers and marketing

environmental changes rather than simply reacting to them. Whenever possible,

intermediaries, including resellers, physical distribution firms, marketing services

companies should try to be proactive, rather than reactive.

agencies and financial intermediaries – cooperate to create customer value. Five types of customer markets include consumer, business, reseller, government and international markets. Competitors vie with the company in an effort to serve

Discussion questions

customers better. Finally, various publics have an actual or potential interest in or

❶ Suppliers, marketing organisations and marketing intermediaries.

impact on the company’s ability to meet its objectives.

It  is evident that there are suppliers and marketing intermediaries who,

The macroenvironment consists of larger societal forces that affect the

together with the marketers they supply and support, must work together

entire microenvironment. The six types of forces making up the company’s

to satisfy customer needs, wants and demands. Is marketing more than

macroenvironment are demographic, economic, natural, technological, political and

promoting and selling a branded product produced by a single marketing

cultural forces. These forces shape opportunities and pose threats to the company.

organisation? If so, how is marketing undertaken? (Learning Objective 1)

Learning Objective 2. Explain how changes in the demographic and economic environments affect marketing decisions. (pp. 72–80) Demography is the study of the characteristics of human populations. Today’s

(AACSB: Reflective Thinking) ❷ Changing populations. Given that Australia and New Zealand’s populations are having children later, and are working longer and living longer, how might these changes affect the fortunes of marketing organisations in these countries? (Learning Objective 2) (AACSB: Reflective Thinking)

demographic environment shows a changing age structure, shifting family profiles,

❸ Households, families and advertising content. There have been major shifts

geographic population shifts, a better-educated and more white-collar population,

in the composition of households in Australia. For one thing, there are fewer

and increasing diversity. The economic environment consists of factors that affect

households comprising a male and female with their biological young.

buying power and patterns. The economic environment is characterised both by

The modern family may take many different structures (not unlike the

greater consumer concern for value and by shifting consumer spending patterns –

television program, Modern Family). Do you think advertisers reflect these

seeking just the right combination of good quality and service at a fair price.

changes in their advertising? Do they need to? Justify your answer. What

The distribution of income also is shifting. The rich have grown richer, the middle

demographic changes should be reflected in advertising and marketing

class has shrunk and the poor have remained poor, leading to a two-tiered market.

Learning Objective 3. Identify the main trends in the firm’s natural and technological environments. (pp. 80–83)

communications? (Learning Objective 2) (AACSB: Reflective Thinking) ❹ Nature and technology. The natural and technological environments of business present some of the biggest opportunities and challenges for marketers of the future. Resources are constrained; we are reaching peak oil; water and energy costs are increasing; and there is considerable pressure for businesses and

The natural environment shows three main trends: shortages of certain raw

marketers to be more sustainable. Yet, at the same time, technology presents

materials, higher pollution levels and more government intervention in natural

promises of solutions through innovation. However, innovation is expensive

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Part 2  Understanding the marketplace and consumers

and changes are occurring at such a fast pace that most businesses can barely

❷ In a small group, discuss cultural trends in Australia or New Zealand.

keep up. Some businesses are responding by simplifying and reducing costs, and

Research one of these trends in depth and create an infographic illustrating

others are innovating and increasing costs. What are the advantages of each

the trend’s impact on marketing. Present your infographic and discuss the

approach? What market segments might find each approach attractive? What

implications of these factors for marketers. (Learning Objective 2) (AACSB:

can marketers do to be proactive about managing these changes? (Learning Objectives 3 and 5) (AACSB: Reflective Thinking)

Teamwork; Use of IT; Diversity) ❸ The Communications Council provides a list of many of the advertising

❺ Cause-related marketing. Opportunities abound for businesses to connect

codes and regulations affecting marketing in Australia and New Zealand.

with their publics and relate to the social and political changes taking place

Visit the Communications Council website and browse the resource centre to learn about these regulations

invest millions of dollars in sponsoring charities, sporting events, cultural

and codes. Write a brief report on one code or regulation and how it impacts

groups, health organisations and the arts. There is an immense social benefit

businesses and consumers. (Learning Objective 4) (AACSB: Communication;

that comes from this; however, there are both advantages and disadvantages

Use of IT, Application of Knowledge)

for the marketer and, sometimes, for the sponsored organisation. The benefits are more obvious but what are some of the drawbacks of cause-related marketing for the business and the sponsored organisation? In what cultural contexts (if any) would cause-related marketing be inappropriate? (Learning Objective 4) (AACSB: Reflective Thinking)

Navigating the key terms Learning Objective 1

Generation Z (p. 75)

marketing intermediaries  (p. 69)

Millennials (Generation Y)  (p. 74)

public  (p. 70)

Learning Objective 3

Critical thinking exercises

Learning Objective 2

❶ A small online retailer sells high-quality organic children’s clothing made

baby boomers  (p. 73)

environmental sustainability  (p. 82) natural environment  (p. 80) technological environment  (p. 83)

in New Zealand to customers in Asia. Identify the microenvironments

demography  (p. 72)

and macroenvironments for this business. What are the main issues that

economic environment  (p. 79)

Learning Objective 4

the company should monitor closely over the next decade? (Learning

Engel’s laws  (p. 80)

cultural environment  (p. 87)

Objective 1) (AACSB: Communication; Application of Knowledge)

Generation X  (p. 73)

political environment  (p. 83)

Mini cases 3.1  Microeconomic environment Connecting with the network Running a small business is pretty lonely sometimes. The owner is not only

❶ Conduct an online search and find the local Chamber of Commerce or

the CEO, but also the chief financial officer, production manager, distribution

business networking organisation in your area. What benefits do they

manager, sales coordinator and marketing manager all rolled into one. With all

list for being part of the network? What challenges do you foresee

these responsibilities it is no wonder that small-business owners have a few

for the small-business owner joining the network? What would

things keeping them awake at night. Among their top-10 concerns are cashflow

be the benefits of connecting with competitors from a marketing

and profitability – hardly a revelation. You might be surprised to learn that making

perspective? (Learning Objective 1) (AACSB: Information Technology;

connections is on that list, too. Connections are important – they represent new customers, distributors, suppliers and the marketing intermediaries that can make a difference between a successful business and one that fails.

Reflective Thinking) ❷ Business Chambers or Chambers of Commerce often take on an advocacy role – raising concerns on behalf of business owners – with

Chambers of Commerce are run the world over and provide support

different political and government groups. Imagine you own a

to members, aiming to inspire business vitality and growth. They provide

small business. What are the issues you would like to raise with

networking opportunities for members, free resources and often have

the government? What marketing concerns that are particularly

mentoring services as well. The Auckland Chamber of Commerce is one such

relevant to various publics would you like to have voiced by your

organisation. At its regular events and training sessions, a small-business owner

local Chamber of Commerce from a business owner’s perspective?

is likely to connect with many different business owners, some competitors,

(Learning Outcome 1) (AACSB: Reflective Thinking; Application of

suppliers, other marketing intermediaries and perhaps even some customers.

Knowledge)

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3.2 Technological environment Uber and the sharing economy Changes in the technological environment have created amazing

attacked, of kidnappings and driver accidents, questioning the thoroughness

opportunities for new business models while, at the same time, threatened

of background checks of the 160 000-plus Uber drivers around the world.

traditional models. For example, Airbnb has shaken up the hospitality industry

Some countries have banned Uber because of these issues.

by allowing people to rent out spare rooms or their entire homes to strangers,

❶ Describe how Uber’s business model works and the role technology

and Uber’s ride-sharing business allows consumers to hire a ride from drivers

has played in its success. What are the arguments in favour of banning

looking to earn extra money with their vehicles. And with Uber, the consumer

these types of businesses? What are the arguments in favour of

does not have to worry about having enough cash or giving their credit card

defending them? (Learning Outcome 3) (AACSB: Communication; Use

to the driver – payments are all done through the Uber app. Traditional hotel

of IT; Reflective Thinking)

and cab companies are crying foul, claiming that these businesses are not

❷ Describe examples of two other businesses based on the sharing

playing by the same regulatory rules to which they themselves are subject.

economy model and create a new business idea based on this concept.

Others are concerned about safety amid reports of riders allegedly being

(Learning Outcome 3) (AACSB: Communication; Reflective Thinking)

3.3 Marketing analytics at work Exploring demographic trends Marketers are interested in demographic trends related to such variables

Statistics, as presented in the following table. The table shows the income

as age, ethnicity and population. The Australian Census Bureau provides

share (%) and the mean weekly income ($) for all households in Australia.

considerable demographic information that is useful for marketers.

The quintiles show households grouped into five equally sized bands. Take

For example, Figure 3.3 is based on data from the Australian Bureau of

a close look at the data.

Gross household income, Australia: 1994–95 and 2013–14 1994–95 Income share (%) Lowest quintile Second quintile

2013–14

Mean income per week ($)

3.9

253

Income share (%) 4.2

Mean income per week ($) 435

9.4

604

8.9

922

Third quintile

16.1

1037

15.0

1552

Fourth quintile

24.9

1604

23.3

2403

Highest quintile

45.8

2954

48.5

5002

Source: Australian Bureau of Statistics, Household Income and Wealth, Australia 2013–14, Cat. No. 6523, Table 1.2 Gross household income, .

❶ In 1994–95, the third quintile (the middle 20 per cent of all households)

For example, in 1994–95, the mean weekly household income of the

had a 16.1 per cent income share but, by 2013–14, this quintile had

second quintile was 2.4 times greater than that of the lowest quintile

dropped to a 15.0 per cent income share. Calculate the percentage

in the same year. The mean weekly household income of the highest

change in share of income for this group. In real terms, what do you

quintile was a massive 11.7 times more than that of the lowest

think this change means for families in this middle-class group?

quintile. Calculate the relative differences in mean weekly income for

(AACSB: Communication; Analytical Thinking; Reflective Thinking)

all quintiles compared to the lowest quintile for each series. Prepare

❷ Notice how significantly the mean weekly income for each group has

a short talk describing the differences and the changes in household

changed between1994–95 and 2013–14. One way to evaluate the

income between 1994–95 and 2013–14. What are the implications

changes is to consider the relative differences between each group.

for marketers? (AACSB: Communication; Analytical Thinking)

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3.4 Ethical reflection Greenwashing Index You might have heard about citizen science, where scientific investigation

out or masks important information, making the green claim sound better

is crowdsourced, with volunteers from all over the world working alongside

than it is’.49

scientists to gather, evaluate and classify data. Together, the collective

❶ Working in a group, choose an ad that everyone has seen. First working

achieves something that would take individual scientists years and decades

individually, rate the ad using the Greenwashing Index criteria (rate

to do. Crowdsourced projects and citizen watchdog groups are active in

the ad out of five for each criterion). Now share your evaluations with

marketing, too. The Greenwashing Index

the group. How similar are your views? (Learning Objective 4) (AACSB:

is a collaborative project between EnviroMedia (a social marketing business)

Communication, Teamwork, Ethical Reasoning)

and the University of Oregon. At the website, citizen marketers post details

❷ A small car-washing business prides itself on its green and socially

of advertisements promoting the environmental qualities of a product or

sustainable credentials. The company uses recycled water and

company, they rate the ads and then other citizen marketers rate the ad, too.

biodegradable detergents, and wastewater is recovered and reused to

It is difficult for a business to fake sustainability when people from all over

irrigate landscaping in the local shopping centre where the business is

the world keep the business honest and each other informed.

located. The business also works closely with social organisations to

The Greenwashing Index uses five scoring criteria to rate each ad (high

provide work for young adults with intellectual disabilities, paying fair

scores are unfavourable), including ‘(1) the ad misleads with words, (2) the

wages and offering an employee social-networking program. Prepare

ad misleads with visuals and/or graphics, (3) the ad makes a green claim

an ad storyboard that shares the green and social credentials of the

that is vague or seemingly improbable, (4) the ad overstates or exaggerates

business. Present your ad to the class. (Learning Objective 4) (AACSB:

how green the product/company/service actually is, and (5) the ad leaves

Communication; Ethical Reasoning; Application of Knowledge).

References

 1 Prakash J Singh & Damien Power, ‘The nature and effectiveness of collaboration between firms, their customers and suppliers: A supply chain perspective’, Supply Chain Management, 14(1), 2009, pp. 189–200.  2 BHP Billiton, ‘BHP Billiton boosts support for Aboriginal and Torres Strait Islander art’, Community & Sustainability News,17 November 2016, ; and see also TARNANTHI website, , accessed November 2016.  3 ’World population clock’, Worldometers, , accessed November 2016. This website provides continuously updated projections of the world populations, sourced from the United Nations and the United States Census Bureau.  4 Population figures are from the Australian Bureau of Statistics, ; and Statistics New Zealand, , all accessed November 2016.  5 Median age data from statista, , accessed November 2016.  6 See ‘Australia’s generations by wealth and income’, The McCrindle Blog, 1 June 2016, , accessed November 2016.  7 See Lucy Battersby, ‘Advertisers ignoring the big-spending baby boomers’, Sydney Morning Herald, 25 July 2016, ; Lindsay Bennett, ‘New agency targets baby boomer market’, AdNews, 8 March 2016, ; and also My Generation Advertising website, ; all accessed November 2016.  8 Quotes from Charis Chang, ‘Generation X is the forgotten, “silent” generation’, news.com.au, 4 October 2016, , accessed November 2016.  9 Australian Bureau of Statistics, Household Use of Information Technology, Australia, 2014–15, Cat. No. 8146.0, released 18 February 2016. 10 ’Does anyone pay attention to online advertising?’, Roy Morgan Research press release, 7 October 2013; ‘NAB online retail sales index: Indepth report – June 2016’, NAB Business Research and Insights, , accessed November 2016; quotes from David Mielach,

‘How to bridge the marketing gap between Gen X and Gen Y’, Business News Daily, 21 November 2011. 11 ’The original social network – Heart Foundation’s “Mums United” campaign’, Marketing Magazine, 17 January 2013; and also the Heart Foundation’s campaign website, , accessed November 2016. 12 Emma Reynolds, ‘Stop whingeing, Gen Y. You’ve got it pretty good’, news.com.au, 9 March 2016, ; Sylvia Pennington, ‘Can Gen Y get ahead or are they destined to be poorer than their parents?’, Sydney Morning Herald, 16 March 2016, ; both accessed November 2016. 13 See Greg Petro, ‘Millennial engagement and loyalty – make them part of the process,’ Forbes, 21 March 2013, ; and ‘AT&T’s Catherine Borda spills the secrets to millennial marketing’, Adweek, 3 March 2015, ; both accessed November 2016. 14 See Airbnb and Uber websites at and , respectively, both accessed November 2016; and also Ben Ice, ‘Mini goes after Gen Y with an Instagram popularity contest’, Marketing Magazine, 3 August 2016, ; Mini Ray website, ; both accessed November 2016. 15 See the Generation Z website from McCrindle Research, , accessed November 2016. 16 Compiled based on household and family statistics, and , accessed November 2016; Statistics New Zealand, National Family and Household Projections, 29 October 2015, , accessed November 2016; and Australian Bureau of Statistics, Household and Family Projections, Australia 2011–2036, Cat. No. 3260, 19 March 2015. 17 Australian Bureau of Statistics, Family Characteristics and Transitions, Australia 2012–13, Cat. No. 4442, 26 February 2015. 18 See HelloFresh website, ; and also ‘Subscription food boxes: Are they worth it?’, news.com.au, 23 June 2015, , accessed November 2016.

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Chapter 3  The marketplace and customers: Analysing the environment

19 Compiled based on Statistics New Zealand, Subnational Population Estimates: At 30 June 2016 (Provisional), 21 October 2016, ; and Australian Bureau of Statistics, Migration, Australia, 2014–2015, Cat. No. 3412, 30 March 2016, ; both accessed November 2016. 20 ’Trentwood sales call for more in-fill sites in Melbourne’s Eastern Suburbs’, The Urban Developer, 29 November 2016, , accessed November 2016. 21 Nick Toscano, ‘One in three Australian workers now regularly works from home’, Sydney Morning Herald, 21 September 2016, , accessed November 2016. 22 See company websites, including Officeworks, ; Zoom, ; Dropbox, ; and Salesforce.com, ; all accessed November 2016. 23 OECD, Education at a Glance 2014: OECD Indicators, OECD Publishing, 2014, , accessed November 2016. 24 Australian Bureau of Statistics, Australian Labour Market Statistics, July 2014, Cat. No. 6105, 8 July 2014, , accessed November 2016. 25 Statistics New Zealand, New Zealand General Social Survey: 2014, 26 May 2015, ; and Australian Bureau of Statistics, Migration, Australia, 2014–15, Cat. No. 3412.0, 30 March 2016, ; both accessed November 2016. 26 See Pink Media Group, ; Pink Monitor 2014, ; see also ‘Thinking pink: The purchasing power of gay Aussies’, Roy Morgan Research, 29 June 2016, ; all accessed November 2016. 27 See LOTL and DNA magazine websites for readership information, and , respectively; accessed November 2016; and also Media Information Pack, , accessed November 2016; and ‘New Medibank ad features same-sex couples’, Gay News Network, 8 February 2016, , accessed November 2016. 28 Australian Bureau of Statistics, Disability, Ageing and Carers, Australia: First Results 2015, Cat. No. 4430.0, 29 April 2016; Statistics New Zealand, Disability Survey 2013, 17 June 2014, , accessed November 2016; ‘Dive into diversity’, BandT, 4 April 2013, ; and website for Link Disability Magazine, , accessed November 2016. 29 Brand promises from Target website, ; and also Sheils website, ; both accessed November 2016. 30 Australian Bureau of Statistics, Household Income and Wealth, Australia, 2013–14, Cat. No. 6523.0, 4 September 2015; and also Ministry of Social Development, Household Incomes in New Zealand: Trends in Indicators of Inequality and Hardship 1982 to 2015, August 2016, ; accessed November 2016. 31 Prices from Ford Australia website, , accessed November 2016. 32 Dana McCauley, ‘How this crazy warm weather is wreaking havoc with Australia’s biggest retailers’, news.com.au, 28 April 2016, , accessed November 2016. 33 The 2030 Water Resources Group, , accessed November 2016; and ‘The world’s water,’ Pacific Institute, , accessed November 2016. 34 See Office of Environment and Heritage, ‘Sustainable practices on the rise at Goodman Fielder’, , accessed November 2016. 35 See LUSH website, , and The Australian Business Awards website, , both accessed November 2016; and see also ‘Cemix’ Envirocrete awarded again’, Scoop Business, 17 August 2011, ; and the Cemix website, , accessed November 2016. 36 ’3M library systems’, 3M, , accessed November 2016. 37 See ‘ABC privacy policy’, , accessed November 2016. 38 See Cancer Council website, , and also Qantas website ; both accessed November 2016. 39 ’How Fortune’s “Change the World” companies profit from doing good’, Fortune, 18 August 2016, , accessed November 2016. 40 See Shoes of Prey website, , accessed November 2016. 41 ’Mass mingling’, trendwatching.com, July 2010, , accessed November 2016. 42 Sherry Turkle, ‘The flight from conversation’, New York Times, 22 April 2012, p. SR1. 43 See Thunderpants website, , accessed December 2016. 44 See The Raw Food Store website, , accessed December 2016. 45 ’Australian organic market report 2014’, Australian Organic, , accessed December 2016. 46 Australian Bureau of Statistics, ‘B14 religious affiliation by sex’, , accessed December 2016. 47 Robert A Cummins, Jacqui Woerner, Melissa Weinberg, James Collard, Linda Hartley-Clark, Krystine Horfiniak & Charini Perera, Australian Unity Wellbeing Index Survey 29.0: The Wellbeing of Australians – Two Extra Hours, Mothers and Mothers-inLaw, Deakin University: Melbourne, 2013, , accessed December 2016. 48 See Philip Kotler, Kotler on Marketing, Free Press: New York, NY, 1999, p. 3; and Philip Kotler, Marketing Insights from A to Z, John Wiley & Sons: Hoboken, NJ, 2003, pp. 23–4. 49 The scoring criteria are from ‘Greenwashing Index scoring criteria’, , accessed January 2017.

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Chapter

4

Marketing analytics: Gaining customer insights In this chapter, we continue our exploration of how marketers gain insights into consumers and the marketplace. We look at how companies develop and manage information about important marketplace elements: customers, competitors, products and marketing programs. To succeed in today’s marketplace, companies must know how to turn mountains of marketing information into fresh customer insights that will help them deliver greater value to customers. As we will see from the discussion in this chapter, good products and marketing programs begin with good customer information. Companies also need an abundance of information on competitors, resellers, and other actors and forces in the marketplace. But more than just gathering information, marketers must use the information to gain powerful customer and market insights. For a visual representation of the chapter, please see the concept map on the following page.

Learning

Objectives

Learning Objective 1 Explain the importance of information in gaining insights about the marketplace and customers. Marketing information and customer insights  pp. 98–102 Learning Objective 2 Define the marketing information system and discuss its parts. Assessing marketing information needs  pp. 102–3 Developing marketing information  pp. 103–5 Learning Objective 3 Outline the steps in the marketing research process. Marketing research  pp. 105–19 Learning Objective 4 Explain how companies analyse and use marketing information. Analysing and using marketing information  pp. 119–21 Learning Objective 5 Discuss the special issues some marketing researchers face, including public policy and ethics issues. Other marketing information considerations  pp. 121–24

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Chapter 4  Marketing analytics: Gaining customer insights

LO 1 Explain the importance of information in gaining insights about the marketplace and customers. (pp. 98–102)

LO 2 Define the marketing information system and discuss its parts. (pp. 102–5)

Marketing insights provide valuable information for marketing decisions

MARKETING INFORMATION SYSTEM Developing needed information Assessing information needs

Marketing intelligence

Marketing research

Analysing and using information

THE MARKETING RESEARCH PROCESS

LO 3 Outline the steps in the marketing research process. (pp. 105–19)

Internal databases

Defining the problem and research objectives

Implementing the research plan: collecting and analysing the data

Developing the research plan for collecting information

Interpreting and reporting the findings

Marketing insights must be used to make better marketing decisions to realise the value of information

LO 4 Explain how companies analyse and use marketing information. (pp. 119–21)

SPECIAL ISSUES

LO 5 Discuss the special issues some marketing researchers face, including public policy and ethics issues. (pp. 121–24)

Matching the research plan to available resources

Understanding the global context when planning and conducting research

Considering public policy, privacy legislation and codes of conduct when conducting research

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Marketing information and customer insights (pp. 98–102) To create value for customers and build meaningful relationships with them, marketers must first gain fresh, deep insights into what customers need and want. Such customer insights come from good marketing information. Companies use these customer insights to develop a competitive advantage. For example, when it began in 2010, social media site Pinterest needed to differentiate itself from the dozens, even hundreds, of existing social networking options. Pinterest’s research uncovered a key customer insight: Many people want more than just Twitter- or Facebook-like places to swap messages and pictures. They want a way to collect, organise, and share things on the Internet related to their interests and passions. So Pinterest created a social scrapbooking site, where people can create and share digital pinboards – themebased image collections on things that inspire them. ‘Pinterest is your own little Internet of only the things you love,’ says the company. Thanks to this unique customer insight, Pinterest has been wildly popular. Today, more than 70 million Pinterest users collectively pin more than 5 million articles a day and view more than 2.5 billion Pinterest pages a month. In turn, more than a half-million businesses use Pinterest to engage and inspire their customer communities.1 Although customer and market insights are important for building customer value and engagement, these insights can be very difficult to obtain. Customer needs and buying motives are often anything but obvious – consumers themselves usually cannot tell you exactly what they need and why they buy. To gain good customer insights, marketers must effectively manage marketing information from a wide range of sources.

Key customer insights have helped make social scrapbooking site Pinterest wildly successful with its 70 million users. In turn, more than a half-million brands use Pinterest to engage and inspire their customer communities. Pinterest

big data

The huge and complex data sets generated by today’s sophisticated information generation, collection, storage and analysis technologies.

Marketing information and today’s ‘big data’

With the recent explosion of information technologies, companies can now generate and find marketing information in great quantities. The marketing world is filled to the brim with information from innumerable sources. Consumers themselves are now generating vast amounts of marketing information. Through their smartphones, microcomputers and tablets, via online browsing and blogging, apps and social media interactions, texting and video, and geolocation data, consumers volunteer a tidal wave of bottom-up information to companies and to each other. Far from lacking information, most marketing managers are overloaded with data and often feel overwhelmed by it. This problem is summed up in the concept of big data. The term big data refers to the huge and complex data sets generated by today’s sophisticated information generation, collection, storage and analysis technologies. Every year, the people and systems of the world generate about a trillion gigabytes of information. That is enough data to fill 2.47 trillion good old CD-ROMs, a stack tall enough to go to the moon and back four times. A full 90 per cent of all the data in the world has been created in just the past two years.2 Big data presents marketers with both big opportunities and big challenges. Companies that tap this glut of big data effectively can gain rich, timely customer insights. However, accessing and sifting through so much data is a daunting task. For example, when a large consumer brand, such as Coca-Cola or Apple, monitors online discussions about its brand in tweets, blogs, social media posts and other sources, its servers might take in a stunning 6 million public conversations a day, more than 2 billion a year. That is far more information than any manager can digest. Thus, marketers do not need more information; they need better information. And they need to make better use of the information they already have.

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99

Marketing analytics Today’s big data can yield big results. But simply collecting and storing huge amounts of data has little value. Marketers must sift through the mountains of data to mine the gems – the bits that yield customer insights. As one marketing executive puts it, ‘It’s actually [about getting] big insights from big data. It’s throwing away 99.999 percent of that data to find things that are actionable.’ Says another data expert, ‘right data trumps big data’.3 That’s the job of marketing analytics. Marketing analytics involves tools and technologies used in making sound marketing decisions that lead to effective outcomes and return on marketing investment. This process requires data collection and analysis from all channels in the physical and digital arenas, including big data, over a time span.4 Marketers apply marketing analytics to the large and complex sets of data they collect from their own databases, marketing research, and web, mobile and social media tracking; customer transactions and engagements; and other data sources. For example, Netflix maintains a bulging customer database and uses sophisticated marketing analytics to gain insights, which it then uses to fuel recommendations to subscribers, to decide what programming to offer and even to develop its own exclusive content in the quest to serve its customers better (see Marketing in action 4.1). Another good example of marketing analytics, and why it matters, comes from food products giant Kraft, whose classic brands – from Vegemite to Philadelphia Cream Cheese and Planters nuts – are found in most Australian and New Zealand homes: Kraft has a treasure trove of marketing data, gathered from years of interactions with customers and from its social media monitoring hub called Looking Glass. Looking Glass tracks consumer trends, competitor activities, and more than 100,000 brand-related conversations daily in social media and on blogs. Kraft also reaps data from customer interactions with its Kraft Food & Family magazine, email communications, and the more than 100 Web and social media sites that serve its large brand portfolio. In all, Kraft has 18 years’ worth of customer data across 22,000 different attributes.5

Managing marketing information The real value of marketing research and marketing information lies in how they are used – in the customer insights they provide. Based on such thinking, many companies are now restructuring their marketing research and information functions. They are creating customer insights teams, headed by a customer insights manager and composed of representatives from all of the firm’s functional areas. For example, Coca-Cola’s US marketing research group is headed by a vice president of marketing strategy and insights. And, at Unilever, marketing research is done by the Consumer and Market Insight division, which helps brand teams harness information and turn it into customer insights. Customer insights groups collect customer and market information from a wide variety of sources – ranging from traditional marketing research studies, to mingling with and observing

marketing analytics

Involves tools and technologies used in making sound marketing decisions that lead to effective outcomes and return on marketing investment. This process requires data collection and analysis from all channels in the physical and digital arenas, including big data, over a time span.

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

Competitive marketing intelligence: MasterCard’s digital intelligence command centre – called the Conversation Suite – monitors, analyses and responds in real-time to millions of brand-related conversations across 56 markets and 27 languages around the world. MasterCard

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Part 2  Understanding the marketplace and consumers

Marketing in Action 4.1

Netflix streams success with big data and marketing analytics

Australians and New Zealanders now watch more movies and television programs

Netflix supplements this already-massive database with consumer information

streamed online than they watch on DVDs and Blu-ray discs. And with its rotating

purchased from Nielsen, Facebook, Twitter and other sources. Finally, the

library of more than 60 000 titles in its US database, Netflix streams more movie

company employs experts to classify each video on hundreds of characteristics,

and program content by far than any other video service. Netflix’s 62 million paid

such as talent, action, tone, genre, colour, volume, scenery and many, many

subscribers watch more than 3.3 billion hours of movies and television programs

others. Using this rich base of big data, Netflix builds detailed subscriber profiles

every month. During peak hours on any given day, a remarkable one-third of all

based on individual viewing habits and preferences. It then uses these profiles to

downloads on the non-mobile internet are devoted to streamed programming

personalise each customer’s viewing experience. According to Netflix, there are

from Netflix.

53 million different versions of Netflix, one for each individual subscriber worldwide.

All of this comes as little surprise to avid Netflixers. But members might be

For example, Netflix uses data on viewing history to make personalised

startled to learn that while they are busy watching Netflix videos, Netflix is busy

recommendations. Wading through 60 000 titles to decide what to watch can be

watching them – watching them very, very closely. Netflix tracks and analyses

overwhelming. So when new customers sign up, Netflix asks them to rate their

a great deal of customer data in excruciating detail. Then it uses the big data

interest in movie and television genres and to rate specific titles they have already

insights to give customers exactly what they want. Netflix knows in depth what

seen. It then cross-references what people like with other similar titles to predict

its audience wants to watch, and it uses this knowledge to fuel recommendations

additional movies or programs customers will enjoy.

to subscribers, to decide what programming to offer and even to develop its own exclusive content.

But that is just the beginning. As customers watch and rate more and more video content, and as Netflix studies the details of their viewing behaviour,

Few companies know their customers better than Netflix. The company

the predictions become more and more accurate. Netflix often comes to know

has mind-boggling access to real-time data on member viewing behaviour and

individual customer viewing preferences better than customers themselves do.

sentiments. Every day, Netflix tracks and parses member data on tens of millions

How accurate are Netflix’s recommendations? Seventy-five per cent of viewing

of searches, ratings and ‘plays’. Netflix’s bulging database contains every viewing

activity results from these suggestions. That is important. The more subscribers

detail for each individual subscriber – what shows they watch, at what time of

watch, the more likely they are to stay with Netflix – viewers who watch at

day, on what devices, at what locations and even when they hit the pause, rewind

least 15 hours of content each month are 75 per cent less likely to cancel their

or fast-forward buttons during programs.

membership. Accurate recommendations increase average viewing time, keeping subscribers in the fold. Increased viewing also depends on offering the right content in the first place. But adding new programming is expensive – content licensing fees constitute the lion’s share of Netflix’s cost of goods sold. With so many new and existing movies and television programs on the market, Netflix must be very selective in what it adds to its content inventory. Once again, it is big data and marketing analytics to the rescue. Just as Netflix analyses its database to come up with subscriber recommendations, it uses the data to assess what additional titles customers might enjoy and how much each is worth. The goal is to maximise subscriber ‘happiness-per-dollar-spent’ on new titles. ‘We always use our in-depth knowledge about what our members love to watch to decide what’s available on Netflix,’ says a Netflix marketer. ‘If you keep watching, we’ll keep adding more of what you love.’ To get even more viewers watching even more hours, Netflix uses its extensive

Marketing analytics and big data: While subscribers are busy watching Netflix videos, Netflix is busy watching them. Then it uses the big data insights to give customers exactly what they want.

big data insights to add its own exclusive video content – things you can see only

Chris Ryan/OJO Images Ltd/PSL Images/Alamy

air the first two seasons of House of Cards, a US version of a hit British political

on Netflix. In its own words, Netflix wants ‘to become HBO faster than HBO can become Netflix’. For example, Netflix stunned the media industry when it outbid both HBO and AMC by paying a stunning US$100 million for exclusive rights to drama produced by Hollywood bigwigs, David Fincher and Kevin Spacey.

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To outsiders, the huge investment in House of Cards seemed highly risky. However, using its powerful database, Netflix was able to predict accurately

101

producing content, have earned Netflix the nickname ‘The Red Menace’ among competitors.

which and how many existing members would watch House of Cards regularly

As more and more high-quality video streams out of Netflix, more success

and how many new members would sign up because of the show. Netflix also

streams in. Netflix’s sales have surged 53 per cent during the past two years.

used its viewer knowledge to pinpoint and personalise promotion of the exclusive

Last year alone, membership grew by more than 20 per cent. Netflix thrives

new series to just the right members. Before House of Cards premiered, based

on using big data and marketing analytics to know and serve its customers.

on their profiles, selected subscribers saw one of 10 different trailers of the show

The company excels at helping customers figure out just what they want to watch

aimed at their specific likes and interests.

and offering just the right content profitably. Says Netflix’s chief communications

Thanks to Netflix’s big data and marketing analytics prowess, House of Cards was a smash hit. It brought in 3 million new subscribers in only the

officer, ‘Because we have a direct relationship with consumers, we know what people like to watch, and that helps us [immeasurably].’

first three months. These new subscribers alone covered almost all of the US$100 million investment. More importantly, a Netflix survey revealed that, for the average House of Cards viewer, 86 per cent were less likely to cancel because of the new program. Such success came as no surprise to Netflix. Its data had predicted that the program would be a hit before the director ever shouted ‘action’. Since then, House of Cards has become Netflix’s hottest program. Based on its success, Netflix developed a number of other original series, including Hemlock Grove, Lillyhammer, Orange Is the New Black, Bad Samaritans, Marco Polo and the animated series, BoJack Horseman. For traditional broadcast networks, the average success rate for new television shows is 35 per cent. In contrast, Netflix is batting almost 70 per cent. To continue the momentum, Netflix has committed US$300 million a year to developing new original content. The digital video giant now has 12 exclusive or original shows on the air, with another 24 scheduled for the next two years, including drama series, comedy specials, movies and documentaries. Netflix’s success has thrown a scare into competitors, such as leading

Sources: Dominic White, ‘Stan is on clear path to profitability’, Australian Financial Review, 12 May 2016, p. 45; Mark Serrels, ‘Netflix just hit 1 million subscribers in Australia’, Kotaku, 20 January 2016, ; Nicole Laporte, ‘Netflix: The red menace,’ Fast Company, 7 January 2014, ; Anders Bylund, ‘Netflix, Inc. is paying huge sums to produce original shows,’ Motley Fool, 6 October 2014, ; David Carr, ‘Giving viewers what they want,’ New York Times, 25 February 2013, p. B1; Zach Bulygo, ‘How Netflix uses analytics to select movies, create content, and make multimillion dollar decisions’, Kissmetrics, 6 September 2013, ; Craig Smith, ‘By the numbers: 40 amazing Netflix statistics and facts,’ Expanded Ramblings, 24 October 2014, ; Marcus Wohlsen, ‘Netflix is beating HBO in revenue, but it’s still the underdog,’ Wired, 7 August 2014, ; Lisa Richwine, ‘Netflix beats forecasts with 62 million streaming subscribers,’ Reuters, 15 April 2015, ; Catherine Knowles, ‘Competition heats up for Netflix in ANZ’, NetGuide, 21 January 2015, , and , accessed September 2015.

Questions

US cable-subscription network HBO, and Australasian competitors Foxtel,

❶ What is marketing analytics?

Quickflix, Lightbox, Neon and Stan. Although Netflix still lags HBO in profits,

❷ What is big data?

its US online-only membership has reached 36 million compared with HBO’s

❸ What benefits does a company like Netflix gain from marketing

30 million cable subscribers, and Netflix recently passed HBO in US revenues. It is no surprise, then, that HBO began selling online-only subscriptions in 2015. By early 2016, Netflix had over 1 million subscribers in Australia, and reached nearly 3 million people. Such numbers, along with its unconventional methods for

analytics? Might this translate into increased customer lifetime value and, if so, why? ❹ Based on your research, what strengths and weaknesses does Netflix exhibit over the competitors mentioned in the vignette?

consumers, to monitoring consumer online conversations about the company and its products. Then, they use this information to develop important customer insights from which the company can create more value for its customers. Thus, companies must design effective marketing information systems that give managers the right information, in the right form, at the right time – and then help them to use this information to create customer value and stronger customer relationships. A marketing information system (MIS) consists of people and procedures dedicated to assessing information needs, developing the needed information and helping decision makers use the information to generate and validate actionable customer and market insights. Figure 4.1 shows that the MIS begins and ends with information users – marketing managers, internal and external partners, and others who need marketing information. First, it interacts with these

marketing information system (MIS)

People and procedures dedicated to assessing information needs, developing the needed information and helping decision makers use the information to generate and validate actionable customer and market insights.

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Marketing managers and other information users Obtaining customer and market insights from marketing information

MARKETING INFORMATION SYSTEM Developing needed information Assessing information needs

Internal databases

Marketing intelligence

Marketing research

Analysing and using information

MARKETING ENVIRONMENT Target markets

Marketing channels

Competitors

Publics

Macroenvironment forces

Figure 4.1  The marketing information system

information users to assess information needs. Next, it interacts with the marketing environment to develop needed information through internal company databases, marketing intelligence activities and marketing research. Finally, the MIS helps users to analyse and use the information to develop customer insights, make marketing decisions and manage customer relationships.

Assessing marketing information needs (pp. 102–3) The marketing information system primarily serves the company’s marketing and other managers. However, it may also provide information to external partners, such as suppliers, resellers or marketing services agencies. For example, retailers’ systems often give key suppliers access to information ranging from customers’ buying patterns and store inventory levels to how many items they have sold in which stores in the past 24 hours.6 A good MIS balances the information users would like to have against what they really need and what is feasible to offer. The company begins by interviewing managers to find out what information they would like. Some managers will ask for whatever information they can get without thinking carefully about what they really need. Too much information can be as harmful as too little. Other managers may omit things they ought to know, or they may not know to ask for some types of information they should have. For example, managers might need to know about surges in favourable or unfavourable consumer discussions about their brands on blogs or online social networks. Because they do not know about these discussions, they fail to ask about them. The MIS must monitor the marketing environment to provide decision makers with information they should have in order to better understand customers and make key marketing decisions. Table 4.1 lists questions for assessing marketing information needs. The costs of obtaining, analysing, storing and delivering information can mount quickly. The company must decide whether the value of insights gained from additional information is worth the

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Table 4.1  Questions for assessing marketing information needs   1

What types of decisions are you regularly called upon to make?

  2

What types of information do you need in order to make these decisions?

  3

What types of information do you regularly get?

  4

What types of special studies do you periodically request?

  5

What types of information would you like to get that you are not now getting?

  6

What information would you want daily? Weekly? Monthly? Yearly?

  7

What magazine and trade reports would you like to see on a regular basis?

  8

What specific topics would you like to be kept informed of?

  9

What types of data analysis programs would you like to see made available?

10

What do you think would be the four most helpful improvements that could be made in the present marketing information system?

costs of providing it, and both value and cost are often difficult to assess. By itself, information has no worth; its value comes from its use – from the customer insights it provides and their impact on decision making. Rather, companies should weigh carefully the costs of getting more information against the benefits resulting from it.

Developing marketing information (pp. 103–5) Marketers can obtain the needed information from internal data, marketing intelligence and marketing research.

Internal data

Many companies build extensive internal databases – electronic collections of consumer and market internal databases information obtained from data sources within the company’s network. Information in the database can Electronic collections of consumer and market come from many sources. The marketing department furnishes information on customer characteristics, information obtained sales transactions and website visits. The customer service department keeps records of customer from data sources within satisfaction or service problems. The accounting department provides detailed records of sales, costs the company’s network. and cashflows. Operations reports on production, shipments and inventories. The salesforce reports on reseller reactions and competitor activities, and marketing-channel partners provide data on pointof-sale transactions. Harnessing such information can provide powerful customer insights and a competitive advantage. Consider this example of the use of internal information by a typical global pharmaceutical company. This company uses its internal information system to analyse daily sales performance. Each day, via notebooks and smartphones, sales consultants report their day’s efforts with chemists and doctors, as well as competitive activity, into head office. In  addition, pharmacy cash registers are connected Internal databases: Access to data when in the field allows salespeople to be to wholesalers, such as Sigma Pharmaceuticals, more effective. which has a comprehensive logistics system, and sales © Mint Images RF/Shutterstock.com 7 are updated daily. Almost the next day, marketing

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managers have a complete report analysing the previous day’s sales through chemists and supermarkets. The system helps marketing managers make better decisions and makes the salespeople more effective. Pharmaceutical sales consultants work mostly from home, and the aim is to reduce the number of hours they spend filling out reports and thereby give them extra time for selling. Internal databases usually can be accessed more quickly and cheaply than other information sources, but they also present some problems. Because internal information is often collected for other purposes, it may be incomplete or in the wrong form for making marketing decisions. Data also age quickly; keeping the database current requires a major effort. Finally, managing the mountains of information that a large company produces requires highly sophisticated equipment and techniques.

competitive marketing intelligence

Competitive marketing intelligence

Competitive marketing intelligence is the systematic monitoring, collection and analysis of

The systematic monitoring, collection and analysis of publicly available information about consumers, competitors and developments in the marketing environment.

publicly available information about consumers, competitors and developments in the marketplace. The goal of competitive marketing intelligence is to improve strategic decision making by understanding the consumer environment, assessing and tracking competitors’ actions, and providing early warnings of opportunities and threats. Marketing intelligence gathering has grown dramatically as more and more companies are now busily eavesdropping on the marketplace and snooping on their competitors. Techniques range from observing consumers first-hand to quizzing the company’s own employees, benchmarking competitors’ products, conducting online research and monitoring social media buzz. Good marketing intelligence can help marketers to gain insights into how consumers talk about and connect with their brands. Many companies send out teams of trained observers to mix and mingle with customers as they use and talk about the company’s products. Other companies – such as Dell, PepsiCo, Kraft and MasterCard – have set up sophisticated digital command centres that routinely monitor brand-related online consumer and marketplace activity. Sentiment analysis might help a digital reconnaissance team to gather relevant customer data, and may have the potential to automate, augment and/or reduce the cost of some traditional approaches to customer segmentation, such as qualitative and quantitative analysis. Companies also need to actively monitor competitors’ activities. They can monitor competitors’ websites and social media sites. For example, Amazon’s Competitive Intelligence arm routinely purchases merchandise from competing websites to analyse and compare their product assortment, speed of delivery and service quality. Companies can use the internet to search specific competitor names, events or trends and see what turns up. Firms use competitive marketing intelligence to gain early insights into competitor moves and strategies and to prepare quick responses. For example, Samsung routinely monitors real-time social media activity surrounding the introduction of Apple’s latest iPhones to quickly shape marketing responses for its own Galaxy S smartphones and tablets.8 Competitors often reveal intelligence information through their annual reports, business publications, trade show exhibits, press releases, advertisements and web pages. The internet is an invaluable source of competitive intelligence. And tracking consumer conversations about competing brands is often as revealing as tracking conversations about the company’s own brands. Moreover, most competitors now place volumes of information on their websites, providing details of interest to customers, partners, suppliers, investors or franchisees. This can provide a wealth of useful information about competitors’ strategies, markets, new products, facilities and other happenings. Intelligence seekers can also pore through any of thousands of online databases. Some are free. For example, the Australian Securities and Investments Commission’s (ASIC’s) database provides a huge stockpile of financial information on public competitors, and the AusPat database (managed by IP Australia, a department of the Australian government) reveals patents competitors have filed. For a fee, companies

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Competitive marketing intelligence: General database services, such as LexisNexis, put an incredible wealth of information at the fingertips of marketing decision makers. © Copyright 2015 LexisNexis, a division of Reed Elsevier Inc. All rights reserved. LexisNexis and the Knowledge Burst logo are registered trademarks of Reed Elsevier Properties Inc. and are used with the permission of LexisNexis.

can also subscribe to any of the more than 3000 online databases and information search services, such as Hoover’s, LexisNexis and Dun & Bradstreet. Today’s marketers have an almost overwhelming amount of competitor information only a few keystrokes away. The intelligence game goes both ways. Facing determined competitive marketing intelligence efforts by competitors, most companies take steps to protect their own information. One self-admitted corporate spy advises that companies should try conducting marketing intelligence investigations of themselves, looking for potentially damaging information leaks. They should start by ‘vacuuming up’ everything they can find in the public record, including job postings, court records, company advertisements and blogs, web pages, press releases, online business reports, social media postings by customers and employees, and other information available to inquisitive competitors.9 The World War II adage ‘Loose lips sink ships!’ is a constant reminder to personnel in many organisations to be mindful of those wishing to gather marketing intelligence. The growing use of marketing intelligence raises a number of ethical issues. Although most of the preceding techniques are legal, and some are considered to be shrewdly competitive, some may involve questionable ethics. Clearly, companies should take advantage of publicly available information. However, they should not stoop to snoop. With all the legitimate intelligence sources now available, a company does not need to break the law or accepted codes of ethics to get good intelligence.

Marketing research (pp. 105–19) In addition to marketing intelligence information about general consumer, competitor and marketplace happenings, marketers often need formal studies that provide customer and market insights for specific marketing situations and decisions. For example, Nike wants to know what appeals will be most effective in its AFL, NRL and A-League advertising. Google wants to know how web searchers will react to a proposed redesign of its site. Perhaps Asus, HTC, LG and Samsung want to know what features smartphone and tablet users want from internet phones using the Android or the company’s proprietary operating system. (See Appendix 2 for more information.) Or LG wants to know how many and what kinds of people will buy its flat-screen and curved-screen OLED televisions. In such situations, marketing intelligence will not provide the detailed information needed. Managers will need marketing research. Marketing research is the systematic design, collection, analysis and reporting of data relevant to a specific marketing situation facing an organisation. Companies use marketing research in a wide variety of

marketing research

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

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Defining the problem and research objectives

qualitative research

Studies involving a small number of individuals, such as focus groups or in-depth one-to-one interviews. The primary tool in qualitative research is the focus group, but this includes modern variations such as online focus groups and teleconferences. One-on-one interviews are used to delve deeply into the topic.

quantitative research

Studies involving ‘a lot’ of people. Quantitative research uses statistical average techniques such as mean ratings, and statistical tools such as sampling error and standard error, to analyse data. There is no stated number of people who must be interviewed to make a study quantitative, but samples of 100 or more are usually considered quantitative.

exploratory research

Marketing research used to gather preliminary information that will help to define problems, and to suggest hypotheses.

descriptive research

Marketing research used to better describe marketing problems, situations or markets.

causal research

Marketing research used to test hypotheses about cause-and-effect relationships.

Developing the research plan for collecting information

Implementing the research plan– collecting and analysing the data

Interpreting and reporting the findings

Figure 4.2  The marketing research process

situations. For example, marketing research gives marketers insights into customer motivations, purchase behaviour and satisfaction. It can help them to assess market potential and market share, or to measure the effectiveness of pricing, product, distribution and promotion activities. In addition, these companies – like their smaller counterparts – frequently hire outside research specialists to consult with management on specific marketing problems and to conduct marketing research studies. Sometimes, firms simply purchase data collected by outside firms to aid in their decision making. Nevertheless, almost any organisation can find informal, low-cost alternatives to the formal and complex marketing research techniques used by research experts in large firms, whether they undertake qualitative research with their main customers, or seek information from online sources. They may also undertake quantitative research across a broad range of consumers, using samples greater than 100 respondents and employing various statistical techniques in any analyses. The marketing research process has four steps (see Figure 4.2): (1) defining the problem and research objectives; (2) developing the research plan; (3) implementing the research plan; and (4) interpreting and reporting the findings.

Defining the problem and research objectives Marketing managers and researchers must work closely together to define the problem and agree on research objectives. The manager best understands the decision for which information is needed; the researcher best understands marketing research and how to obtain the information. Defining the problem and research objectives is often the most difficult step in the research process. The manager may know that something is wrong, without knowing the specific causes. After the problem has been defined carefully, the manager and researcher must set the research objectives. A marketing research project might have one of three types of objectives. The objective of exploratory research is to gather preliminary information that will help define the problem and to suggest hypotheses. The objective of descriptive research is to describe things, such as the market potential for a product or the demographics and attitudes of consumers who buy the product. The objective of causal research is to test hypotheses about cause-and-effect relationships. For example, would a 10 per cent decrease in tuition fees at a private secondary college result in an enrolment increase sufficient to offset the reduced tuition revenue? Managers often start with exploratory research and then follow later with descriptive or causal research. The statement of the problem and research objectives guides the entire research process. The manager and researcher should put the statement in writing to be certain that they agree on the purpose and expected results of the research.

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

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Research objectives must be translated into specific information needs. For example, suppose that Nando’s wants to know how consumers would react to the addition of drive-through service to its restaurants. In the United States, fast-food chains generate an estimated 24 per cent of sales through drive-throughs. However, Nando’s – home of the legendary butterfly-cut, flame-grilled PERiPERi ­chicken – does not offer drive-through service. Adding drive-throughs might help Nando’s leverage its strong brand position and attract new sales. The proposed research might call for the following specific information: • The demographic, economic and lifestyle characteristics of current Nando’s customers. Do  current counter-service customers also use drive-throughs? Are drive-throughs consistent with their needs and lifestyles? Or would Nando’s marketers would need many types of information to decide Nando’s need to target a new segment of consumers? whether to introduce drive-through service and, if so, the best way to do it. • The characteristics and usage patterns of the broader Nando’s Australia population of fast-food and fast-casual diners. What do they need and expect from such restaurants? Where, when and how do they use them, and what existing quality, price and service levels do they value? secondary data The new Nando’s service would require strong, relevant and distinctive positioning in the crowded Information that already exists somewhere, fast-food market. having been collected • Impact on Nando’s customer experience. Would drive-throughs be consistent with a higher-quality for another purpose. fast-casual experience, like the one Nando’s offers? • Nando’s employee reactions to drive-through service. Would restaurant employees support drive-throughs? primary data Would adding drive-throughs disrupt operations and their ability to deliver high-quality food and Information collected for the specific purpose service to inside customers? at hand. • Forecasts of both inside and drive-through sales and profits. Would the new drive-through service create new sales and customers or simply divert sales away from current operations? Nando’s marketers would need answers to these questions and many other types of information in order to decide whether to introduce drive-through service and, if so, the best way to do it. The research plan should be presented in a written proposal. A written proposal is especially important when the research project is large and complex, or when an outside firm carries it out. The  proposal should cover the management problems addressed, the research objectives, the information to be obtained and how the results will help management’s decision making. The proposal also should include estimated research costs. To meet the manager’s information needs, the research plan can call for gathering secondary data, primary data or both. Secondary data consists of information that already exists somewhere, having been collected for another purpose. Primary data consists of information collected for the specific purpose at hand.

Gathering secondary data Researchers usually start by gathering secondary data. The company’s internal database provides a good starting point. However, the company can also tap into a wide assortment of external information sources, including commercial data services and government sources (see Table 4.2).

Market growth: A decision by Red Bull to add a line of enhanced waters to its already successful mix of energy drinks would call for marketing research that provides a good deal of specific information. Red Bull GmbH

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Table 4.2  Sources of secondary data Internal sources Internal sources include company profit and loss statements, balance sheets, sales figures, sales call reports, invoices, inventory records and prior research reports. Today, this information is usually stored and manipulated in digital form as part of a firm’s executive information system (EIS).

Government publications The Year Book Australia (Cat. No. 1301.0), updated annually, provides summary data on the Australian economy, demography and society. A catalogue of publications is available from the Australian Bureau of Statistics as well as Australian Government Publishing Service offices in state capitals. Most of the time, marketers are interested in publications relating to population and population projections by state and local government area, as well as household income and expenditure. Today, such data can also be accessed directly via computer links where such a service is subscribed to – for example, 2011 Census: CDATA, available online from and search on CDATA.

Periodicals and books Business Periodicals Index, published monthly, lists business articles appearing in a wide variety of business publications, from newspapers to BRW. Marketing journals include Journal of Marketing, Journal of Marketing Research, The International Review of Retail, Distribution and Consumer Research and Journal of Consumer Research. Useful Australian trade magazines include Retail World, Foodweek and B&T, while US trade magazines include Advertising Age, Chain Store Age, Progressive Grocer, Sales and Marketing Management and Stores. Useful general business newspapers and magazines include the Australian Financial Review, Australian Business Monthly and BRW, which are published in Australia, and New Zealand Business and NZ Marketing in New Zealand. Useful US publications include BusinessWeek, Fortune, Forbes and Harvard Business Review. There are also many specialist publications relating to specific industries, such as APC for subscribers interested in microcomputers and tablets, which contain a wealth of marketing as well as technical information.

Commercial data Here are just a few of the dozens of commercial research houses selling data to subscribers: • Nielsen Company provides data on household purchasing (NPD/Nielsen Electronic Household Panel), supermarket scanner data (Nielsen), data on television audiences (OzTAM, Nielsen and Roy Morgan Research Centre) and others. • Nielsen produces product movement reports based on warehouse withdrawals data from supermarkets, chemists and mass ­merchandisers, and supermarket scanner data. • The Roy Morgan Research Centre provides annual reports covering television markets, giving values and lifestyles typography and geodemographic data by sex, income, age and brand preferences (selective markets and media reaching them). • Specialist researchers, the Federal Chamber of Automotive Industries, provide data on motor vehicle sales in its VFACTS report, while IDC (International Data Corporation) provides feedback on such industries as information technology. • Others, such as BIS Shrapnel, undertake syndicated research on the food services industry and the construction industry, as well as general economic forecasting studies. • Firms such as Deloitte Access Economics undertake econometric studies of the type that governments and opposition parties use, for example, to model such inputs/outputs as the effects of a particular policy change (e.g. a goods and services tax) on household income and expenditure.

commercial online databases

Computerised collections of information available from online commercial sources or via the internet.

Companies can buy secondary data reports from outside suppliers. For example, Nielsen sells buyer data from a consumer panel of more than 250 000 households in 25 countries worldwide, with measures of trial and repeat purchasing, brand loyalty and buyer demographics. Experian Australia sells information on brands in many product categories, including detailed consumer profiles that assess everything from the products consumers buy and the brands they prefer, to their lifestyles, attitudes and media preferences. Roy Morgan Single Source is a key offering by Roy Morgan Research and incorporates the Roy Morgan Readership Survey, Roy Morgan BrandPLANNER, MediaPLANNER, RadioPLANNER, TVPLANNER and CreativePLANNER. It  also offers other decision-science products for various industries. These and other firms supply high-quality data to suit a wide variety of marketing information needs.10 Using commercial online databases, marketing researchers can conduct their own searches of secondary data sources. General database services, such as ProQuest and LexisNexis, put an incredible wealth of information within easy reach of marketing decision makers. Beyond commercial websites offering information for a fee, almost every industry association, government agency, business publication and news medium offers free information to those tenacious enough to find their websites or apps.

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Internet search engines can also be a big help in locating relevant secondary information sources. However, they can also be very frustrating and inefficient. For example, a Nando’s marketer googling ‘fast-food drivethrough’ from Australia would come up with more than 1.5 million results. Still, well-structured, welldesigned online searches can be a good starting point to any marketing research project. Secondary data can usually be obtained more quickly and at a lower cost than primary data. Also, secondary sources can sometimes provide data an individual company cannot collect on its own – information that either is not directly available or would be too expensive to collect. For example, it would be too expensive for Nando’s marketers to conduct a continuing retail store audit to find out about the market shares, prices and displays of competitors’ brands. But it can buy household panel data and the Panorama service from Nielsen, which provides information on media habits, lifestyles, attitudes and product consumption at a local market level, as well as offering an Asia-Pacific level through Nielsen Media Index. Secondary data can also present problems. The needed information may not exist – researchers can rarely obtain all the data they need from secondary sources. For example, Nando’s will not find existing information about consumer reactions to a new drive-through service that it has not yet introduced to the market. Moreover, when data can be found, the information might not be very usable. In such cases, the researcher must evaluate secondary information carefully to make certain it is relevant (fits research project needs), accurate (reliably collected and reported), current (up-to-date enough for current decisions) and impartial (objectively collected and reported).

Primary data collection Secondary data provide a good starting point for research and often help to define research problems and objectives. In most cases, however, the company must also collect primary data. Just as researchers must carefully evaluate the quality of secondary information, they also must take great care when collecting primary data. They need to make sure the data will be relevant, accurate, current and unbiased. Table 4.3 shows that designing a plan for primary data collection calls for a number of decisions on research approaches, contact methods, sampling plan and research instruments.

Research approaches Research approaches for gathering primary data include observation, surveys and experiments. Here, we discuss each approach in turn.

Observational research

Observational research involves gathering primary data by observing relevant people, actions and situations. For example, a bank might evaluate possible new branch locations by checking traffic patterns, neighbourhood conditions and the location of competing branches. Researchers often observe consumer behaviour to glean customer insights they cannot obtain by simply asking customers questions. For instance, Fisher-Price has set up an observation lab in which it can observe the reactions of young children to new toys. The Fisher-Price Play Lab is a sunny, toy-strewn space where lucky kids get to test Fisher-Price prototypes, under the watchful eyes of designers who hope to learn what will get kids worked up into a new-toy frenzy. Similarly, in its research labs, using high-tech cameras and other equipment, Gillette observes women shaving and uses the insights to design new razors and shaving products.

observational research

Gathering primary data by observing relevant people, actions and situations.

Table 4.3  Planning primary data collection Research approaches

Contact methods

Sampling plan

Research instruments

Observation Survey Experiment

Mail Telephone Personal Online

Sampling unit Sample size Sampling procedure

Questionnaire Mechanical instruments

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Marketers not only observe what consumers do but also what they are saying. As discussed earlier, marketers now routinely listen in on consumer conversations on social media and feedback provided on websites. Observing such naturally occurring feedback can provide inputs that simply cannot be gained through more structured and formal research approaches. A wide range of companies now use ethnographic research. Ethnographic research involves sending trained observers to watch and interact with consumers in their ‘natural habitats’. Global branding firm, Landor, launched Landor Families, an ongoing ethnographic study that has followed 11 French families intensely for the past seven years. Landor researchers visit the families twice a year in their homes, peeking into their refrigerators and diving deeply into their food-shopping behaviours and opinions. The researchers also shop with the families at their local supermarkets and look over their shoulders while they shop online. The families furnish monthly online reports detailing their shopping behaviours and opinions. The Landor Families study provides rich behavioural insights for Landor clients, such as Danone, Kraft Foods and Procter & Gamble. Ethnographic research: The Landor Families ongoing ethnographic study has followed 11 French families intensely for the past seven years, diving Today’s big data analytics can provide important insights deeply into both their refrigerators and their food-shopping behaviours. into the whats, whens and wheres of consumer buying. Says Landor, ‘There is no better way to understand people than to The Landor Families program is designed to explore the observe them in real life.’ whys. According to Landor, ‘There is no better way to Landor understand people than to observe them in real life.’11 ethnographic Observational and ethnographic research will often yield the kinds of details that are not possible using research traditional research questionnaires or focus groups. For example, focus groups told the Best Western hotel A form of observational chain that it is men who decide when to stop for the night and where to stay; however, videotapes of couples research that involves on cross-country journeys showed it was usually the women who made these decisions. sending trained observers to watch and ‘The beauty of ethnography,’ says a research expert, is that it ‘allows companies to zero in on their interact with consumers customers’ unarticulated desires.’ Agrees another researcher, ‘Classic market research doesn’t go far enough. in their ‘natural habitats’. It can’t grasp what people can’t imagine or articulate.’12 For this reason, Disney sends its executives into the field at theme parks. Kimberley-Clark even runs a program to give its executives a first-hand experience of what it is like to be elderly, with poor vision and arthritis – the company puts its executives into retail outlets wearing vision-blurring glasses, unpopped popcorn in their shoes and bulky rubber gloves. Participants come back from these experiences bursting with ideas for elderly-friendly store changes, such as bigger typefaces and more eye-friendly colours on packaging and flyers, new store lighting and clearer signage, and instant call buttons near heavy merchandise such as bottled water and laundry detergent.13

Survey research

survey research

Gathering primary data by asking people questions about their knowledge, attitudes, preferences and buying behaviour.

Survey research, the most widely used method for primary data collection, is the approach best suited for gathering descriptive information. A company that wants to know about people’s knowledge, attitudes, preferences or buying behaviour can often find out by asking them directly. The major advantage of survey research is its flexibility – it can be used to obtain many different kinds of information in many different situations. Surveys addressing almost any marketing question or decision can be conducted by telephone or mail, in person or online.

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However, survey research also presents some problems. Sometimes, people are unable to answer survey questions because they cannot remember or have never thought about what they do or why. People may be unwilling to respond to unknown interviewers or about things they consider to be private. Respondents may answer survey questions even when they do not know the answer in order to appear smarter or more informed. Or they may try to help the interviewer by giving pleasing answers. Finally, busy people may not take the time, or they might resent the intrusion into their privacy.

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

experimental research

Gathering primary data by selecting matched groups of subjects, giving them different treatments, controlling related factors and checking for differences in group responses.

Contact methods Information can be collected by mail, telephone, personal interview or online. Table 4.4 shows the strengths and weaknesses of each of these contact methods.

Mail, telephone and personal interviewing Mail questionnaires can be used to collect large amounts of information at a low cost per respondent. Respondents may give more honest answers to more personal questions on a mail questionnaire than to an unknown interviewer in person or over the telephone. Also, no interviewer is involved to bias the respondent’s answers. However, mail questionnaires are not very flexible – all respondents answer the same questions in a fixed order, or may skip over pertinent questions. Mail surveys usually take longer to complete, and the response rate – the number of people returning completed questionnaires – is often very low. Finally, the researcher often has little control over the mail questionnaire sample. Even with a good mailing list, it is difficult to control who at the mailing address fills out the questionnaire. As a result of these shortcomings, more and more marketers are now shifting to faster, more flexible and lower-cost online surveys. Telephone interviewing can be one of the best methods for gathering information quickly, and it provides greater flexibility than mail questionnaires. Interviewers can explain difficult questions and, depending on the answers they receive, skip some questions or probe on others. Response rates tend to be higher than with mail questionnaires, and interviewers can ask to speak to respondents with the desired characteristics or even by name. However, with telephone interviewing, the cost per respondent is higher than with mail or online questionnaires. Also, people may not want to discuss personal questions with an interviewer. The method introduces interviewer bias – the way interviewers talk, how they ask questions and other differences may affect respondents’ answers. Finally, in this age of do-not-call lists and promotion-harassed consumers, Table 4.4  Strengths and weaknesses of contact methods Mail

Telephone

Personal

Online

Flexibility

Poor

Good

Excellent

Good

Quality of data that can be collected

Good

Fair

Excellent

Good

Control of interviewer effects

Excellent

Fair

Poor

Fair

Control of sample

Fair

Excellent

Good

Excellent

Speed of data collection

Poor

Excellent

Good

Excellent

Response rate

Poor

Poor

Good

Fair

Cost

Good

Fair

Poor

Excellent

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focus group interviewing

potential survey respondents are increasingly hanging up on telephone interviewers rather than talking with them. This raises the costs as it is necessary to make many calls in order to reach sufficient numbers of respondents willing to be interviewed, in order to achieve a valid sample size. Personal interviewing takes two forms – individual interviewing and group interviewing. Individual interviewing involves talking with people in their homes or offices, on the street or in shopping malls. Such interviewing is flexible. Trained interviewers can guide interviews, explain difficult questions and explore issues as the situation requires. They can show subjects actual products, advertisements or packages, and observe reactions and behaviour. However, individual personal interviews may cost three to four times as much as telephone interviews. Group interviewing consists of inviting small groups of people to meet with a trained moderator to talk about a product, service or organisation. Participants normally are paid a small sum for attending. The moderator encourages free and easy discussion, hoping that group interactions will bring out actual feelings and thoughts. At the same time, the moderator ‘focuses’ the discussion – hence the name focus

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

group interviewing. Researchers and marketers watch the focus group discussions from behind one-way glass and record comments in writing or on video for later study. Today, focus group researchers can use videoconferencing and online technology to connect marketers in distant locations with live focus-group action. Using cameras and two-way sound systems, marketing executives in a far-off boardroom can look in and listen, using remote controls to zoom in on faces and pan the focus group at will. Along with observational research, focus group interviewing has become one of the main qualitative marketing research tools for gaining fresh insights into consumer thoughts and feelings. However, focus group studies present some challenges. They usually employ small samples to keep time and costs down, and it may be difficult to generalise from the results. Moreover, consumers in focus groups are not always open and honest about their real feelings, behaviour and intentions in front of other people. To overcome these problems, many researchers are tinkering with the focus group design. Some companies are changing the environments in which they conduct focus groups to help consumers relax and to elicit more authentic responses. For example, Lexus hosts ‘An Evening with Lexus’ dinners in customers’ homes with groups of luxury-car buyers to learn up close and personal why they did or did not buy a Lexus. Other companies use immersion groups – small groups of consumers who interact directly and informally with product designers without a focus group moderator present. Consider this example: Volvo equals safety. In focus group after focus group, participants said the same thing. But to check these findings, Volvo called in a hypnotist. Members of Volvo focus groups were asked to test-drive a car. Immediately afterwards, they were hypnotised and asked their true feelings about the brand. It was not pretty: Many revealed that Volvo also equals being middle-aged. That idea ‘for some people was suffocating,’ says a Volvo researcher. ‘Hypnosis helped get past the clichés. We needed the conversation taken to a deeper, more emotional place.’14

Focus groups: These are often conducted in congenial settings so that customers open up and share their experiences with products and communicate any changes they might like made. Photos To Go

Individual and focus group interviews can add a personal touch as opposed to more numbers-oriented, big data research. They can provide rich insights into the motivations and feelings behind the numbers and analytics. ‘Focus groups are the most widely used qualitative research tool,’ says one analyst, ‘and with

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good reason. They foster fruitful discussion and can provide unique insight into customers’ and potential customers’ needs, wants, thoughts, and feelings.’ Things really come to life when you hear people say them.15

Online marketing research The internet has had a dramatic impact on how marketing research is conducted. Increasingly, researchers are collecting primary data through online marketing research – internet surveys, online panels, experiments, content analysis, online focus groups and brand communities. Online research can take many forms. A company can use the internet or mobile technology as a survey medium. It can include a questionnaire on its website or social media sites or use email or mobile devices to invite people to answer questions. It can create online panels that provide regular feedback or conduct live discussions or online focus groups. Researchers can also conduct online experiments. They can experiment with different prices, headlines or product features on different websites or mobile sites or at different times, to learn the relative effectiveness of their offers. They can set up virtual shopping environments and use them to test new products and marketing programs. Or a company can learn about the behaviour of online customers by following their clickstreams as they visit the online site and move to other sites. To capture appropriate samples using the web, marketing organisations increasingly find it necessary to use multiframe surveys involving a combination of computer-assisted telephone interviewing (CATI) and mobile technologies together with the internet.16 As we have already seen, the things that customers write about in different forms of social media can be captured and analysed by way of content analysis.17 The internet is especially well suited to quantitative research – conducting marketing surveys and collecting data. Over three-quarters of all Australian households now have access to the web, making it a fertile channel for reaching a broad cross-section of consumers.18 As response rates for traditional survey approaches decline and costs increase, the web is quickly replacing mail and the telephone as the dominant data collection methodology. The use of online panels has had a marked effect on the marketing research industry, and online research now accounts for about 50 per cent of all survey research done in the United States, and probably for a higher percentage in Australia and New Zealand given that some 80 per cent of the population accesses the internet.19 Internet-based survey research offers some real advantages over traditional telephone and mail approaches. The most obvious advantages are speed and low costs.20 Using the internet eliminates most of the postage, telephone, interviewer and data-handling costs associated with the other approaches. Moreover, sample size and location have little impact on costs. By going online, researchers can quickly and easily distribute internet surveys to thousands of respondents simultaneously via email or by posting them on selected websites. Once the questionnaire is set up, there is little difference in cost between 10 respondents and 10 000 respondents on the internet, or between local or globally distant respondents. Responses can be almost instantaneous and, because respondents themselves enter the information, researchers can tabulate, review and share research data as they arrive. Large organisations, such as Telstra, employ real-time data for management decision making, using a dashboard approach to predictive analytics in making best use of customer insights. Customer data is at the heart of predictive analytics, which differs from forecasting as it offers the ability to generate predictions for each individual customer or prospect. Commenting on the necessary links between IT and the company’s one-to-one marketing division in predictive analytics, Telstra’s Director of Research, Insights and Analytics stated: ‘This helps us move more effectively from insight generation to insight action within our one-to-one marketing team.’21

online marketing research

Collecting primary data online through internet surveys, online panels, experiments, content analysis, online focus groups and brand communities.

predictive analytics

Extracting information from data and using it to generate predictions for each individual customer or prospect.

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Thus, online research is well within the reach of almost any business, large or small. In fact, with the internet, practically anybody can use it for research purposes. Even smaller, less-sophisticated researchers can use online survey services, such as Qualtrics () and SurveyMonkey (), to create, publish and distribute their own custom surveys in minutes. Beyond their speed and cost advantages, web-based surveys also tend to be more interactive and engaging, easier to complete and less intrusive than traditional telephone or mail Online marketing research: Thanks to survey services such as SurveyMonkey, almost surveys. As a result, they usually garner higher any business, large or small, can create, publish and distribute its own custom online response rates. The internet can be an excellent or mobile surveys in minutes. medium for reaching the hard-to-reach – for SurveyMonkey example, the often-elusive teen, single, affluent or well-educated audiences. It is also good for reaching working parents and other people who lead busy lives. Such people are well represented online, and they can respond in their own space and at their own convenience. Just as marketing researchers have rushed to use the internet for quantitative surveys and data collection, they are now also adopting qualitative web-based research approaches – such as online depth interviews, focus groups, blogs and social networks. The internet can provide a fast, low-cost way to gain qualitative customer insights. A primary qualitative web-based research approach is online focus groups. Such focus groups offer online focus groups many advantages over traditional focus groups. Participants can log in from anywhere – all they need is a Gathering a small group laptop and a web connection. Thus, the internet works well for bringing together people from different of people online with a parts of the country or world, especially those in higher-income groups who cannot spare the time to trained moderator to travel to a central location. Also, researchers can conduct and monitor online focus groups from just about chat about a product, service or organisation, anywhere, eliminating travel, lodging and facility costs. Finally, although online focus groups require some and gain qualitative advance scheduling, results are almost immediate. insights about consumer Online focus groups can take any of several formats. Most occur in real-time, in the form of online chatattitudes and behaviour. room discussions in which participants and a moderator sit around a virtual table exchanging comments. Alternatively, researchers might set up an online message board on which respondents interact over the course of several days or a few weeks. Participants log in daily and comment on focus group topics. Although low in cost and easy to administer, online focus groups can lack the real-world dynamics of more personal approaches. The online world is devoid of the eye contact, body language and direct personal interactions found in traditional focus group research. And the internet format – running, typed commentary and online ‘emoticons’ (punctuation marks that express emotion, such as :-) to signify happiness, or :-o to signify surprise) – greatly restricts respondent expressiveness. The impersonal nature of the internet can prevent people from interacting with each other in a normal way and getting excited about a concept. To overcome these shortcomings, some researchers are now adding real-time audio and video to their online focus groups. For example, online research firms can put the human touch back into online research by assembling focus group participants in people-friendly ‘virtual interview rooms’. At the appointed time, participants sign on via their webcam-equipped computer, view live video of other participants and interact in real-time. Researchers can monitor the focus group from anywhere, seeing and hearing every respondent. Although the use of online marketing research is growing rapidly, both quantitative and qualitative web-based research do have some drawbacks. One major problem is controlling who is in the online

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sample. Without seeing respondents, it is difficult to know who they really are. To overcome such sample and context problems, many online research firms use opt-in communities and respondent panels. For example, Research Now offers online consumer and business panels profiled on many more attributes.22 Alternatively, many companies are now developing their own custom social networks and using them to gain customer inputs and insights.

Online behavioural and social tracking and targeting The internet has become an important tool for conducting research and developing customer insights. But today’s marketing researchers are going even further – well beyond online surveys, focus groups and internet communities. Increasingly, they are listening to and watching consumers by actively mining the rich veins of unsolicited, unstructured, ‘bottom-up’ customer information already coursing around the internet. Whereas traditional marketing research provides more logical consumer responses to structured and intrusive research questions, online listening provides the passion and spontaneity of unsolicited consumer opinions. Tracking consumers online might be as simple as scanning customer reviews and comments on the company’s brand site or on shopping sites, such as Amazon.com or productreview.com.au. Or it might mean using sophisticated online-analysis tools to deeply analyse the mountains of consumer brand-related netnographic research comments and messages found in blogs or on social media sites, such as Facebook, Yelp, YouTube, Instagram Like ethnographic or Twitter. Listening to and engaging customers online can provide valuable insights into what consumers research, which are saying or feeling about a brand. It can also provide opportunities for building positive brand experiences observes people in natural settings, and relationships. netnographic research Many companies now excel at listening online and responding quickly and appropriately by conducting involves monitoring what is termed netnographic research, which involves monitoring online communities of interest, online communities such as Bimmerpost.com, productreview.com.au and Whirlpool.net.au, in order to gain customer insights of interest to gain customer insights from from posts to online forums, blogs and social media generally. In these relatively natural environments, posts to online forums, customers make frank disclosures about their experiences and attitudes towards brands and companies. blogs and social media Researchers use such tools as Leximancer to analyse the communications and graphically present their generally. findings as themes and concepts.23 Observational netnographic research often yields the kinds of details that do not emerge from traditional research questionnaires or focus groups. Whereas traditional quantitative research approaches seek to test known hypotheses and obtain answers to well-defined product or strategy questions, observational research can generate fresh customer and market insights that people are unwilling or unable to provide. It provides a window into customers’ unconscious actions and unexpressed needs and feelings. However, some things simply cannot be observed, such as attitudes, motives or private behaviour. Longterm or infrequent behaviour is also difficult to observe. Finally, observations can be very difficult to interpret. Because of these limitations, researchers often use observation along with other data collection methods. Netnographic research: To better understand the views of members of communities of interest, the content of posts, blogs and social media Information about what consumers do while generally can be analysed by such specialised software as Leximancer. trolling the vast digital expanse – what searches they Concept Map generated by Leximancer Pty Ltd make, the online and mobile sites they visit, how

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they shop and what they buy – is pure gold to marketers. And today’s marketers are busy mining that gold. Then, in a practice called online behavioural targeting, marketers use the online data to target ads and offers to specific consumers. For example, if you place an Apple iPad in your Amazon.com shopping cart but do not buy it, you might expect to see some ads for that very type of tablet the next time you visit your favourite sports website to catch up on the latest sports scores. The newest wave of web analytics and targeting takes online eavesdropping even further – from behavioural targeting to social targeting. Whereas behavioural targeting tracks consumer movements across online sites, social targeting also mines individual online social connections and conversations from social networking sites. Research Behavioural targeting: Marketers watch and analyse shows that consumers shop a lot like their friends do and are much more what consumers do online, then use the resulting insights to personalise online shopping experiences. Is it likely to respond to ads from brands friends use. So, instead of having sophisticated online research or ‘just a little creepy’? a Brooks.com.au ad for running shoes pop up just because you have Andresr/Shutterstock.com recently searched online for running shoes (behavioural targeting), an ad for a specific pair of running shoes pops up because a friend you are connected to via Twitter bought online behavioural those shoes last week (social targeting). targeting Online listening, behavioural targeting and social targeting can help marketers to harness the Using online data to massive amounts of consumer information swirling around the internet. However, as marketers get target ads and offers to more adept at trolling blogs, social networks and other internet and mobile domains, many critics specific consumers. worry about consumer privacy. At what point does sophisticated online research cross the line into consumer stalking? Proponents claim that behavioural and social targeting benefit more than abuse consumers by feeding back ads and products that are more relevant to their interests. But to many consumers and public advocates, following consumers online and stalking them with ads feels more than just a little creepy. Regulators and others are stepping in due to consumer concerns. There may soon be a ‘Do Not Track’ system (the online equivalent to the ‘Do Not Call’ registry) – which would let people opt out of having their actions monitored online. So far, many major internet browsers and social media have heeded the concerns by adding extended privacy features to their services.24 For example, the Google browser has this tracking feature turned off by default – other than in iPhones and iPads, where it is not possible for technical reasons.25 Thus, privacy is an explosive issue facing online researchers. Failure to address such privacy issues could result in angry, less cooperative consumers and increased government intervention. Despite these concerns, most industry insiders predict healthy growth for online marketing research.26

Sampling plan sample

A segment of the population selected for marketing research to represent the population as a whole.

Marketing researchers usually draw conclusions about large groups of consumers by studying a small sample of the total consumer population. A sample is a segment of the population selected for marketing research to represent the population as a whole. Ideally, the sample should be representative so that the researcher can make accurate estimates of the thoughts and behaviours of the larger population. Designing the sample requires three decisions. First, who is to be studied (what sampling unit)? The answer to this question is not always obvious. For example, to learn about the decision-making process for a new family motor-vehicle purchase, should the subject be the husband, wife, other family members, dealership salespeople or all of these? The researcher must determine what information is needed and who is most likely to have it.

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Second, how many people should be included (what sample size)? Large samples give more reliable results than small samples. However, larger samples usually cost more, and it is not necessary to sample the entire target market or even a large portion to get reliable results. If well chosen, samples of less than 1 per cent of a population can often give good reliability. Finally, how should the people in the sample be chosen (what sampling procedure)? Table 4.5 describes different kinds of samples. Using probability samples, each population member has a known chance of being included in the sample, and researchers can calculate confidence limits for sampling error. But when probability sampling costs too much or takes too much time, marketing researchers often take non-probability samples, even though their sampling error cannot be measured. These varied ways of drawing samples have different costs and time limitations, as well as different accuracy and statistical properties. Which method is best depends on the needs of the research project.

Table 4.5 Types of samples Probability sample Simple random sample

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

Stratified random sample

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

Cluster (area) sample

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

Non-probability sample Convenience sample

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

Judgment sample

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

Quota sample

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

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

Questionnaires The questionnaire is by far the most common instrument, whether administered in person, by phone or online. Questionnaires are very flexible – there are many ways to ask questions. Closed-end questions include all the possible answers, and subjects make choices among them. Examples include multiple-choice questions and scale questions. Open-end questions allow respondents to answer in their own words. In a survey of airline users, an airline might simply ask, ‘What is your opinion of the Qantas–Emirates alliance?’. Or it might ask people to complete a sentence: ‘When I fly to London, the most important consideration is . . .’. These and other kinds of open-end questions often reveal more than closed-end questions because they do not limit respondents’ answers. Open-end questions are especially useful in exploratory research, when the researcher is trying to find out what people think but not measuring how many people think in a certain way. The number of sentences used is one measure of the quality of responses to online surveys. Closed-end questions, on the other hand, provide answers that are easier to interpret and tabulate. Researchers should also use care in the wording and ordering of questions. They should use simple, direct, unbiased wording. Questions should be arranged in a logical order. The first question should create interest, if possible, and difficult or personal questions should be asked last so that respondents do not become defensive. Mechanical instruments Although questionnaires are the most common research instrument, researchers also use mechanical instruments to monitor consumer behaviour. Nielsen Media Research attaches people meters to television

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sets, cable boxes and satellite systems in selected homes to record who watches which programs. Retailers use checkout scanners to record shoppers’ purchases. Still other researchers are applying ‘neuromarketing’, measuring brain activity to learn how consumers feel and respond. Marketing scientists using MRI scans and EEG devices have learned that tracking brain electrical activity and blood flow can provide companies with insights into what turns consumers on and off regarding their brands and marketing. Companies ranging from PepsiCo and Disney to Google and Microsoft now hire neuromarketing research companies, such as Neurons Inc and Nielsen NeuroFocus, to help figure out what people are really thinking.27 For example, eBay’s PayPal began pitching its online payment service as ‘fast’ after brain-wave research showed that speed appeals to consumers more than security and safety, earlier themes used in eBay ad campaigns. Although neuromarketing techniques can measure consumer involvement and emotional responses second by second, such brain responses can be difficult to interpret. Thus, neuromarketing is usually used in combination with other research approaches to gain a more complete picture of what goes on inside consumers’ heads.

Implementing the research plan The third step in the marketing research process (see Figure 4.2) is putting the marketing research plan into action. This involves Mechanical instruments: To find out what ads work and why, collecting, processing and analysing the information. Data collection Disney researchers have developed an array of devices to can be carried out by the company’s marketing research staff or by track eye movement, monitor heart rates and measure other outside firms. Researchers should watch closely to make sure the physical responses. plan is implemented correctly. They must guard against problems Erich Schlegel/Head Press with data collection techniques and technologies, data quality and timeliness. Researchers must also process and analyse the collected data to isolate important information and insight. They need to check data for accuracy and completeness and code it for analysis. The researchers then tabulate the results and calculate statistical measures.

Interpreting and reporting the findings As the final step in the marketing research process, the market researcher must now interpret the findings, draw conclusions and report them to management. The researcher should not try to overwhelm managers with numbers and fancy statistical techniques. Rather, the researcher should present important findings and insights that are useful in the major decisions faced by management. However, interpretation should not be left only to the researchers. Researchers are often experts in research design and statistics, but the marketing manager knows more about the problem and the decisions that must be made. The best research means little if the manager blindly accepts faulty interpretations from the researcher. Similarly, managers may be biased – they might tend to accept research results that show what they expected and to reject those they did not expect or hope for. In many cases, findings can be interpreted in different ways, and discussions between researchers and managers will help point to the best interpretations. Thus, managers and researchers must work together closely when interpreting research results, and both must share responsibility for the research process and resulting decisions.

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Linking the concepts We have covered a lot of territory. Let’s take a breather and see if you can apply the marketing research process you’ve just studied. ● What specific kinds of research might Nando’s marketing management use to learn more about its customers’ preferences and buying behaviours? Sketch out a brief research plan for assessing potential reactions to a new drive-through service.

● Could you use the marketing research process to analyse your career opportunities and job possibilities? (Think of yourself as a ‘product’ and employers as potential ‘customers’.) If so, what would your research plan look like?

Analysing and using marketing information (pp. 119–21) Information gathered in internal databases and through competitive marketing intelligence and marketing research usually requires additional analysis. Managers may need help applying the information to gain customer and market insights that will improve their marketing decisions. This help may include advanced statistical analysis to learn more about the relationships within a set of data. Information analysis might also involve the application of analytical models that will help marketers make more-informed decisions. Once the information has been processed and analysed, it must be made available to the right decision makers at the right time. In the following sections, we take a closer look at analysing and using marketing information.

Customer relationship management The question of how best to analyse and use individual customer data presents special problems. Most companies are awash in information about their customers, particularly due to the advent of big data. In fact, smart companies capture information at every possible customer touch point. These touch points include customer purchases, salesforce contacts, service and support calls, website and social media site visits, satisfaction surveys, credit and payment interactions, market research studies – every contact between the customer and the company. Unfortunately, this information is usually scattered widely across the organisation. It is buried deep in the separate databases and records of different company departments. To overcome such problems, many companies are now turning to customer relationship management (CRM) to manage detailed information about individual customers and carefully manage customer touch points in order to maximise customer loyalty. CRM consists of sophisticated software and analytical tools from such companies as Oracle, Microsoft, Salesforce.com and SAS that integrate customer information from all sources, analyse it in depth and apply the results to build stronger customer relationships. CRM integrates everything that a company’s sales, service and marketing teams know about individual customers, providing a 360-degree view of the customer relationship. CRM analysts develop data warehouses and use sophisticated data mining techniques to unearth the riches hidden in customer data. A data warehouse is a company-wide electronic database of finely detailed customer information that needs to be sifted through for gems. The purpose of a data warehouse is not just to gather information, but to pull it together into a central, accessible location. Then, once the data warehouse brings the data together, the company uses high-powered data mining techniques to sift through the mounds of data and dig out interesting findings about customers.

customer relationship management (CRM)

Managing detailed information about individual customers and carefully managing customer touch points in order to maximise customer loyalty.

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These findings often lead to marketing opportunities, as company databases, particularly retailer databases, provide deep insights for marketing decisions. For example, FlyBuys is Australia’s largest shopping rewards program, involving Coles Supermarkets and other major retailers. The program enables participating stores to dig deeply into data obtained from customer loyalty cards. It uses the customer insights gained for everything from targeting coupons to locating and stocking its stores. 28 Thus, a marketing organisation is able to integrate information from Roy Morgan Single Source with their own customer database information and use this for modelling and predictive purposes.29 By using CRM to understand customers better, organisations can provide higher levels of customer service and develop deeper customer relationships. They can use CRM to pinpoint high-value customers, target them more effectively, cross-sell the company’s products and create offers tailored to specific customer requirements.

Distributing and using marketing information Marketing information has no value until it is used to gain customer insights and make better marketing decisions. Thus, the marketing information system must make the information readily available to the managers and Roy Morgan Single Source: Through detailed evaluation and correlation across hundreds others who need it. In some cases, this means providing managers with of measures, Single Source helps marketers regular performance reports, intelligence updates and reports on the results understand individual consumers, target markets of research studies. and populations. But marketing managers may also need non-routine information for special Roy Morgan Research situations and on-the-spot decisions. For example, a sales manager having trouble with a large customer may want a summary of the account’s sales and profitability over the past year. Perhaps a retail store manager who has run out of a best-selling product may want to know the current inventory levels in the chain’s other stores. Or a brand manager may want to get a sense of the amount of the social media buzz surrounding the recent launch of a new product. These days, therefore, information distribution involves entering information into databases and making it available in a timely, user-friendly way. Many firms use a company intranet and internal CRM systems to facilitate this process. The intranet provides ready access to research information, reports, shared work documents, contact information for employees and other stakeholders, and more. For example, catalogue and web retailers integrate incoming customer service calls with up-to-date database information about customers’ web purchases and email inquiries. By accessing this information on the intranet while speaking with the customer, the companies’ service representatives can get a well-rounded picture of each customer’s purchasing history and previous contacts with the company. In addition, companies are increasingly allowing key customers and value-network members to access account, product and other data on demand through extranets. Suppliers, customers, resellers and select other network members may access a company’s extranet to update their accounts, arrange purchases and check orders against inventories to improve customer service.30 Thanks to modern technology, today’s marketing managers can gain direct access to a company’s information system at any time and from virtually anywhere. They can tap into the system from a home office, hotel room or the local Starbucks – any place they can connect on a laptop, smartphone or tablet. Such systems allow managers to get the information they need directly and quickly, and tailor it to their own needs.

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Linking the concepts Let’s stop here, think back and be certain you have the ‘big picture’ concerning marketing information systems. ● What is the overall goal of a marketing information system? How are the individual components linked, and what does each contribute? Take another look at Figure 4.1 – it provides a good organising framework for the entire chapter.

● Apply the MIS framework to Converse (a Nike company). How might Converse go about assessing marketing managers’ information needs, developing the needed information and helping managers to analyse and use the information to gain actionable customer and market insights?

Other marketing information considerations (pp. 121–24) This section discusses marketing information in two special contexts: (1) marketing research in small businesses and not-for-profit organisations, and (2) international marketing research. Finally, we look at public policy and ethics issues in marketing research.

Marketing research in small businesses and not-for-profit organisations Just like larger firms, small organisations need market information and the customer and market insights it can provide. Start-up businesses need information about their potential customers, industries, competitors, unfilled needs and reactions to new market offers. Existing small businesses must track changes in customer needs and wants, reactions to new products and changes in the competitive environment. Managers of small businesses and not-for-profit organisations often think that marketing research can be done only by experts in large companies with big research budgets. True, large-scale research studies are beyond the budgets of most small businesses. However, many of the marketing research techniques discussed in this chapter can also be used by smaller organisations in a less formal manner and at little or no expense. Thus, small businesses and not-for-profit organisations can obtain good marketing insights through observation or informal surveys using small convenience samples. Also, many associations, local media and government agencies provide special help to small organisations. For example, organisations such as VECCI (Victorian Employers’ Chamber of Commerce and Industry), the New South Wales state government’s Small Business Development Corporation and Western Australia’s Small Business Development Corporation offer dozens of free publications from their websites that give advice on topics ranging from starting, financing and expanding a small business, to ordering business cards. Finally, small businesses can collect a considerable amount of information online at very little cost by scouring competitor and customer websites and using internet search engines to research specific companies and issues. In summary, secondary data collection, observation, surveys and experiments can all be used effectively by small organisations with small budgets. However, although these informal research methods are less complex and less costly, they still must be conducted with care. Managers must think carefully about the objectives of the research, formulate questions in advance, recognise the biases introduced by smaller samples and less-skilled researchers, and conduct the research systematically.31

International marketing research International marketing research has grown tremendously over the past decade. International researchers follow the same steps as domestic researchers, from defining the research problem and developing a research plan to interpreting and reporting the results. However, these researchers often face more and different problems. Whereas domestic researchers deal with fairly homogeneous markets within a single

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country, international researchers deal with diverse markets in many different countries. These markets often vary greatly in their levels of economic development, cultures and customs, and buying patterns. In many overseas markets, the international researcher may have a difficult time finding good secondary data. Whereas Australian and New Zealand marketing researchers can obtain reliable secondary data from dozens of domestic research services, many countries have almost no research services at all. Some of the largest international research services do operate in many countries. For example, the Nielsen Company (the world’s largest marketing research company) has offices in more than 100 countries, from Schaumburg in the US state of Illinois, to Hong Kong, to Nicosia in Cyprus.32 However, most research firms operate in only a relative handful of countries. Thus, even when secondary information is available, it usually must be obtained from many different sources on a country-by-country basis, making the information difficult to combine or compare. Because of the scarcity of good secondary data, international researchers often must collect their own primary data. For example, they may find it difficult simply to develop good samples. Australasian Global marketing research: Some of the largest research researchers can use current telephone directories, email lists, census services firms operate on a worldwide scale. Nielsen has offices data and any of several sources of socioeconomic data to construct in more than 100 countries. samples. However, such information is largely lacking in many Copyrighted information © 2016 of The Nielsen Company, licensed for use herein. countries. Once the sample is drawn, the Australasian researcher usually can reach most respondents easily by telephone, by mail, on the internet or in person. Reaching respondents is often not so easy in other parts of the world where telephone and internet cater only to the major cities, if they are available at all. In some countries, few people have phones or personal computers. For example, in Kenya, there are only nine internet users per 100 people. In some countries, the postal system is notoriously unreliable. In Brazil, for instance, an estimated 30 per cent of the mail is never delivered. In many developing countries, poor roads and transportation systems make certain areas hard to reach, making personal interviews difficult and expensive.33 Cultural differences from country to country cause additional problems for international researchers. Language is the most obvious obstacle. For example, questionnaires must be prepared in one language and then translated into the languages of each country researched. Responses then must be translated back into the original language for analysis and interpretation. This adds to research costs and increases the risks of error. Even within a given country, language can be a problem. For example, in India, English is the language of business, but consumers may use any of 14 ‘first languages’, with many additional dialects. Translating a questionnaire from one language to another is anything but easy. Many idioms, phrases and statements mean different things in different cultures. For example, a Danish executive noted, ‘Check this out by having a different translator put back into English what you’ve translated from English. You’ll get the shock of your life. I remember [an example in which] “out of sight, out of mind” had become “invisible things are insane”.’34 Consumers in different countries also vary in their attitudes towards marketing research. People in one country may be very willing to respond; in other countries, non-response can be a major problem. Customs in some countries may prohibit people from talking with strangers. In certain cultures, research

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questions often are considered too personal. For example, in many Latin American countries, people may feel embarrassed to talk with researchers about their choices of shampoo, deodorant or other personal-care products. Similarly, in many Muslim countries, mixed-gender focus groups are taboo, as is videotaping female-only focus groups. And, even when respondents are willing to respond, they may not be able to because of high functional illiteracy rates. Despite these problems, as global marketing grows, global companies have little choice but to conduct such international marketing research. Although the costs and problems associated with international research may be high, the costs of not doing it – in terms of missed opportunities and mistakes – might be even higher. Once recognised, many of the problems associated with international marketing research can be overcome or avoided.

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

Intrusions on consumer privacy Many consumers feel positive about marketing research and believe it serves a useful purpose. Some actually enjoy being interviewed and giving their opinions. However, others strongly resent or even mistrust marketing research. They do not like being interrupted by researchers. They worry that marketers are building huge databases full of personal information about customers. Or they fear that researchers might use sophisticated techniques to probe our deepest feelings, peek over our shoulders as we shop or eavesdrop on our conversations and then use this knowledge to manipulate our buying. There are no easy answers when it comes to marketing research and privacy. For example, is it a good thing or a bad thing that marketers track and analyse consumers’ web clicks and target ads to individuals based on their browsing behaviour? Should we applaud or resent companies that monitor consumer discussions on YouTube, Facebook, Twitter or other public social networks in an effort to be more responsive?35 Many companies view tracking and responding to social media conversations as opportunities to engage consumers in helpful two-way conversations. For example, users of the information and communications technologies-focused Whirlpool Forums realise that the major telecommunications companies (telcos) monitor and reply to questions and correct erroneous posts, even though the telco employees do not necessarily identify themselves. This is in contrast to Productreview.com.au forums where responding companies do identify themselves.36 However, some disconcerted users might see these as an intrusion of privacy. Companies such as Dell track only public forums but, like most, Dell does not inform consumers or obtain their consent. Interestingly, many consumers do not seem to mind. Consumers often moan that companies do not listen to them. Perhaps the monitoring of online discussions can provide an answer to that problem. Consumers may also have been taken in by previous ‘research surveys’ that actually turned out to be attempts to sell them something. Still other consumers confuse legitimate marketing research studies with promotional efforts and say ‘no’ before the interviewer can even begin. Most, however, simply resent the intrusion. They dislike mail, telephone or web surveys that are too long or too personal, or that interrupt them at inconvenient times. Increasing consumer privacy concerns have become a major problem for the marketing research industry. Companies face the challenge of unearthing valuable but potentially sensitive consumer data while also maintaining consumer trust. At the same time, consumers wrestle with the trade-offs between

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personalisation and privacy. ‘The debate over online [privacy] stems from a marketing paradox,’ says a privacy expert. ‘Internet shoppers want to receive personalised, timely offers based on their wants and needs but they resent that companies track their online purchase and browsing histories.’ The key question is: Where is the line between questionable and acceptable customer data-gathering activities? Failure to address such privacy issues could result in angry, less-cooperative consumers and increased government intervention. Most major companies – including IBM, Microsoft, Facebook, Citigroup, American Express – and even some governments have now appointed a chief privacy officer (CPO), whose job is to safeguard the privacy of consumers who do business with the company. In the end, if researchers provide value in exchange for information, customers will gladly provide it. For example, Amazon.com’s customers accept that the firm is building a database of products they buy as a way to provide future product recommendations. This saves time and provides value. The best approach is for researchers to ask only for the information they need, use it responsibly to provide customer value and avoid sharing information without the customer’s permission.

Misuse of research findings Research studies can be powerful persuasion tools; companies often use study results as claims in their advertising and promotion. Today, however, many research studies appear to be little more than vehicles for pitching the sponsor’s products. In fact, in some cases, the research surveys appear to have been designed just to produce the intended effect. Few advertisers openly rig their research designs or blatantly misrepresent the findings; most abuses tend to be subtle ‘stretches’. In the end, however, unethical or inappropriate actions cannot simply be regulated away. Each company must accept responsibility for policing the conduct and reporting of its own marketing research to protect consumers’ and its own best interests.

Codes of practice The marketing research industry is considering several options for responding to this problem. One example is the ‘Your Opinion Counts’ and ‘Respondent Bill of Rights’ initiatives by the US Council for Marketing and Opinion Research to educate consumers about the benefits of marketing research and to distinguish it from telephone selling and database building. The industry in the United States also has considered adopting broad standards, perhaps based on the International Chamber of Commerce’s International Code of Marketing and Social Research Practice. This code outlines researchers’ responsibilities to respondents and to the general public. For example, it states that researchers should make their names and addresses available to participants. It also bans companies from representing such activities as database compilation or sales and promotional pitches as research. In Europe, the ICC/ESOMAR International Code of Marketing and Social Research Practice regulates the professional activities of marketing researchers. The code sets out what is meant by ‘marketing and social research, including opinion research’ and emphasises that such research must always be clearly distinguished from other forms of marketing activities (many of which are regulated by their own separate code of practice and, in certain cases, by legislative controls). The code outlines researchers’ responsibilities to the general public, states that researchers should make their names and addresses available to participants, and bans companies from misrepresenting their database compilation activities as marketing research. So, too, the Australian Market and Social Research Society (AMSRS) maintains its code of practice in the light of strengthened privacy legislation and other factors.37

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Student Learning Centre

125

Learning Objective 3. Outline the steps in the marketing research process. (pp. 105–19) The first step in the marketing research process involves defining the problem and setting the research objectives, which may be exploratory, descriptive or causal research. The second step consists of developing a research plan for collecting data from primary and secondary sources. The third step calls for implementing

Reviewing the learning objectives To create value for customers and build meaningful relationships with them, marketers must first gain fresh, deep insights into what customers need and want. Such insights come from good marketing information. As a result of the recent explosion of ‘big data’ and marketing technology, companies can now obtain great quantities of information, sometimes even too much. Consumers themselves are now generating a tidal wave of bottom-up information through their smartphones, computers and tablets via online browsing and blogging, apps and social media interactions, and texting and video. The challenge is to transform today’s vast volume of consumer information into actionable customer and market insights.

Learning Objective 1. Explain the importance of information in gaining insights about the marketplace and customers. (pp. 98–102) The marketing process starts with a complete understanding of the marketplace and consumer needs and wants. Thus, the company needs sound information in order to produce superior value and satisfaction for customers. The company also requires information on competitors, resellers, and other actors and forces in the marketplace. Increasingly, marketers are viewing information not only as an input for making better decisions but also as an important strategic asset and marketing tool.

Learning Objective 2. Define the marketing information system and discuss its parts. (pp. 102–5) The marketing information system (MIS) consists of people and procedures for assessing information needs, developing the needed information and helping decision makers to use the information to generate and validate actionable customer and market insights. A well-designed information system begins and ends with users. The MIS first assesses information needs. The marketing information system primarily serves the company’s marketing and other managers, but it may also provide information to external partners. Then, the MIS develops information from internal databases, marketing intelligence activities and marketing research. Internal databases provide information on the company’s own operations and departments. Such data can be obtained quickly and cheaply but often needs to be adapted for marketing decisions. Marketing intelligence activities supply everyday information about

the marketing research plan by gathering, processing and analysing the information. The fourth step consists of interpreting and reporting the findings. Additional information analysis helps marketing managers apply the information and provides them with sophisticated statistical procedures and models from which to develop more rigorous findings. Both internal and external secondary data sources often provide information more quickly and at a lower cost than primary data sources, and they can sometimes yield information that a company cannot collect by itself. However, needed information might not exist in secondary sources. Researchers must also evaluate secondary information to ensure that it is relevant, accurate, current and impartial. Primary research must also be evaluated for these features. Each primary data collection method – observational, survey and experimental – has its own advantages and disadvantages. Similarly, each of the various research contact methods – mail, telephone, personal interview and online – also has its own advantages and drawbacks.

Learning Objective 4. Explain how companies analyse and use marketing information. (pp. 119–21) Information gathered in internal databases and through marketing intelligence and marketing research usually requires more analysis. This may include advanced statistical analysis or the application of analytical models that will help marketers make better decisions. To analyse individual customer data, many companies have now acquired or developed special software and analysis techniques – called customer relationship management (CRM) – that integrate, analyse and apply the mountains of individual customer data contained in their databases. Marketing information has no value until it is used to make better marketing decisions. Thus, the marketing information system must make the information available to the managers and others who make marketing decisions or deal with customers. In some cases, this means providing regular reports and updates; in other cases, it means making non-routine information available for special situations and on-the-spot decisions. Many firms use company intranets and extranets to facilitate this process. Thanks to modern technology, today’s marketing managers can gain direct access to the information system at any time and from virtually any location.

Learning Objective 5. Discuss the special issues some marketing researchers face, including public policy and ethics issues. (pp. 121–24)

developments in the external marketing environment. Market research consists

Some marketers face special marketing research situations, such as those

of collecting information relevant to a specific marketing problem faced by the

conducting research in small business, not-for-profit or international situations.

company. Lastly, the MIS helps users in their marketing analytics whereby they

Marketing research can be conducted effectively by small businesses and non-

analyse and use the information to develop customer insights, make marketing

profit organisations with limited budgets. International marketing researchers

decisions and manage customer relationships.

follow the same steps as domestic researchers, but often face more and different

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problems. All organisations need to act responsibly in terms of the public policy

❷ Want to earn a little extra cash? Businesses use focus groups and surveys to

and ethical issues surrounding marketing research, including issues of intrusions

make better marketing decisions, and they might pay for your participation.

on consumer privacy and misuse of research findings.

Visit and , then review the opportunities available for research participation. Find

Discussion questions ❶ Marketing analytics. Why are marketing analytics important? Are marketing analytics only applicable in the case of big data or does the term apply to all marketing data? Justify your answer. (Learning Objectives 1 and 5) (AACSB: Communication; Reflective Thinking) ❷ Marketing information system. What is a marketing information system? What characteristics should it possess? (Learning Objectives 1, 2 and 3) (AACSB: Communication) ❷ Marketing intelligence. Take the situation where, in an endeavour to conduct marketing intelligence, a company employs a service agency to sort through its competitors’ rubbish after hours. Is this ethical behaviour? Is it illegal? Either way, what do you think the general public would make of such activities if they came across a newspaper report on a well-known company undertaking such activities? (Learning Objective 5) (AACSB: Communication) ❹ Netnographic research. What might be the advantages and/or disadvantages of netnographic research over traditional survey research? (Learning Objectives 3 and 4) (AACSB: Communication) ❺ The internet in marketing analytics. What impact has the internet had on how marketing analytics are conducted? What advantages does the internet provide over traditional marketing data collection and analytical methods? (Learning Objective 2) (AACSB: Communication; Reflective Thinking) ❻ International marketing research. Identify and report the similarities and differences when conducting research in another country versus the Australian–New Zealand market. (Learning Objective 5) (AACSB: Communication)

Critical thinking exercises ❶ In a small group, identify a problem faced by a local business or not-for-

two more websites that recruit research participants. Write a brief report of what you found, and discuss the implications for companies conducting marketing research when researchers recruit participants this way. (Learning Objectives 2 and 3) (AACSB: Communication; Use of IT; Reflective Thinking) ❷ Go to the Strategic Business Insights (SBI) website and take the VALS survey (). What type of research is being conducted – exploratory, descriptive or causal? How can marketers use this information? (Learning Objectives 2 and 3) (AACSB: Communication; Use of IT; Reflective Thinking)

Navigating the key terms Learning Objective 1

exploratory research  (p. 106)

big data   (p. 98)

focus group interviewing  (p. 112)

customer insights  (p. 99)

marketing research  (p. 105)

marketing analytics   (p. 99)

netnographic research  (p. 115)

marketing information system

observational research  (p. 109)

(MIS)  (p. 101)

Learning Objective 2 competitive marketing intelligence  (p. 104) internal databases  (p. 103)

Learning Objective 3 causal research  (p. 106) commercial online databases  (p. 108)

online behavioural targeting   (p. 116) online focus groups  (p. 114) online marketing research  (p. 113) predictive analytics (p. 113) primary data  (p. 107) qualitative research  (p. 106) quantitative research  (p. 106) sample  (p. 116) secondary data  (p. 107) survey research  (p. 110)

profit organisation and propose a research project addressing that problem.

descriptive research  (p. 106)

Learning Objective 4

Develop a research proposal that implements each step of the marketing

ethnographic research  (p. 110)

customer relationship management

research process. Discuss how the research results will help the business

experimental research  (p. 111)

(CRM)  (p. 119)

or not-for-profit organisation. (Learning Objectives 1, 2 and 4) (AACSB: Communication; Analytical Thinking; Reflective Thinking)

Mini cases 4.1  Gathering data Measuring marketing communication impact The Nielsen Company has expanded globally with its marketing

home-based barcode-scanning unit that uploads home purchase data

research services. In Australia, the company uses its Nielsen Television

weekly to Nielsen. Nielsen refers to this consumer panel service as

Audience Measurement (Nielsen TAM) to monitor free-to-air (FTA) and

Homescan. Such information can be supplemented with psychographic

subscriber television viewing on behalf of OzTAM (currently owned

data by using depth interviews and focus groups when necessary.

by commercial networks Nine, Seven and Ten). Through a separate

The latter probing would involve consumers with the same demographic

service and using a separate panel, household composition and

profile as those in the Homescan panel, but would not involve the same

geodemographic and behavioural information can be obtained via a

respondents.

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Chapter 4  Marketing analytics: Gaining customer insights

Using point-of-sale store scan data, Nielsen is able to provide a

Other companies, such as Roy Morgan, also offer single-source data

good picture of sales and market share by unit and dollar volumes

research.38

for packaged goods using this retailer-supplied ScanTrack service.

❶ Visit Nielsen Australia at to learn more

Fresh produce and chilled meats from the butchery and deli sections

about its customer insight services and the types of analyses performed

are not tracked via scan data unless individual retailers provide this

by this company. Investigate and list the services on offer to clients, giving

information. A separate retail audit service involving butchers and

a short explanation for each. Conduct a similar investigation by visiting

supermarket butchery and deli departments is available to obtain this

Roy Morgan Research at . (Learning Objectives 1

information.

and 2) (AACSB: Communication; Analytical Thinking; Use of IT) ❷ What is syndicated single-source research as the term is used by Nielsen

detailed analysis of market segments and sub-segments. Nielsen has

Research and Roy Morgan Research? Do these companies refer to

invested heavily in client services executives whose job is to analyse data

the same thing? Explain your answer. (Learning Objective 2) (AACSB:

and make recommendations to their clients.

Communication; Analytical Thinking; Reflective Thinking)

© OzTAM

Nielsen also provides syndicated single-source research that allows

Television audience measurement: OzTAM is the official source of television audience measurement, covering the five city metropolitan areas and nationally for subscription TV (pay-TV).

4.2  Customer insights Online, mobile and social media marketing: Social data People have been using Twitter’s social media platform to tweet short bursts

at the bottom of the foothills in terms of the kind of global demand for social

of information in 140 characters or less since 2006 and now average 500

data.’ In 2014, Twitter alone earned more than US$70 million from licensing

million tweets a day. The full stream of tweets is referred to as Twitter’s fire

its data.39 Clearly there is gold in such data mining.

hose. Various firms analyse data from the fire hose and sell the information

❶ Discuss the value of social data for marketers. (Learning Objectives 1

gleaned from that analysis to other companies. Twitter recently purchased

and 2) (AACSB: Communication; Reflective Thinking)

Gnip, the world’s largest social data provider and one of the few companies

❷ A ‘dark social channel’ refers to a private channel or a channel difficult

that had access to the fire hose. Gnip also mines public data from Facebook,

to match with other digital channels. An example of a dark channel is

Google+, Tumblr and other social media platforms. Analysing social data has

email. However, Google routinely mines its roughly half-billion Gmail

become a big business because companies such as PepsiCo, Warner Brothers

users’ emails. Research how Google scans email data and the fallout

and General Motors pay to learn about consumers’ sentiments toward them.

from those actions, then summarise your findings. (Learning Objectives

According to the CEO of social media analysis company BrandWatch, ‘We’re

1, 4 and 5) (AACSB: Communication; Use of IT; Reflective Thinking)

4.3  Marketing analytics at work The value of information Conducting research is costly, and the costs must be weighed against the value

reduce price in order to maintain market share, or should the company

of the information gathered. Consider a hypothetical company – QuickParts

maintain its current price? The company has conducted some preliminary

Online – faced with a competitor’s price reduction on a three-month parts

research showing the financial outcomes of each decision under two

supply contract to motor repair customer groups. Should QuickParts also

competitor responses: the competition maintains its price or the competition

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4.3  Marketing analytics at work continued lowers its price further. The company feels pretty confident that the competitor

acquiring it? One way to assess the value of additional information is to

cannot lower its price further and assigns that outcome a probability (p) of

determine the expected value of perfect information (EMVPI), calculated

0.7, which means the other outcome would have only a 30 per cent chance

using the following equation:

of occurring (1 − p = 0.3). These outcomes are shown in the table below: Competitive response QuickParts action

Maintain price p • 0.7

Reduce price (1 • p) • 0.3

Reduce price

$160 000

$120 000

Maintain price

$180 000

$100 000

For example, if QuickParts reduces its price and the competitor maintains its price, the company would realise $160 000 and so on. From this information, the expected monetary value (EMV) of each company action (reduce price or maintain price) can be determined using the following

EMVPI = EMVcertainty − EMVbest alternative where EMVcertainty = (  p) (highest financial outcomep) + (1 − p) (highest financial outcome(1 − p)) If the value of perfect information is more than the cost of conducting the research, then the research should be undertaken (that is, EMVPI > cost of research). However, if the value of the additional information is less than the cost of obtaining more information, the research should not be conducted. ❶ Calculate the expected monetary value (EMV) of both company actions. Which action should QuickParts take? (Learning Objectives 1 to 5)

equation: EMV = (  p) (financial outcomep) + (1 − p) (financial outcome(1 − p)) The company would select the action expected to deliver the greatest EMV. More information might be desirable, but is it worth the cost of

(AACSB: Communication; Analytical Reasoning) ❷ What is the expected value of perfect information (EMVPI)? Should QuickParts conduct the research? (Learning Objectives 1 to 5) (AACSB: Communication; Analytical Reasoning)

4.4  Ethical reflection Might SMS promotions break the law? The makers of DeepBlueIce soft drink, DBICorp (DBIC), have used

use the mobile phone numbers to send bulk SMS messages promoting the

advertising to build membership of the DeepBlueIce Dance Club.

dance club events and offering incentives so that people will interact with

The marketing manager, Spike Torn, convinced the company’s directors that

the company via SMS, including forwarding the SMS to their friends.

the dance club strategy would enable DBIC to penetrate the youth market

Take on the role of a member of Spike Torn’s marketing management

using a one-to-one communication strategy. The company plans to sponsor

team. Do you agree with Spike Torn’s plans for the use of the data gathered

DJs, such as Dirty South, at events where it will run competitions in which

in the proposed marketing research? If so, why is this an appropriate plan?

consumers will suggest mixer drinks based on DeepBlueIce. It plans to build

If not, what alternatives might the company consider, and why? Might

the membership base and gather such information as email addresses,

Spike Torn’s planned approach breach the Australian Spam Act 2003 (Cth)

mobile phone numbers and other demographic details under the guise

and/or the Do Not Call Register Act 2006 (Cth), or are there steps that the

of conducting marketing research at these events. The company plans to

marketers can take to comply with such legislation?

References

1 See Craig Smith, ‘By the numbers: 175 amazing Pinterest statistics’, Digital Marketing Ramblings, 2 January 2015, ; and Kerry Flynn, ‘Get ready to see more ads on Pinterest in 2015’, Huffington Post, 29 December 2014, . 2 See ‘Big data’, Wikipedia, , accessed February 2015; and Michael Lev-Ram, ‘What’s the next big thing in big data? Bigger data’, Fortune, 16 June 2014, pp. 233–40. 3 Andrew Nusca, ‘Despite high tech, the future of marketing is exactly the same: Focus on customers’, Fortune, 15 July 2014, ; and Phani Nagarjuna, ‘Seven steps to understanding your business and monetizing analytics’, Sales & Marketing Management, 9 January 2015, .

4 For more discussion, see Elizabeth A Sullivan, ‘Analytics in action’, Marketing News, December 2014, pp. 24–33; and Jayson DeMers, ‘2014 is the year of digital marketing analytics: What it means for your company’, Forbes, 2 February 2014, . Also see ‘Marketing analytics: What it is and why it matters’, SAS, , accessed May 2016. 5 Avi Dan, ‘How data nourishes agile marketing at Kraft’, Forbes, 26 October 2014, ; and Jack Neff, ‘Kraft says content delivers four times better ROI than ads’, Advertising Age, 15 September 2014, p. 8. 6 See ‘Retail Link 2.0’, 8th & Walton, , accessed September 2015. 7 See Sigma Pharmaceuticals and the retail banner groups involved at , accessed May 2016.

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8 Example based on information from Michal Lev-Ram, ‘Samsung’s road to mobile domination’, Fortune, 4 February 2013, pp. 99–101; Jason Gilbert, ‘Samsung mocks iPhone 5, Apple fanboys again in new Galaxy S3 commercial’, Huffington Post, 1 September 2012, ; Suzanne Vranica, ‘Tweets spawn ad campaigns’, Wall Street Journal, 22 October 2012, p. B5; and Luke Villapaz, ‘Samsung mocks Apple iPhone 6 and Apple Watch in new series of ads’, International Business Times, 11 September 2014, . 9 George Chidi, ‘Confessions of a corporate spy’, Inc., February 2013, pp. 72–7. 10 For more on research firms that supply marketing information, see Laurence N Gold, ‘The 2015 AMA gold global top 50 report’, Marketing News, August 2015. Other information from and , accessed May 2016. 11 See Christine Birkner, ‘C’est la vie’, Marketing News, , accessed November 2016; and ‘Landor Families’, , accessed May 2016. 12 Spencer E Ante, ‘The science of desire’, BusinessWeek, 5 June 2006, p. 100; Rhys Blakely, ‘You know when it feels like somebody’s watching you . . .’, The Times, 14 May 2007, p. 46; and Jack Neff, ‘Marketing execs: Researchers could use a softer touch’, Advertising Age, 27 January 2009. 13 See Brooks Barnes, ‘Disney expert uses science to draw boy viewers’, New York Times, 14 April 2009, p. A1; Linda Tischler, ‘Every move you make’, Fast Company, April 2004, pp. 73–5; Ellen Byron, ‘Seeing store shelves through senior eyes’, Wall Street Journal, 14 September 2009, p. B1; and Natasha Singer, ‘The fountain of old age’, New York Times, 6 February 2011, p. BU1. 14 Adapted from information in Kenneth Hein, ‘Hypnosis brings groups into focus’, Brandweek, 23 May 2008, p. 4. Also see G Svensson, G Wood & M D Callaghan, ‘Masochistic marketing: Volvo Australia’s “so safe” strategy’, Journal of Consumer Marketing, 23(7), 2006, pp. 438–44. 15 Molly Soat, ‘Everything in moderation’, Marketing News, April 2014, pp. 36–46, at p. 38. 16 See Roy Morgan Research, ‘Telephone interviewing’, , accessed May 2016. 17 For more on content analysis in marketing research, see Harold H Kassarjian, ‘Content analysis in consumer research’, Journal of Consumer Research, 4(1), 1977, pp. 8–18; and Christina Goulding, ‘Grounded theory, ethnography and phenomenology: A comparative analysis of three qualitative strategies for marketing research’, European Journal of Marketing, 39(3/4), 2005, pp. 294–308. 18 See ‘Pew research internet project’, Pew Internet, 27 February 2014, . 19 See ‘Internet world stats’, , accessed May 2016. 20 See Heath McDonald & Stewart Adam, ‘A comparison of online and postal data collection methods in marketing research’, Marketing Intelligence and Planning, 21(2), 2003, pp. 85–95; and Stewart Adam & Robin N Shaw, ‘Small business perceptions of online marketing research’, Australasian Journal of Market Research, 12(1), 2004, pp. 22–32. 21 Nadia Cameron, ‘How Telstra is applying data and analytics to customer experience’, CMO, 5 May 2016, , accessed May 2016; also see Chris Riddell, ‘The top 3 directions predictive analytics will take in 2015’, CMO, 10 February 2015, cmo.com.au/ article/565924/top-3-directions-predictive-analytics-will-take-2015, accessed May 2016. 22 For examples, see Australia Online Research, , accessed May 2016. 23 For more on netnography, see Robert Kozinets, ‘The field behind the screen: Using netnography for marketing research in online communities’, Journal of Marketing Research, 39(1), February 2002, pp. 61–72; Pradeep K Tyagi, ‘Webnography: A new tool to conduct marketing research’, Journal of American Academy of Business, March 2010, pp. 262–8; Robert V Kozinets, ‘Netnography: The marketer’s secret weapon’, March 2010, , accessed February 2013; and Michael Osofsky, ‘Turning online discussions into insight’, December 2010, . 24 For more discussion, see the US ‘Do-Not-Track Online Act of 2013’, ; Fred B Campbell, Jr., ‘The slow death of

129

“Do Not Track”’, New York Times, 27 December 2014, p. A17; and ‘Do Not Track legislation’, , accessed September 2015. 25 For more, see , accessed May 2016. 26 See the Australian Privacy Commissioner website, , accessed May 2016. 27 See Adam L Penenberg, ‘NeuroFocus uses neuromarketing to hack your brain’, Fast Company, 8 August 2011, ; and Carmen Nobel, ‘Neuromarketing: Tapping into the “pleasure center” of consumers’, Forbes, 2 February 2013, . For other examples and discussion, see Roger Dooley, ‘Is Starbucks coffee too cheap?’, Forbes, 14 October 2013, ; and Thomas Zoega Ramsey, Neuromarketing & Consumer Neuroscience, Neurons Inc: Rorvig, Denmark, 2014. 28 For more on Flybuys, see , accessed May 2016. 29 For more on Roy Morgan Single Source, and how the data are collected and processed, see ‘How we collect and process Single Source data in Australia’, , accessed May 2016. 30 See Daryl Travis, ‘The best omni-channel brands look more like a cause than a business’, The Hub, August 2014, . 31 For some good advice on conducting market research in a small business, see ‘Conducting market research’, , accessed May 2016. ‘Researching your market’, Entrepreneur, , accessed September 2015. Also see James Y L Thong, ‘An integrated model of information systems adoption in small business’, Journal of Management Information Systems, 15(4), 1999, pp. 187–214. 32 See Diane Bowers & Michael Brereton, ‘The 2015 AMA gold global top 25 report’, Marketing News, August 2015, pp. 34ff; and and , accessed August 2015. 33 For these and other examples, see ‘From tactical to personal: Synovate’s tips for conducting marketing research in emerging markets’, Marketing News, 30 April 2011, pp. 20–2. Internet statistics are from , accessed May 2016. 34 Subhash C Jain, International Marketing Management, 3rd edn, PWS-Kent: Boston, MA, 1990, p. 338. For more discussion on international marketing research issues and solutions, see Warren J Keegan & Mark C Green, Global Marketing, 8th edn, Prentice Hall: Upper Saddle River, NJ, 2015, pp. 170–201. 35 See Andrew Roberts, ‘In some stores, all eyes are on you’, Bloomberg Businessweek, 10 December 2012, pp. 32–3; and ‘EyeSee mannequin’, , accessed September 2014. 36 See Whirlpool Forums, where users seek and provide information on telcos’ mobile phone plans and internet service providers (ISPs), among other information, , and also see ; accessed May 2016. 37 ‘ICC/ESOMAR international code of marketing and social research practice’, , accessed May 2016. Also see ‘Respondent bill of rights’, , accessed May 2016. 38 Joanne Lipman, ‘Single-source ad research heralds detailed look at household habits’, Wall Street Journal, 16 February 1988, p. 39; Joe Schwartz, ‘Back to the source’, American Demographics, January 1989, pp. 22–6; Thomas Exter, ‘Advertising and promotion: The one-two punch’, American Demographics, March 1990, pp. 18–21; and Magid M Abraham & Leonard M Lodish, ‘Getting the most out of advertising and promotion’, Harvard Business Review, May–June 1990, pp. 50–60. See also OzTAM, , and ACNielsen Australia, , accessed May 2016; and Roy Morgan, , accessed May 2016. 39 Juliette Garside, ‘Twitter puts trillions of tweets up for sale to data miners’, The Guardian, 19 March 2015, , accessed November 2016.

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Chapter

5

Buyer behaviour: Understanding consumer and business buyers In Chapter 4, we considered how marketers obtain, analyse and use marketing information to gain customer and market insights as a basis for creating customer value and relationships. In this chapter, we continue our marketing journey with a closer look at the most important element of the marketplace – customers. The aim of marketing is to affect how customers think about and behave towards the organisation and its market offerings. But to affect the whats, whens and hows of buying behaviour, marketers must first understand the whys. We look first at final consumer buying influences and processes, and then at the buying behaviour of business customers. You will see that understanding buying behaviour is an essential, but very difficult, task. For a visual representation of the chapter, please see the concept map on the following page.

Learning

Objectives

Learning Objective 1 Identify the consumer market and the main factors that influence consumer buyer behaviour. Consumer markets and consumer buyer behaviour  pp. 132–45 Learning Objective 2 Identify and discuss the stages in the buyer decision process. The buyer decision process  pp. 145–48 Learning Objective 3 Describe the adoption and diffusion process for new products. The buyer decision process for new products  pp. 148–50 Learning Objective 4 Define the business market and identify the main factors that influence business buyer behaviour. Business markets and business buyer behaviour  pp. 150–56 Learning Objective 5 List and define the steps in the business buying decision process. The business buying process  pp. 156–59 E-procurement: Buying on the internet  pp. 159–60 Business-to-business digital and social media marketing   p. 160

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LO 1 Identify the consumer market and the main factors that influence consumer buyer behaviour. (pp. 132–45)

The environment

Buyer decision process

Marketing stimuli

Other stimuli

Product Price Placement logistics Promotion People Processes

Economic Technological Social Cultural

Buyer response

Buyer’s black box

Buying attitudes and preferences

Buyer’s characteristics Buyer’s decision process

Purchase behaviour Brand and company relationship behaviour

LO 2 Identify and discuss the stages in the buyer design process. (pp. 145–48)

Need recognition

Information search

Evaluation of alternatives

Purchase decision

Post-purchase behaviour

CONSUMER BUYER BEHAVIOUR LO 3 Describe the adoption and diffusion process for new products. (pp. 148–50)

Early majority Innovators

Late majority

Early adopters

Laggards

Time of adoption of innovations

The environment LO 4 Define the business market and identify the main factors that influence buyer behaviour. (pp. 150–56)

LO 5 List and define the steps in the business buying decision process. (pp. 156–60)

Buyer decision process

Marketing stimuli

Other stimuli

The buying organisation

Product Price Placement logistics Promotion People Processes

Economic Technological Social Cultural Competitive

The buying centre Buying decision process

Buyer response Product or service choice Supplier choice Order quantities Delivery terms and times Service terms Payment

Problem recognition

General need description

Product specification

Supplier search

Proposal solicitation

Supplier selection

Order-routine specification

Performance review

BUSINESS BUYER BEHAVIOUR

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Part 2  Understanding the marketplace and consumers

Consumer markets and consumer buyer behaviour (pp. 132–48) consumer buyer behaviour

The buying behaviour of final consumers – individuals and households – that buy goods and services for personal consumption.

consumer market All the individuals and households that buy or acquire goods and services for personal consumption.

Consumer buyer behaviour refers to the buying behaviour of final consumers – individuals and households that buy goods and services for personal consumption. All of these final consumers combine to make up the consumer market. The combined Australian and New Zealand consumer market consists of nearly 28 million people who consume more than $1 trillion worth of goods and services each year, making it one of the larger markets in the world. The world consumer market consists of more than 7.3 billion people who annually consume an estimated $50 trillion worth of goods and services.1 Consumers around the world vary tremendously in age, income, education level and tastes. They also buy an incredible variety of goods and services. How these diverse consumers relate with each other, and with other parts of the world around them, impacts their choices among various products, services and companies. Here, we examine the fascinating array of factors that affect consumer behaviour.

Model of consumer behaviour Consumers make many buying decisions every day, and the buying decision is the focal point of the marketer’s effort. Most large companies research consumer buying decisions in great detail in order to answer questions about what consumers buy, where they buy, how and how much they buy, when they buy and why they buy. Marketers can study actual consumer purchases to find out what they buy, where and how much. But learning about the whys of consumer buying behaviour is not so easy – the answers are often locked deep within the consumer’s mind. Often, consumers themselves do not know exactly what influences their purchases. ‘The human mind doesn’t work in a linear way,’ says one marketing expert. ‘The idea that the mind is a computer with storage compartments where brands or logos or recognisable packages are stored in clearly marked folders that can be accessed by cleverly written ads or commercials simply doesn’t exist. Instead, the mind is a whirling, swirling, jumbled mass of neurons bouncing around, colliding and continuously creating new concepts and thoughts and relationships inside every single person’s brain all over the world.’ Another expert agrees: ‘There are a lot of black holes in what we observe people are doing, why they’re doing it, and what’s going on in the brain.’2 The central question for marketers is: How do consumers respond to various marketing efforts the company might use? The starting point is the stimulus–response model of buyer behaviour, shown in Figure 5.1. This figure shows that marketing and other stimuli enter the consumer’s ‘black box’ and produce certain responses. Marketers must work out what is in the buyer’s black box. Marketing stimuli consist of the marketing mix elements: product, price, placement logistics and promotion, together with the people, processes and physical evidence involved. Other stimuli include major forces and events in the buyer’s environment: economic, technological, political, social and cultural. All these inputs enter the buyer’s mind, a black box where they are turned into a set of observable buyer responses: buying attitudes and preferences, the buyer’s brand and company relationship behaviour, and what he or she buys, when, where and how often. The marketer wants to understand how the stimuli are changed into responses inside the consumer’s black box, which has two parts. First, the buyer’s characteristics influence how he or she perceives and reacts to the stimuli. Second, the buyer’s decision process itself affects the buyer’s behaviour. We look first at buyer characteristics as they affect buyer behaviour and then discuss the buyer decision process.

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THE ENVIRONMENT

BUYER’S BLACK BOX

BUYER RESPONSES

Other

Buyer’s characteristics Buyer’s decision process

Buying attitudes and preferences Purchase behaviour: what the buyer buys, when, where and how much Brand and company relationship behaviour

Marketing stimuli Product Price Placement logistics Promotion People Processes Physical evidence

Economic Technological Social Cultural

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Figure 5.1  Model of buyer behaviour

Characteristics affecting consumer behaviour Consumer purchases are influenced strongly by cultural, social, personal and psychological characteristics, shown in Figure 5.2. For the most part, marketers cannot control such factors, but they must take them into account. We must also acknowledge influences such as marketing programs (which marketers can control).

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

Culture

Culture is the most basic cause of a person’s wants and behaviours. Human behaviour is largely learned. Growing up in a particular society, children learn basic values, perceptions, wants and behaviours from their family and other important institutions. Global marketers must be fully aware of the cultures in each

CULTURAL Culture

Cultural group

Social class

SOCIAL Reference groups

Family

Roles and status

PERSONAL Age and life-cycle stage Occupation Economic situation Lifestyle Personality and self-concept

culture

The set of basic values, perceptions, wants and behaviours learned by a member of society from family and other important institutions.

PSYCHOLOGICAL Motivation Perception Learning Beliefs and attitudes

BUYER

Figure 5.2  Factors influencing consumer behaviour

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market and adapt their marketing strategy accordingly. Failure to adjust to these differences can result in ineffective marketing or embarrassing mistakes. Marketers are always trying to identify cultural shifts in order to discover new products that might be wanted. For example, the cultural shift towards greater concern about health and fitness has created a huge industry for health-and-fitness services, exercise equipment and clothing, organic foods and a variety of diets. The shift towards informality has resulted in more demand for casual clothing and simpler home furnishings.

Cultural group Each culture contains smaller cultural groups, or groups of people with shared value systems based on cultural group A group of people with common life experiences and situations. The cultures in Australia and New Zealand are diverse and shared value systems richly varied, comprising First Peoples, Anglo-Saxon/Celtic early immigrants (although there were based on common significant groups of migrants from China early in the histories of both countries) and, in the last 80 years life experiences and situations. or so, immigrants from throughout Europe, Asia and the South Pacific. Marketers must respond to the diversity of their market and design products and marketing programs tailored to the needs of these diverse groups. People with a similar ethnic background often have shared value systems. However, individuals may also share identities of gender, sexual preference, age, political affiliation, class and religious belief. These factors will affect food preferences, clothing choices, recreational pursuits and even aspirations, such as career goals. Different cultural groups place different values on marriage, for example. Young couples may or may not be encouraged to marry (and for gay and lesbian couples, such formalised recognition of their relationships may not be possible). Thus, cultural and sociopolitical factors may combine and affect individual interest in all manner of products, as well as brand preferences. Individuals may identify more or less strongly with their cultural groups at different times and in different contexts. So, while marketers may use membership of cultural groups as a convenient way of segmenting markets and as a focus for strategy development, they should take care to avoid oversimplification of a group. The First Peoples of both Australia and New Zealand are themselves very diverse.3 In New Zealand, Maoˉ ri share a common language, albeit with distinct regional dialects, and a common oral history and heritage. In contrast, ‘Indigenous Australia is multicultural, with over 350 distinct languages and nations and varied histories, traditions, laws and lifestyles. Apart from their traditional cultural heritage, Indigenous people today live complex and contemporary lifestyles that draw upon the customs, traditions and lifestyles of every subsequent immigrant group within their community. Therefore, Indigenous people, like all other Australians and New Zealanders, are diverse and fluid in their cultural group memberships.’4 As the world population ages, mature consumers are becoming a very attractive market. Mature consumers: Older consumers are tech-friendly and more socially active As of 2015, the entire ‘baby boomer’ generation, than ever. the largest and wealthiest demographic cohort SeniorMatch in the country, has moved into the 50-plus

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135

age bracket. They control a larger proportion of wealth, income and consumption than any current or previous generation. Despite some financial setbacks resulting from the global economic downturn, mature consumers remain an attractive market for companies in all industries, from pharmaceuticals, groceries, beauty products and clothing, to consumer electronics, travel and entertainment, and financial services.5 Contrary to popular belief, mature consumers are not ‘stuck in their ways’. A recent study showed that older consumers for products such as stereos, computers and mobile phones are more willing to shop around and switch brands than their younger Generation X counterparts.6 The growing cadre of mature consumers creates an attractive market for a wide range of services. For example, the social networking site ‘Older Dating Online’ targets older consumers who are interested in forming new relationships and friendships. And their desire to look as young as they feel also makes more-mature consumers good candidates for cosmetics and personal-care products, health foods, fitness products and other items that combat the effects of ageing. Marketers are also noticing that ‘It’s more powerful to promote shared and interesting experiences, over product ownership’ for these older consumers. For example, ‘There is a boom in mature women travelling and wanting safe and interesting experiences.’ Young at Heart Holidays has developed its service for just this market segment, with holidays in Australia and selected international destinations for couples, singles and friends travelling together. Its ‘Big Book of Holidays’ reassures travellers that they can ‘pack their bags, we’ll do the rest’, offering ‘escorted itineraries, relaxed pace, terrific companions, interesting places, quality accommodation, good meals and genuine personal attention’.7

Social class Almost every society has some kind of hierarchy or social class structure. India has a rigid caste system whereas Australia, New Zealand and South-East Asian countries have a class system that permits movement between the classes. Completing tertiary education may result in a better job and movement up the social scale; losing a prestigious position may cause a slide down the social scale. Social classes are relatively permanent and ordered divisions in a society, whose members share similar values, interests and behaviours. Social class is not determined by a single factor. A number of classification schemes have been developed, ranging from those using occupation and education to those based on a combination of occupation, income, education, wealth and other variables. Marketers are interested in social class when it is relevant, because people within a given social class tend to exhibit similar behaviour, including buying behaviour. Researchers, such as Mark McCrindle, have suggested that social class may not be a good basis for developing marketing strategies. Although there is a class system in Australia, Australians seem not to place themselves within such groups as ‘working class’ and, in any event, the groups are so large as to make them ineffective as market segments.8

social class

Relatively permanent and ordered divisions in a society, whose members share similar values, interests and behaviours.

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

Groups and social networks Many small groups influence a person’s behaviour. Groups that have a direct influence and to which a person belongs are called membership groups. In contrast, reference groups serve as direct (face-to-face) or indirect points of comparison or reference in forming a person’s attitudes or behaviour. People often are influenced by reference groups to which they do not belong. For example, an aspirational group is one to

group

Two or more people who interact to accomplish individual or mutual goals.

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opinion leader

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

online social networks

Online social communities – blogs, social networking websites or even virtual worlds – where people socialise or exchange information and opinions.

which the individual wishes to belong, such as when a young couple renting indicate a desire, regardless of how difficult it may be, to become home-owners.9 Marketers try to identify the reference groups of their target markets. Reference groups expose a person to new behaviours and lifestyles, influence the person’s attitudes and self-concept, and create pressures to conform that may affect the person’s product and brand choices. The importance of group influence varies across products and brands. It tends to be strongest when the product is visible to others whom the buyer respects. Marketers of brands subjected to strong group influence must work out how to reach opinion leaders – people within a reference group who, because of special skills, knowledge, personality or other characteristics, exert social influence on others. Some experts call these people the influentials or leading adopters. One study found that these influencers are ‘four times more likely than average consumers to belong to five or more organisations, four times more likely to be considered experts, and twice as likely to recommend a product they like’. Another survey found that when consumers are looking for advice about a decision they have to make, they are turning to trusted online sources for that advice, rather than to family.10 Marketers often try to identify opinion leaders for their products and to direct marketing efforts towards them. They use buzz marketing by enlisting or even creating opinion leaders to serve as ‘brand ambassadors’ who spread the word about their products. Many companies are now creating brand ambassador programs in an attempt to turn influential but everyday customers into brand evangelists. The Australian Red Cross has recently invited Soup to help increase blood donations by targeting new donors. Soup is a leading word-of-mouth agency with a membership base of more than 75 000 inf luencers who spread the word about brands in both Australia and New Zealand. Soup  recruits ‘soupers’ – people who ‘love having their say’ and who are well connected and interested. Soup does not pay its members; instead, they are given free samples and asked for their ‘honest opinions’. In return, clients using this type of opinion leader service hope for positive recommendations for their brands.11 Over the past few years, a new type of social interaction has exploded on to the scene – online social networking. Online social networks are online communities where people socialise or exchange information and opinions. Social networking media range from blogs and social networking websites, such as Facebook, YouTube, Instagram and Reddit, to entire virtual worlds, such as Second Life, InWorldz, Eve, IMVU and Gaia Online. This new form of high-tech buzz has big implications for marketers and is being used more and more by consumers to provide advice in decision making.12 Marketers are working to harness the power of these new social networks to promote their products and build closer customer relationships. Instead of throwing more one-way commercial messages at ad-weary consumers, they hope to use social networks to interact with consumers and become a part of their conversations and lives. For example, Australian band Powderfinger used Twitter to organise ‘guerrilla’ gigs in Brisbane, Sydney and Melbourne. The number of the band’s online followers tripled in just one day. And companies such as AirAsia, Nike and Xbox have had great success in responding to customer questions on Facebook, Twitter, Weibo and other social media platforms. They use these platforms as a major component of their customer service strategy to engage with and service customers, whether things are positive or not. A company executive explains, ‘Social networks are tools that help build and leverage our relationship with the consumer. Ultimately, we are about connecting with the consumer where they are’ to listen and to help.13 Other companies post ads or custom videos on video-sharing sites such as YouTube. For example, when Yarra Valley Water launched its ‘Choose Tap’ campaign with a YouTube video, it received over 95 000 hits in just a few weeks. The video portrays customers in a fictional pop-up store – Dupé – which sells ‘Organic Fresh Air’ and ‘All Natural February Moonlight’. The store website displays the product range, and the shopping cart links to the campaign tagline, ‘Buying bottled air just doesn’t make sense. It’s just like buying bottled water.’14

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But marketers must be careful when tapping into online social networks. Results are difficult to measure and control. Ultimately, the users control the content, so social network marketing attempts can easily backfire. For example, the Taxi Council of Victoria used Twitter to try to fight the disruptive onslaught of Uber by asking people to share their taxi stories on Twitter with #YourTaxis. Within hours, this campaign that was designed to promote Victorian Taxis’ goodwill descended into horror for the industry body as consumers used the platform to vent their hatred for taxis. Their competitor, Uber, even used this as a promotional opportunity of their own by targeting stories covering this debacle.15 We look more closely at online social networks as a marketing tool in Chapter 13.

Family Family members can strongly influence buyer behaviour. The family is the most important consumer/buying organisation in society, and it has been researched extensively. Marketers are interested in the roles and influence of the husband, wife and children on the purchase of different products and services. Online social networks: Yarra Valley Water’s YouTube campaign, which compared Husband–wife involvement varies widely selling bottled water to selling bottled air, had over 95 000 hits in just a few weeks. by product category and by stage in the buying Campaign creative by Ogilvy process. Buying roles change with evolving consumer lifestyles. In Australia and New Zealand, women have traditionally been the main purchasing agent for the family in the areas of food, household products and clothing. But with more women working, others are doing more of the family’s purchasing. One recent study found that at least half of all grocery shopping is being done by men. Another found that ‘not only do 79 per cent of men like shopping, but 29 per cent say they love it’. In the past, men have been more likely to be ‘mission shoppers’ – in and out as quickly as possible to get whatever it is they are searching for. But this new study found that ‘27 per cent of men would spend more with retailers who design and coordinate the online and in-store experience’, and ‘19 per cent would spend more if technology is used to enable them to shop with more confidence and ease’. These findings have very clear implications for how marketers design in-store experiences.16 Children may also have a strong influence on family buying decisions. One study found that children significantly influence family decisions about everything from where they take holidays to what cars and mobile phones they buy. Most children spend money on toys and sweets, but some also buy books and magazines, DVDs and music. In recognition of the power of child shoppers, many companies devote parts of their website to children. Sanitarium has a kids’ page on its Weet-Bix website, and broadcasters such as the ABC and TVNZ, and subscription services such as Netflix, have websites devoted to their young viewers.17 Roles and status A person belongs to many groups – family, clubs, organisations. The person’s position in each group can be defined in terms of both their role and their status. A role consists of the activities people are expected

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to perform according to the persons around them. Each role carries a status reflecting the general esteem given to it by society. People usually choose products appropriate to their roles and status. Consider the various roles a working mother plays. In her company, she plays the role of a brand manager; in her family, she plays the role of wife and mother; at her favourite sporting events, she plays the role of avid fan. As a brand manager, she will buy the kind of clothing that reflects her role and status in her company; and as a fan, she supports her team by wearing the club’s colours to home games.

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

Age and life-cycle stage People change the goods and services they buy over their lifetimes. Tastes in food, clothes, furniture and recreation are often age-related. Buying is also shaped by the stage of the family life cycle – the stages through which families might pass as they mature over time. Life-stage changes usually result from demographics and life-changing events – marriage, having children, purchasing a home, divorce, children going to university, changes in personal income, moving out of the house and retirement. Marketers often define their target markets in terms of life-cycle stage and develop appropriate products and marketing plans for each stage. Age and family life cycle are not the only time-related impacts of the way people consume goods and services. Major life events also shape consumption. These impacts may even be cross-generational: the early death of a parent impacts on people’s buying behaviour just as much as getting married does. These issues are explored further in Marketing in action 5.1. Occupation A person’s occupation affects the goods and services bought. Manual workers tend to buy rugged work clothes whereas executives tend to buy business suits. Marketers try to identify the occupational groups that have an above-average interest in their products and services. A company can even specialise in making products needed by a given occupational group. For example, Spear’s Specialty Shoes fills a tiny niche in the shoe world by making high-end shoes for – of all things – clowns (and some team mascots and even store Santas). Founder Gary Spear, a former clown himself, discovered a need for good, comfortable clown shoes with reasonable delivery times. Over the past 25 years, his company has built a worldwide reputation. At the company’s website (), professional clowns can browse different colours and styles and design their own shoes. It is a fun niche, but these shoes are no joke. Made for professional clowning around, they are made with lightweight soles and serious padding, at a starting price of US$360 a pair.18

lifestyle

Economic situation A person’s economic situation will affect his or her store and product choices. Marketers watch trends in personal income, savings and interest rates. Recent research shows that nearly half of all Australian consumers are prioritising saving and, when they do spend, many are buying from offshore online retailers. In the face of these trends, most companies are taking steps to redesign, reposition and reprice their products. For example, Budget Direct repositioned its brand with the ‘Captain Risky’ campaign. The discount insurer rolled out the campaign in the face of continued pressure on household finances as well as increased competition and complexity in the insurance market. It offered consumers a value proposition emphasising price and simplicity: ‘We don’t insure Captain Risky, to keep prices low.’19

A person’s pattern of living as expressed in his or her activities, interests and opinions.

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

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139

Consumer behaviour: A whole life story

Mature consumers behave very differently from teenagers. Marketers understand

a change in hairstyle and a new wardrobe, and for others by excessive purchasing,

this, so age is one of the ways markets are segmented. The markets for

drinking or gambling. Why people respond differently to life events is not clear,

entertainment, mobile communications and travel are often segmented by

but researcher George Moschis, with his work on life course perspectives, has

age. Breakfast cereals use age (among other factors) to segment their market.

been throwing some light on the issue. Moschis suggests that the way life events

But sometimes age segmentation does not work – for example, the market

impact on consumption is moderated by a person’s ‘socialisation, stress and coping

for luxury goods is not defined by age. Researchers have also found that some

responses and development and growth’. Thus, a response to negative life events,

behaviour of consumers seems to have less to do with age than with life events.

such as the death of a parent, will depend on how a person handles stress and the

Materialism and compulsive consumption appear to be orientations to buying

coping strategies they employ. But it will also be affected by their socialisation and

that are particularly affected by life events.

their view of their new role in the family. So, contrary to traditional perspectives

Materialism reflects a longing for material possessions rather than spiritual fulfilment. Some people are more materialistic than others. This orientation is

with a simple ‘cause and effect’ view of consumer behaviour, Moschis’s work casts consumer behaviour as being much more complex.

seen in a number of the lifestyle and values segments identified by companies

Marketers are yet to establish just how to deal with this view of the consumer,

such as SBI () and Roy Morgan

but there is no doubt that it is likely to change the way they think about their markets.

(). Research has shown that children’s responses to family disruptions (such as their parents’ divorce) may later impact on their own tendency towards materialistic consumption. We also know that people who have experienced considerable financial hardship often have conspicuous consumption patterns. Similar negative early life experiences are also linked to compulsive consumption – often of unhelpful products or services, such as cigarettes or gambling. However, it is not just negative consumption behaviour that develops as a result of earlier life events. These events may also affect how and when we get married, have children, the type of work we do, where we live and where we do our shopping – in fact, everything we do. So, what a person buys and how they consume should be seen as a result of their whole life story and not just a particular age or stage of their life cycle. Segmenting consumer markets by age or even life-cycle stage may need to be revised in light of this view of a consumer. The consumption patterns of a young mother whose husband has just died in the line of duty as a police officer may be much more like those of a 60-year-old woman whose husband recently died in a car accident than those of women her own age or stage in life (young mother). However, there is a great deal we do not know about how life events translate into differences in consumption. For some people, ending a relationship is marked by

Research suggests that consumer behaviour is complex, and is shaped by the whole history of life events. Lucy Lambriex/Getty

Sources: Excerpts from A Rindfleisch, J E Burroughs & F Denton, ‘Family structure, materialism and compulsive consumption’, Journal of Consumer Research, 23, 1997, pp. 312–25; J A Roberts, C Manolis & J Tanner, Jr, ‘Family structure, materialism, and compulsive buying’, Journal of the Academy of Marketing Science, 31(3), 2003, pp. 300–11; and George P Moschis, ‘Life course perspectives on consumer behaviour’, Journal of the Academy of Marketing Science, 35, 2007, pp. 295–307.

Questions ❶ Reflect on your life. Draw a timeline and mark the main events in your life – for example, leaving home, starting your first job, your first serious relationship and so on. Have there been any major life events that you see playing out in the way you consume goods and services? Compare your experiences with the life events of a friend and their consumption patterns. ❷ Identify some goods and services that would benefit from market segmentation approaches based on life events rather than on other segmentation variables.

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consumers’ major AIO dimensions – activities (work, hobbies, shopping, sports, social events), interests (food, fashion, family, recreation) and opinions (about themselves, social issues, business, products). Lifestyle captures something more than the person’s social class or personality; it profiles his or her whole pattern of acting and interacting in the world. Leading lifestyle researchers, Roy Morgan Research Centre, provide lifestyle and values segmentation for the Australian market. This omnibus research has identified 10 Australian lifestyle groups (Morgan Values Segments™). Among other lifestyle differences, these groups are shown to have different media and entertainment consumption patterns, which is useful information for marketers keen to reach different parts of their potential market.20 When used carefully, the lifestyle concept can help marketers understand changing consumer values and how they affect buying behaviour. Consumers do not just buy products; they buy the values and lifestyles those products represent. For example, Harley Davidson does not just sell motorbikes; it sells adventure and freedom: ‘We fulfill dreams of personal freedom.’ And Driza-Bone sells more than just rugged clothing; it recognises individualism and invites customers to ‘make your own story’.21

personality

The unique psychological characteristics that distinguish a person or group.

brand personality

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

Personality and self-concept Each person’s distinct personality influences his or her buying behaviour. Personality refers to the unique psychological characteristics that distinguish a person or group. Personality is usually described in terms of traits such as self-confidence, dominance, sociability, autonomy, defensiveness, adaptability and aggressiveness. Personality can be useful in analysing consumer behaviour for certain product or brand choices. The idea is that brands also have personalities, and that consumers are likely to choose brands with personalities that match their own. A brand personality is the specific mix of human traits that may be attributed to a particular brand. One researcher identified five brand personality traits: sincerity (down-to-earth, honest, wholesome and cheerful); excitement (daring, spirited, imaginative and up-todate); competence (reliable, intelligent and successful); sophistication (upper-class and charming); and ruggedness (outdoorsy and tough).22 Most well-known brands are strongly associated with one particular trait: IKEA with ‘functionality’, MTV with ‘youthfulness’ and Dove with ‘sincerity’. Hence, these brands will attract people who are high on the same personality traits. Many marketers use a concept related to personality – a person’s self-concept (also called self-image). The idea is that people’s possessions contribute to and reflect their identities – that is, ‘we are what we have’. Thus, in order to understand consumer behaviour, the marketer must first understand the relationship between consumer self-concept and possessions.23 Air New Zealand applies these concepts to engage with its customers in everything from its advertising, to its in-flight safety videos and its motion sickness bags. The airline brand personality has an ‘irreverent sense of fun’ according to a recent customer experience study. The airline is such a hit that bloggers all over the world post and re-post the engaging in-flight videos – search online for themed videos inspired by films such as The Hobbit, events such as the Rugby World Cup, celebrities such as Betty White and Bear Grylls, and a take-off (pardon the pun!) of life in Hollywood. One blogger said of an in-flight safety video from ‘Middle Earth’: ‘It captures everything I love about New Zealand, and about Air New Zealand – a sense of pride in what they do, but in a way that shows they have a sense of humor.’24

Psychological factors A person’s buying choices are further influenced by four main psychological factors: (1) motivation, (2) perception, (3) learning, and (4) beliefs and attitudes.

Motivation A person has many needs at any given time. Some are biological, arising from states of tension, such as hunger, thirst or discomfort. Others are psychological, arising from the need for recognition, esteem or

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belonging. A need becomes a motive when it is aroused to a sufficient level of intensity. A motive (or drive) is a need that is sufficiently pressing to direct the person to seek satisfaction. Psychologists have developed theories of human motivation. Two of the most popular – the theories of Sigmund Freud and Abraham Maslow – have quite different meanings for consumer analysis and marketing. Sigmund Freud assumed that people are largely unaware of the real psychological forces shaping their behaviour. He saw the person as growing up and repressing many urges. These urges are never eliminated or under perfect control; they emerge in dreams, in slips of the tongue, in neurotic and obsessive Motivation: An ageing baby boomer who buys a sports car might explain behaviour or, ultimately, in psychoses. that he simply likes the feel of the wind in his (thinning) hair. At a deeper Freud’s theory suggests that a person’s buying level, he may be buying the car in order to feel young and independent again. decisions are affected by subconscious motives that © Monkey Business Images | Dreamstime.com even the buyer may not fully understand. Thus, an ageing baby boomer who buys a sporty BMW Z4 convertible might explain that he simply likes the feel of the wind in his (thinning) hair. At a deeper motive (drive) level, he may be trying to impress others with his success. At a still deeper level, he may be buying the A need that is sufficiently pressing to direct car in order to feel young and independent again. the person to seek The term motivation research refers to qualitative research designed to probe consumers’ hidden, satisfaction of the need. subconscious motivations. Consumers often do not know or cannot describe just why they act as they do. Thus, motivation researchers use a variety of probing techniques to uncover underlying emotions and attitudes towards brands and buying situations. Many companies employ teams of psychologists, anthropologists and other social scientists to carry out motivation research. One ad agency routinely conducts one-on-one, therapy-like interviews to delve into the inner workings of consumers. Another company asks consumers to describe their favourite brands as animals or cars (say, Holden versus Ford) in order to assess the prestige associated with various brands. Still others rely on hypnosis, dream therapy or soft lights and mood music to plumb the murky depths of consumer psyches. These approaches, included in the area of interpretive consumer research, allow marketers to dig deeper into consumer psyches and develop better marketing strategies by recognising the experiential, symbolic, ideological and sociocultural aspects of consumer behaviour.25 Abraham Maslow sought to explain why people are driven by particular needs at particular times. Why does one person spend much time and energy on personal safety and another on gaining the esteem of others? Maslow’s answer is that human needs are arranged in a hierarchy, as shown in Figure 5.3, from the most pressing at the bottom to the least pressing at the top.26 These needs include physiological needs, safety needs, social needs, esteem needs and self-actualisation needs. A person tries to satisfy the most important need first. When that need is satisfied, it will stop being a motivator and the person will then try to satisfy the next most important need. For example, starving people (physiological need) will not take an interest in the latest happenings in the art world (self-actualisation needs), nor in how they are seen or esteemed by others (social or esteem needs), nor even in whether they are breathing clean air (safety needs). But as each important need is satisfied, the next most important need will come into play. Of course, consumer motivations are complex and will not always be strictly hierarchical; and although Maslow’s work has been criticised, it suggests that marketers should reflect on the types of needs consumers may be satisfying when they buy goods and services.

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Selfactualisation needs Self-development and realisation

Esteem needs Self-esteem, recognition, status

Social needs Sense of belonging, love

Safety needs Security, protection

Physiological needs Hunger, thirst

Figure 5.3  Maslow’s hierarchy of needs Source: Abraham H Maslow, Robert D Frager (Editor) & James Faidman (Editor), Motivation and Personality, 3rd edn, © 1987. Printed and electronically reproduced by kind permission of Pearson Education, Inc., Upper Saddle River, NJ.

Perception A motivated person is ready to act. How the person acts is influenced by his or her own perception of the situation. All of us learn by the flow of information through our five senses: sight, hearing, smell, touch and taste. However, each of us receives, organises and interprets this sensory information in an individual way. Perception is the process by which people select, organise and interpret information to form a perception The process by meaningful picture of the world. which people select, People can form different perceptions of the same stimulus because of three perceptual processes: organise and interpret selective attention, selective distortion and selective retention. We are exposed to a great amount of information to form a meaningful picture of stimuli every day. For example, individuals are exposed to an estimated 3000 to 5000 ad messages daily. the world. The cluttered digital environment adds 30 billion online display ads shown each day, 500 million tweets sent daily, 144 000 hours of video uploaded daily on YouTube, and 4.75 billion pieces of content shared on Facebook every day.27 It is impossible to pay attention to all these stimuli. Selective attention – the tendency for people to screen out most of the information to which they are exposed – means that marketers must work especially hard to attract the consumer’s attention.28 Even noticed stimuli do not always come across in the intended way. Each person fits incoming information into an existing mindset. Selective distortion describes the tendency of people to interpret information in a way that will support what they already believe. For example, if you Selective perception: It is impossible for people to pay attention to the distrust a company, you might perceive even honest thousands of ads that they see every day, so they screen most of them out. ads from the company as being questionable. © Andrey Bayda/Shutterstock.com Selective distortion means that marketers must try

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to understand the mindsets of consumers and how these will affect interpretations of advertising and sales information. People also will forget much of what they learn. They tend to retain information that supports their attitudes and beliefs. Because of selective retention, consumers are likely to remember good points made about a brand they favour and to forget good points made about competing brands. Because of selective attention, distortion and retention, marketers must work hard to get their messages through. This fact explains why marketers use so much drama and repetition in sending messages to their market. Interestingly, although most marketers worry about whether their offers will be perceived at all, some consumers worry they will be affected by marketing messages without even knowing it – through subliminal advertising. More than 50 years ago, a researcher announced that he had flashed the phrases ‘Eat popcorn’ and ‘Drink Coca-Cola’ on a screen in a movie theatre in the United States every five seconds for 1/300th of a second. He reported that although viewers did not consciously recognise these messages, they absorbed them subconsciously and bought 58 per cent more popcorn and 18 per cent more Coke.29 Suddenly, advertisers and consumer-protection groups became intensely interested in subliminal perception. People voiced fears of being brainwashed, and California and Canada declared the practice illegal. Although the researcher later admitted to making up the data, the issue has not died. Some consumers still fear they are being manipulated by subliminal messages. Numerous studies by psychologists and consumer researchers have found little or no link between subliminal messages and consumer behaviour. Recent brain-wave studies have found that, in certain circumstances, our brains may register subliminal messages. However, it appears that subliminal advertising simply does not have the power attributed to it by its critics. Most advertisers scoff at the notion of an industry conspiracy to manipulate consumers through ‘invisible’ messages. Says one industry insider: [Some consumers believe we are] wizards who can manipulate them at will. Ha! Snort! Oh my sides! As we know, just between us, most of [us] have difficulty getting a 2 per cent increase in sales with the help of $50 million in media and extremely liminal images of sex, money, power, and other [motivators] of human emotion. The very idea of [us] as puppeteers, cruelly pulling the strings of consumer marionettes, is almost too much to bear.30

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

learning

Changes in an individual’s behaviour arising from experience.

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belief

A descriptive thought that a person holds about something.

attitude

A person’s consistently favourable or unfavourable evaluations, feelings and tendencies towards an object or idea.

Beliefs and attitudes People acquire beliefs and attitudes by doing and learning. These beliefs and attitudes, in turn, influence their buying behaviour. A belief is a descriptive thought that a person has about something. Beliefs may be based on real knowledge, opinion or faith, and may or may not carry an emotional charge. Marketers are interested in the beliefs that people formulate about specific products and services, because these beliefs make up product and brand images that affect buying behaviour. If some of the beliefs prevent purchase, the marketer will want to launch a campaign to correct them. People have attitudes regarding religion, politics, clothes, music, food and almost everything else. Attitude describes a person’s relatively consistent evaluations, feelings and tendencies towards an object or idea. Attitudes put people into a frame of mind of liking or disliking things, of moving towards or away from them. From the definition, we can see that attitudes are made up of three parts – our thoughts and beliefs (cognition), our feelings (affect) and an intention to behave in a certain way (conation). This understanding led to the development of the most common model marketers, psychologists, consumer researchers and others use to make sense of consumer attitudes – the tricomponent attitude model shown in Figure 5.4. As its name suggests, the tricomponent attitude model displays (models) our attitudes in terms of three (‘tri’) parts (‘components’). The cognitive component of our attitudes refers to our beliefs, thoughts and the attributes we associate with the attitude object. They develop through our experiences with, our observations of, and through information we have learned about, the actual object of the attitude. This component of our attitude is the one we are most likely to be aware of compared to the others. It is also more susceptible to change through logical persuasion. The affective component of our attitudes refers to our feelings and emotions linked to the attitude object. This component of our attitude is based on a personal judgment and can be positive (we like something), negative (we dislike something) or neutral (we are indifferent). The affective component of our attitude impacts on the other components of the attitude – it can represent how we evaluate our cognitive beliefs and also how we act in relation to the object. Further, the stronger our feelings and emotion in relation to the object, the stronger the attitude is likely to be. The conative component of our attitude refers to how we act, or would act, should the situation arise in relation to the attitude object. It can be difficult to separate from the other two components and is the only component of our attitude that is visible. Our camera buyer may hold attitudes such as ‘Buy the best’ (conative), ‘Japanese companies make the best electronics products in the world’ (cognitive) and ‘Creativity and self-expression are among

Affect

Conation

Cognition

Figure 5.4  A simple representation of the tricomponent attitude model Source: L Schiffman, A O’Cass, A Paladino & J Carlson, Consumer Behaviour, 6th edn, Pearson, Sydney, 2013.

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the most important things in life’ (affective). If so, the Nikon camera would fit well into the consumer’s existing attitudes. Attitudes are difficult to change. A person’s attitudes fit into a pattern, and to change one attitude may require difficult adjustments in many others. Thus, a company should usually try to fit its products into existing attitudes rather than attempt to change attitudes. For example, today’s food marketers now cater to people’s new attitudes about health and wellbeing with a range of products offering alternatives to high-sugar treats. Wholeberry Folk has launched a new range of bake-at-home treats with these consumer attitudes Attitudes: Wholeberry Folk’s bake-at-home range taps into people’s in mind. The range of cupcakes and biscuits uses spelt attitudes about health and wellbeing. flour and real fruit. A company representative explains: ‘As Packaging designed for Wholeberry Folk by Vicki Nhieu parents we have a moral obligation to feed our children healthy food, so when it comes to sweet treats we created an alternative.’31 We can now appreciate the many forces acting on consumer behaviour. The consumer’s choice results from the complex interplay of cultural, social, personal and psychological factors.

The buyer decision process (pp. 145–48) Now that we have looked at the influences that affect buyers, we are ready to look at how consumers make buying decisions. Figure 5.5 shows that the buyer decision process consists of five stages: (1) need recognition, (2) information search, (3) evaluation of alternatives, (4) purchase decision and (5) post-purchase behaviour. Clearly, the buying process starts long before the actual purchase and continues long after. Marketers need to focus on the entire buying process rather than on just the purchase decision. The figure suggests that consumers pass through all five stages with every purchase. But in more routine purchases, consumers often skip or reverse some of these stages. A woman buying her regular brand of toothpaste would recognise the need and go straight to the purchase decision, skipping information search and evaluation. However, we use the model in Figure 5.5 because it shows all the considerations that arise when a consumer faces a new and complex purchase situation.

Stages in the buyer decision process Need recognition The buying process starts with need recognition – the buyer recognises a problem or need. The need can be triggered by internal stimuli when one of the person’s normal needs – hunger, thirst, sex – rises to a level high enough to become a drive. A need can also be triggered by external stimuli. For example, an advertisement or a discussion with a friend might get you thinking about buying a new car. At this stage in the buyer decision

Need recognition

Information search

Evaluation of alternatives

Purchase decision

Post-purchase behaviour

Figure 5.5  The buyer decision process

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process, the marketer should research consumers to find out what kinds of needs or problems arise, what brought these about and how they led the consumer to this particular product.

Information search An interested consumer may or may not search for more information. If the consumer’s drive is strong and a satisfying product is near at hand, the consumer is then likely to buy it. If not, he or she may store the need in memory or undertake an information search related to the need. For example, once you have decided you need a new car, at the very least, you will probably pay more attention to car ads, cars owned by friends and conversations about cars. Or you may actively search the web, talk with friends and gather information in other ways. The amount of searching you do will depend on the strength of your drive, the amount of information you start with, the ease of obtaining more information, the value you place on additional information and the satisfaction you get from searching. Consumers can obtain information from any of several sources. These include personal sources (family, friends, neighbours, acquaintances), commercial sources (advertising, salespeople, dealer websites, packaging, displays), public sources (mass media, consumer rating organisations, internet searches) and experiential sources (handling, examining, trialling/using the product). The relative influence of these information sources varies with the product and the buyer. Generally, the consumer receives the most information about a product from commercial sources – those controlled by the marketer. The most effective sources, however, tend to be personal. Commercial sources normally inform the buyer, but personal sources legitimise or evaluate products for the buyer. A recent study revealed that consumers find sources of user-generated content – discussion forums, blogs, online review sites and social networking sites – 20 per cent more influential, 35 per cent more memorable and 50 per cent more trusted than other types of media when making a purchase decision.32 As more information is obtained, the consumer’s awareness and knowledge of the available brands and features increase. In your car information search, you may learn about the several brands available. The information might also help you to drop certain brands from consideration. A company must design its marketing mix to make prospects aware of and knowledgeable about its brand. The company should carefully identify consumers’ sources of information and the importance of each source.

Evaluation of alternatives We have seen how the consumer uses information to arrive at a set of final brand choices. How does the consumer choose among the alternative brands? The marketer needs to know about alternative evaluation – that is, how the consumer processes information to arrive at brand choices. Unfortunately, consumers do not use a simple and single evaluation process in all buying situations. Instead, several evaluation processes are at work. The consumer arrives at attitudes towards different brands through some evaluation procedure. How consumers go about evaluating purchase alternatives depends on the individual consumer and the specific buying situation. In some cases, consumers use careful calculations and logical thinking. At other times, the same consumers do little or no evaluating; instead, they buy on impulse and rely on intuition. Sometimes consumers make buying decisions on their own; sometimes they turn to friends, online reviews or salespeople for buying advice. Suppose you have narrowed your car choices to three brands. And suppose you are primarily interested in four attributes – price, style, fuel economy and performance. By this time, you have probably formed beliefs about how each brand rates on each attribute. Clearly, if one car rated best on all the attributes, the marketer could predict you would choose that brand. However, the brands will no doubt vary in appeal. You might base your buying decision mostly on one attribute, and your choice would be easy to predict. If you wanted style above everything else, you would buy the car that you think has the most style. But most buyers consider several attributes, each with different importance.

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By knowing the importance you assigned to each attribute, the marketer could predict your car choice more reliably. Marketers should study buyers to find out how they actually evaluate brand alternatives. If they know what evaluative processes go on, marketers can take steps to assist buyers in their decision making.

Purchase decision In the evaluation stage, the consumer ranks brands and forms purchase intentions. Generally, the consumer’s purchase decision will be to buy the most preferred brand, but two factors can come between the purchase intention and the purchase decision. The first factor is the attitudes of others. If someone important to you thinks you should buy the lowest-priced car, then the chances of your buying a more expensive car are reduced. The second factor is unexpected situational factors. The consumer may form a purchase intention based on such factors as expected income, expected price and expected product benefits. However, unexpected events may change the purchase intention. For example, the economy might take a turn for the worse, a close competitor might drop its price or a friend might report being disappointed in your preferred car. Thus, preferences – and even purchase intentions – do not always result in actual purchase choice.

Post-purchase behaviour The marketer’s job does not end when the product is bought. After purchasing the product, the consumer will be satisfied or dissatisfied and will engage in post-purchase behaviour that is of interest to the marketer. What determines whether the buyer is satisfied or dissatisfied with a purchase? The answer lies in the relationship between the consumer’s expectations and the product’s perceived performance. If the product falls short of expectations, the consumer is disappointed; if the product meets expectations, the consumer is satisfied; if it exceeds expectations, the consumer is delighted. The larger the gap between expectations and performance, the greater the consumer’s dissatisfaction. This suggests that sellers should promise only what cognitive their brands can deliver so that buyers are satisfied. Almost all major purchases, however, result in cognitive dissonance, or discomfort caused by dissonance Buyer discomfort post-purchase conflict. After the purchase, consumers are satisfied with the benefits of the chosen caused by post-purchase brand and are glad to avoid the drawbacks of the brands not bought. However, every purchase conflict. involves compromise. So, consumers feel uneasy about acquiring the drawbacks of the chosen brand and about losing the benefits of the brands not purchased. Thus, consumers feel at least some post-purchase dissonance for every purchase.33 Why is it so important to satisfy the customer? Customer satisfaction is a key to building profitable relationships with consumers – to keeping and growing consumers and reaping their customer lifetime value. Satisfied customers buy a product again, talk favourably to others about the product, pay less attention to competing brands and advertising, and buy other products from the company. Many marketers go beyond merely meeting the expectations of customers – they aim to delight the customer. Cognitive dissonance: Steel Blue aims to reduce post-purchase conflict with a A dissatisfied consumer responds differently. comfort guarantee. Bad word of mouth often travels further and faster Steel Blue boots, www.steelblue.com.au than good word of mouth. It can quickly damage

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consumer attitudes about a company and its products. But companies cannot simply rely on dissatisfied customers to volunteer their complaints when they are dissatisfied. Most unhappy customers never tell the company about their problem. Therefore, a company should measure customer satisfaction regularly. It should set up systems that encourage customers to complain. In this way, the company can learn how well it is doing and how it can improve. By studying the overall buyer decision, marketers may be able to find ways to help consumers move through it. For example, if consumers are not buying a new product because they do not perceive a need for it, marketing might launch advertising messages that trigger the need and show how the product solves customers’ problems. If customers know about the product but are not buying because they hold unfavourable attitudes towards it, the marketer must find ways either to change the product or to change consumer perceptions.

Roles in the buying process Marketers need to know which people are involved in the buying decision and what role each person plays. Identifying the decision maker in many transactions is fairly easy. Men normally choose their own shoes, and women choose their own pantyhose. Other products, however, may involve group decisions. For example, choosing a movie to share with friends is usually a group decision. Five different roles can be identified in most buying processes: initiator, influencer, decider, buyer and user. The initiator is the person who first suggests or thinks of the idea of buying a particular product or service. For example, in your home this is the person who notices that you are out of breakfast cereal. The influencer is someone whose views or advice carry some weight in making the final buying decision. Continuing the breakfast cereal example, this could be any member of the family whose preferences are important, but it could also be the family doctor who has made dietary recommendations. The person who ultimately makes a buying decision or any part of it – whether to buy, what to buy, how to buy or where to buy – is the decider. But the decider may not be the actual buyer. The buyer is the person who makes an actual purchase, and the user is the person who consumes or uses a product or service. Knowing the main participants and the roles they play helps the marketer to fine-tune the marketing and communication program.

The buyer decision process for new products (pp. 148–50) new product

A good, service or idea that is perceived by some potential customers as new.

We have looked at the stages buyers go through in trying to satisfy a need. Buyers may pass quickly or slowly through these stages, and some of the stages may even be reversed. Much depends on the nature of the buyer, the product and the buying situation. We now look at how buyers approach the purchase of new products. A new product is a good, service or idea that is perceived by some potential customers as new. It may have been around for a while, but our interest is in how consumers learn about products for the first time and make decisions on whether to adopt them. The adoption process is ‘the mental process through which an individual passes from first learning about an innovation to final adoption’, and adoption is the decision by an individual to become a regular user of the product.34

Stages in the adoption process Consumers go through five stages in the process of adopting a new product: • Awareness: The consumer becomes aware of the new product, but lacks information about it. • Interest: The consumer seeks information about the new product. • Evaluation: The consumer considers whether trying the new product makes sense. • Trial: The consumer tries the new product on a small scale to improve his or her estimate of its value. • Adoption: The consumer decides to make full and regular use of the new product.

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This model suggests that the new-product marketer should think about how to help consumers move through the adoption process stages. For example, car brands offer detailed and effusive information about their makes and models via various media, websites, personal selling and so on (interest); and car dealers commonly offer incentives to potential new car buyers – such as attractive finance deals, extended warranties and after-sales servicing (interest and evaluation), extended test-drive periods (trial) and so on – to move consumers to adopt a new car.

Individual differences in innovativeness

adoption process The mental process through which an individual passes from first hearing about an innovation to final adoption.

People differ greatly in their readiness to try new products. In each product area, there are ‘consumption pioneers’ and early adopters. Other individuals adopt new products much later. People can be classified into the adopter categories shown in Figure 5.6. After a slow start, an increasing number of people adopt the new product. The number of adopters reaches a peak and then drops off as fewer non-adopters remain. Five groups of adopters have been identified. The five adopter groups have differing values. Innovators are venturesome – they try new ideas at some risk. Early adopters are guided by respect – they are opinion leaders in their communities and adopt new ideas early but carefully. The early majority are deliberate – although they rarely are leaders, they adopt new ideas before the average person. The late majority are sceptical – they adopt an innovation only after a majority of people have tried it. Finally, laggards are tradition bound – they are suspicious of changes and adopt the innovation only when it has become something of a tradition itself. This adopter classification suggests that an innovating firm should research the characteristics of innovators and early adopters in their product category and direct initial marketing efforts towards them. In general, innovators tend to be relatively younger, better educated and higher in income than later adopters and non-adopters. They are more receptive to unfamiliar things, rely more on their own values and judgment, and are more willing to take risks. They are less brand-loyal and more likely to take advantage of special promotions such as discounts, coupons and samples.

Influence of product characteristics on rate of adoption The characteristics of the new product affect its rate of adoption. Some products catch on almost overnight – for example, the Apple iPad, which flew off retailers’ shelves at an astounding rate from the day the product

Lagging adopters 16%

% share of all adopters

100 Late majority 34% 75 Early majority 34%

50

25 Innovators 2.5%

149

Early adopters 13.5%

0

Time of adoption of innovation

Figure 5.6  Adopter categorisation on the basis of relative time of adoption of innovations

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was introduced. Other products take a longer time to gain acceptance. For example, digital television was first launched in Australia in 2001 and, in the first five years of transmission, fewer than one-third of Australian households were watching digital TV (the figure is now 89 per cent).35 Five characteristics are especially important in influencing an innovation’s rate of adoption (we will use high-definition television (HDTV) as an example as we work through these characteristics): • Relative advantage: the degree to which the innovation appears superior to existing products. HDTV offers substantially improved picture quality. This sped up its rate of adoption. • Compatibility: the degree to which the innovation fits the values and experiences of potential consumers. HDTV, for example, is highly compatible with the lifestyles of the television-watching public. However, in the early years, HDTV was not yet compatible with programming and broadcasting systems, slowing adoption. Now, as more and more high-definition programs and channels have become available, the rate of HDTV adoption has increased. • Complexity: the degree to which the innovation is difficult to understand or use. HDTVs are not very complex. Therefore, as more programming has become available and prices have fallen, the rate of HDTV adoption is increasing faster than that of more complex innovations. • Divisibility: the degree to which the innovation may be tried on a limited basis. Early HDTVs were very expensive, slowing the rate of adoption. As prices fall, adoption rates are increasing. • Communicability: the degree to which the results of using the innovation can be observed or described to others. HDTV is easy to demonstrate and describe, and this will enhance the uptake by consumers. Other characteristics influence the rate of adoption, such as initial and ongoing costs, risk and uncertainty, and social approval. The new-product marketer must research all these factors when developing the new product and its marketing program.

Linking the concepts Here is a good place to pause and apply the concepts you have examined in the first part of this chapter. ● Think about a specific major purchase you have made recently. What buying process did you follow? What major factors influenced your decision? ● Pick a company or brand that we have discussed in a previous chapter – Amazon, Disney, Sass & Bide, ALDI, McDonald’s, Revlon or another (there are many to choose from). How does

the company you chose use its understanding of customers and their buying behaviour to build better customer relationships? ● Think about a company, such as Intel, which sells its products to computer makers and other businesses rather than to final consumers. How would Intel’s marketing to business customers differ from Apple’s marketing to final consumers? The second part of the chapter deals with this issue.

Business markets and business buyer behaviour (pp. 150–56) business buyer behaviour

The buying behaviour of the organisations that buy goods and services for use in the production of other products and services or to resell or rent them to others at a profit.

In one way or another, most large companies sell to other organisations. Companies such as Pacific Dunlop, Dell Computer, IBM, Caterpillar and countless others in various industries sell most of their products to other businesses. Even large consumer-product companies, which make products used by final consumers, must first sell their products to other businesses. For example, Nestlé makes many familiar consumer brands – beverages (Milo, Nesquik), baking products (Carnation, Choc Bits), snacks (Uncle Tobys, Roll-Ups, Le Snak) and others. But to sell these products to consumers, Nestlé must first sell them to its wholesaler and retailer customers, who in turn serve the consumer market. Nestlé also sells products directly to other businesses that use the products to make their own finished products. Business buyer behaviour refers to the buying behaviour of the organisations that buy goods and services for use in the production of other products and services that are sold, rented or supplied

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to others. It also includes the behaviour of retailing and wholesaling firms that acquire goods to resell or to rent to others at a profit. In the business buying process, business buyers determine which products and services their organisations need to purchase, and then find, evaluate and choose among alternative suppliers and brands. Business-to-business (B2B) marketers must do their best to understand business markets and business buyer behaviour. Then, like businesses that sell to final buyers, they must build profitable relationships with business customers by creating superior customer value.

Business markets The business market is huge. In fact, business markets involve far more dollars and items than do consumer markets. For example, think about the large number of business transactions involved in the production and sale of a single set of Dunlop tyres. Various suppliers sell Dunlop the rubber, steel, equipment and other goods that it needs to produce tyres. Dunlop then sells the finished tyres to retailers, who in turn sell them to consumers. Thus, many sets of business purchases were made for only one set of consumer purchases. In addition, Dunlop sells tyres as original equipment to manufacturers who install them on new vehicles, and as replacement tyres to companies that maintain their own fleets of company cars, trucks, buses or other vehicles. Business marketing includes resellers (the reseller market) and manufacturers (the industrial market). We can also think of institutional and government markets as being part of this group, as much of the discussion on business marketing also applies to marketing to, and by, governments and institutions. In some ways, business markets are similar to consumer markets. Both involve people who assume buying roles and make purchase decisions to satisfy needs. However, business markets differ in many ways from consumer markets. The main differences are in market structure and demand, the nature of the buying unit, and the types of decisions and the decision process involved.

Market structure and demand The business marketer normally deals with far fewer but far larger buyers than the consumer marketer does. Even in large business markets, a few buyers often account for most of the purchasing. For example, when Dunlop sells replacement tyres to final consumers, its potential market includes the owners of the millions derived demand of cars currently in use around the world. But Dunlop’s fate in the business market depends on getting orders Business demand that ultimately comes from from one of only a handful of large car makers. The smaller number of buyers creates greater dependencies (derives from) the and, as a result, closer relationships tend to develop between buyer and seller in business markets. demand for consumer goods. Further, business demand is derived demand – it ultimately comes from (derives from) the demand for consumer goods. Hewlett-Packard, Dell, Lenovo and others buy Intel microprocessor chips because consumers buy personal computers. If consumer demand for computers drops, so will the demand for microprocessors. Therefore, B2B marketers sometimes promote their products directly to final consumers to increase business demand. For example, Intel advertises heavily to personal computer buyers, selling them on the virtues of Intel and its microprocessors. Recent ads from Intel speak to users, asking them to ‘Look Inside’ – reminding us all to ask what is inside because it should be ‘Intel Inside’. The increased Derived demand: Intel advertises heavily to sell users on the virtues of the demand for Intel chips boosts demand for the PCs company and its microprocessors. containing them, and both Intel and its business Intel Corporation partners win.

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Many business markets have inelastic demand; that is, total demand for many business products is not affected much by price changes, especially in the short run. A drop in the price of leather will not cause shoe manufacturers to buy much more leather unless it results in lower shoe prices that, in turn, will increase consumer demand for shoes. Finally, business markets have more fluctuating demand. The demand for many business goods and services tends to change more – and more quickly – than the demand for consumer goods and services does. A small percentage increase in consumer demand can cause large increases in business demand. Sometimes a rise of only 10 per cent in consumer demand can cause as much as a 200 per cent rise in business demand during the next period.

Nature of the buying unit Compared with consumer purchases, a business purchase usually involves more decision participants and a more professional purchasing effort. Often, business buying is done by trained purchasing agents who spend their working lives learning how to buy better. The more complex the purchase, the more likely it is that several people will participate in the decision-making process. Buying committees made up of technical experts and top management are common in the buying of major goods. Beyond this, B2B marketers now face a new breed of higher-level, better-trained supply managers. Therefore, companies must have well-trained marketers and salespeople to deal with these welltrained buyers.

Types of decisions and the decision process

supplier development

Systematic development of networks of supplier– partners to ensure an appropriate and dependable supply of products and materials for use in making products or reselling them to others.

Business buyers usually face more complex buying decisions than do consumer buyers. Business purchases often involve large sums of money, complex technical and economic considerations, and interactions among many people at many levels of the buyer’s organisation. Because the purchases are more complex, business buyers may take longer to make their decisions. The business buying process also tends to be more formalised than the consumer buying process. Large business purchases usually call for detailed product specifications, written purchase orders, careful supplier searches and formal approval. Rather than make outright purchases, businesses will often lease products. Leasing is common with computers, shop machinery, packaging equipment, heavy-construction equipment, delivery trucks, machine tools and company motor vehicles. The lessee gains many advantages, including conserving capital, getting the seller’s latest products, receiving better service and gaining some tax advantages. The lessor often ends up with a larger net income and the chance to deal with customers who could not afford outright purchase. For example, ORIX Australia is a company that specialises in the financing and management of commercial and passenger vehicles, and provides finance for manufacturing and construction plant and equipment. It supplies commercial finance, leasing, property finance, business finance and specialist fleet-management leasing services. Finally, in the business buying process, the buyer and seller are often much more dependent on each other. B2B marketers may roll up their sleeves and work closely with their customers during all stages of the buying process – from helping customers to define problems, to finding solutions, to supporting after-sale operation. They often customise their offerings to individual customer needs. In the short run, sales go to suppliers who meet buyers’ immediate product and service needs. In the long run, however, B2B marketers keep a customer’s sales, and create customer value by meeting current needs and by partnering with customers to help them solve their problems. In recent years, relationships between customers and suppliers have been changing from downright adversarial to close and friendly. In fact, many customer companies are now practising supplier development – that is, systematically developing networks of supplier–partners to ensure an

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appropriate and dependable supply of products and materials that they will either use in making their own products or resell to others. For example, Caterpillar no longer calls its buyers ‘purchasing agents’ – they are managers of ‘purchasing and supplier development’. Giant Swedish furniture retailer IKEA does not just buy from its suppliers; it involves them deeply in the process of delivering a stylish and affordable lifestyle to IKEA’s customers.

Business buyer behaviour  At the most basic level, marketers want to know how business buyers will respond to various marketing stimuli. Figure 5.7 shows a model of business buyer behaviour. In this model, marketing and other stimuli affect the buying organisation and produce certain buyer responses. These stimuli enter the organisation and are turned into buyer responses. In order to design good marketing strategies, the marketer must understand what happens within the organisation to turn stimuli into purchase responses. Within the organisation, buying activity consists of two main parts: the buying centre, made up of all the people involved in the buying decision, and the buying decision process. The model shows that the buying centre and the buying decision process are influenced by internal organisational, interpersonal and individual factors, as well as by external environmental factors. The model in Figure 5.7 suggests four questions about business buyer behaviour: What buying decisions do business buyers make? Who participates in the buying process? What are the main influences on buyers? How do business buyers make their buying decisions?

Main types of buying situations There are three main types of buying situations.36 At one extreme is the straight rebuy, which is a fairly routine decision. At the other extreme is the new task, which may call for thorough research. In the middle is the modified rebuy, which requires some research. In a straight rebuy, the buyer reorders something without any modifications. It is usually handled on a routine basis by the purchasing department. Based on past buying satisfaction, the buyer simply chooses from the various suppliers on its list. ‘In’ suppliers try to maintain product and service quality. They often propose automatic reordering systems so that the purchasing agent will save reordering time. ‘Out’ suppliers try to find new ways to add value or exploit dissatisfaction so that the buyer will consider them. In a modified rebuy, the buyer wants to modify product specifications, prices, terms or suppliers. The modified rebuy usually involves more decision participants than does the straight rebuy. The ‘In’ suppliers may become nervous and feel pressured to put their best foot forward to protect an account.

THE ENVIRONMENT Marketing stimuli

Other stimuli

Product Price Placement logistics Promotion People Processes

Economic Technological Political Cultural Competitive

THE BUYING ORGANISATION

BUYER RESPONSES

The buying centre

Product or service choice Supplier choice Order quantities Delivery terms and times Service terms Payment

Buying decision process (Interpersonal and individual influences)

straight rebuy

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

modified rebuy

A business buying situation in which the buyer wants to modify product specifications, prices, terms or suppliers.

(Organisational influences)

Figure 5.7  A model of business buyer behaviour

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new task

A business buying situation in which the buyer purchases a product or service for the first time.

systems selling (solutions selling)

Buying a packaged solution to a problem from a single seller, thus avoiding all the separate decisions involved in a complex buying situation.

‘Out’ suppliers may see the modified rebuy situation as an opportunity to make a better offer and gain new business. A company buying a product or service for the first time faces a new-task situation. In such cases, the greater the cost or risk, the larger the number of decision participants and the greater their efforts to collect information. The new-task situation is the marketer’s greatest opportunity and challenge. The marketer not only tries to reach as many key buying influences as possible, but also provides help and information. The buyer makes the fewest decisions in the straight rebuy and the most in the new-task situation. In the new-task situation, the buyer must decide on product specifications, suppliers, price limits, payment terms, order quantities, delivery times and service terms. The order of these decisions varies with each situation, and different decision participants influence each choice. Many business buyers prefer to buy a complete solution to a problem from a single seller instead of buying separate products and services from several suppliers and putting them together. The sale often goes to the firm that provides the most complete system for meeting the customer’s needs and solving its problems. Such systems selling (or solutions selling) is often a key business marketing strategy for winning and holding accounts. Thus, Elders does more than offer trading options for farmers in Australia and New Zealand. It develops entire solutions for its primary producer clients. For example, Elders offers everything from farm supplies, such as seeds, chemicals and fencing, through to market reports, insurance, financial planning and banking solutions. But the company does not stop there; it also offers farm advice, export and real estate services – all this on top of the traditional trade in crops, livestock and wool. A farmer would be hard-pressed to find something that Elders could not do for his or her business.37

Participants in the business buying process buying centre

All the individuals and units that play a role in the business purchase decision-making process.

Who does the buying of the trillions of dollars’ worth of goods and services needed by business organisations? The decision-making unit of a buying organisation is called its buying centre and comprises all the individuals and units that play a role in the business purchase decision-making process. This group includes the actual users of the product or service, those who make the buying decision, those who influence the

Solutions selling: Elders bundles a complete system of services for farmers, offering everything from farm supplies to finance. Elders

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buying decision, those who do the actual buying and those who control buying information. The buying centre is not a fixed and formally identified unit within the buying organisation. It is a set of buying roles assumed by different people for different purchases. Within the organisation, the size and makeup of the buying centre will vary for different products and for different buying situations. For some routine purchases, one person – say, a purchasing agent – may assume all the buying centre roles and serve as the only person involved in the buying decision. For more complex purchases, the buying centre may include 20 or 30 people from different levels and departments in the organisation. The buying centre concept presents a major marketing Buying centre: The buying centre for a company buying a corporate challenge. The business marketer must learn who participates jet will include obvious people, such as the pilot and the CEO, but in the decision, each participant’s relative influence, and may also include less obvious people. Martin Harvey | Getty Images what evaluation criteria each decision participant uses. This can be difficult. The buying centre usually includes some obvious participants who are involved formally in the buying decision. For example, the decision to buy a corporate jet will probably involve the company’s CEO, chief pilot, a purchasing agent, some legal staff, a member of top management and others formally charged with the buying decision. It may also involve less obvious, informal participants, some of whom may actually make or strongly affect the buying decision. Sometimes, even the people in the buying centre are not aware of all the buying participants. For example, the decision about which corporate jet to buy may actually be made by a corporate board member who has an interest in flying and who knows a lot about aircraft. This board member may work behind the scenes to sway the decision. Many business buying decisions result from the complex interactions of ever-changing buying centre participants.

The main influences on business buyers Business buyers are subject to many influences when they make their buying decisions. Some marketers assume the main influences are economic. They think buyers will favour the supplier who offers the lowest price or the best product or the most service. They concentrate on offering strong economic benefits to buyers. However, business buyers actually respond to both economic and personal factors. Far from being cold, calculating and impersonal, business buyers are human and social as well. They react to both reason and emotion. Today, most B2B marketers recognise that emotion plays an important role in business buying decisions. For example, you might expect that an advertisement designed to help small businesses avoid fraud would stress the risks of fraud and the need to be vigilant. But Consumer Affairs Victoria ads appeal to business owners’ emotions by injecting humour into an otherwise uninteresting issue. The ‘Stevie’s Scam School’ online campaign introduces small business owners to some of the most common scams, using ‘Stevie’, a reformed ‘scam artist’. The series of six ‘quirky and entertaining’ videos certainly captured attention, with each one receiving thousands of ‘hits’.38 When suppliers’ offers are very similar, business buyers have little basis for a strictly rational choice. Because they can meet organisational goals with any supplier, buyers can allow personal factors to play a larger role in their decisions. However, when competing products differ greatly, business buyers are more accountable for their choices and tend to pay more attention to economic factors. Figure 5.8 lists various groups of influences on business buyers – environmental, organisational, interpersonal and individual.39

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ENVIRONMENTAL Economic developments Supply conditions Technological change Political and regulatory developments Competitive developments Culture and customs

ORGANISATIONAL Objectives

INTERPERSONAL Authority

Policies Procedures Organisational structure Systems

Status Empathy Persuasiveness

INDIVIDUAL Age Income Education Job position Personality Risk attitudes

BUYERS

Figure 5.8  Major influences on business buyer behaviour

Business buyers are heavily influenced by environmental factors, such as economic, technological, political, competitive, and social and cultural developments. For example, during economic downturns, business buyers – just like final consumers – tighten their budgets and spending. Like final consumers, they are looking for greater value in everything they buy. During such times, even more so than normally, B2B marketers must sharpen their value propositions and help customers find effective and efficient solutions. ‘Anyone who says the economy is not a challenge is totally in denial,’ says one B2B marketing expert. Companies ‘need to look at the needs of customers. It’s customer, customer, and customer now.’40 Organisational factors are also important. Each buying organisation has its own objectives, policies, procedures, structure and systems, and the business marketer must understand these factors well. Questions such as these arise: How many people are involved in the buying decision? Who are they? What are their evaluative criteria? What are the company’s policies and limits on its buyers? The buying centre usually includes many participants who influence each other, so interpersonal factors also influence the business buying process. However, it is often difficult to assess such interpersonal factors and group dynamics. Buying centre participants do not wear tags that label them as ‘key decision maker’ or ‘not influential’. Nor do buying centre participants with the highest rank always have the most influence. Interpersonal factors are often very subtle. Whenever possible, business marketers must try to understand these factors and design strategies that take them into account. Finally, each participant in the business buying decision process brings in personal motives, perceptions and preferences. These individual factors are affected by personal characteristics, such as age, income, education, professional identification, personality and attitudes towards risk. Also, buyers have different buying styles. Some may be technical types who make in-depth analyses of competitive proposals before choosing a supplier. Other buyers may be intuitive negotiators who are adept at pitting the sellers against one another for the best deal.

The business buying process (pp. 156–59) Figure 5.9 lists the eight stages of the business buying process.41 Buyers who face a new-task buying situation usually go through all stages of the buying process. Buyers making modified or straight rebuys may skip some of the stages. When examining business buying behaviour, it becomes clear that the buying situation has a greater impact than the type of product/service being purchased.

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Problem recognition

General need description

Product specification

Supplier search

Proposal solicitation

Supplier selection

Order-routine specification

Performance review

157

Figure 5.9  Stages of the business buying process

We now examine these eight stages for the typical new-task buying situation. The buying process begins with problem recognition – when someone in the company recognises a problem or need that can be met by acquiring a specific product or service. Problem recognition can result from internal or external factors. Business marketers use their salesforces or advertising to alert customers to potential problems and then show how their products provide solutions. For example, a Sharp ad notes that a multifunction printer (MFP) can present data security problems and asks, ‘Is your MFP a portal for identity theft?’ The solution? Sharp’s data security kits ‘help prevent sensitive information from falling into the wrong hands’. Having recognised a need, the buyer next prepares a general need description that describes the product or characteristics and quantity of the needed items or solutions. For standard purchases, this process service value presents few problems. For complex items, however, the buyer may need to work with others – analysis Carefully analysing a engineers, users, consultants – to define what is needed. The team may want to rank the importance product’s or service’s of reliability, durability, price and other attributes desired in the item. In this phase, the alert components to business marketer can help the buyers define their needs and provide information about the value determine if they can be redesigned and made of different product characteristics. more effectively and Once the buying organisation has defined the need, it develops the item’s technical product efficiently to provide specifications, often with the help of a value analysis engineering team. Product or service value greater value. analysis is an approach to cost reduction in which the company carefully analyses a product’s or service’s components to determine if they can be redesigned and made more effectively and efficiently to provide greater value. The team decides on the best product or service characteristics and specifies them accordingly. Sellers, too, can use value analysis as a tool to help secure new accounts and retain existing accounts. Especially in a weak economy, improving customer value and helping customers find more cost-effective solutions gives the business marketer an important edge both in keeping current customers loyal and in winning new business. By showing buyers a better way to make an object, outside sellers can turn straight rebuy situations into new-task situations that give them a chance to Problem recognition: Business marketers of office products, obtain new business. such as Sharp or HP, use their salesforce or advertising to In the next buying process step, the buyer conducts a supplier alert customers to potential data security problems with their search to find the best vendors. The buyer can locate qualified multifunction printers and then show how their products provide solutions. suppliers through trade directories, computer searches or © Mayuree Moonhirun/Shutterstock.com recommendations from others. Today, more and more companies

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are turning to the internet to find suppliers. For marketers, this has levelled the playing field – the internet gives smaller suppliers many of the same advantages as larger competitors. The newer the buying task and the more complex and costly the item, the greater the amount of time the buyer will spend searching for suppliers. The supplier’s task is to get listed in major directories and build a good reputation in the marketplace. Salespeople should watch for companies in the process of searching for suppliers and make certain their firm is considered. In the proposal solicitation stage of the business buying process, the buyer invites qualified suppliers to submit proposals. When the purchase is complex or expensive, the buyer will usually require detailed written proposals or formal presentations from each potential supplier. In response, business marketers must be skilled in researching, writing and presenting proposals. The proposals should be marketing documents, not just technical documents. They should spell out how the seller’s solution creates greater value for the customer compared to competing solutions. The buyer next reviews the proposals and selects a supplier or suppliers. During supplier selection, the buyer will consider many supplier attributes and their relative importance. Such attributes include product and service quality, reputation, on-time delivery, ethical corporate behaviour, honest communication and competitive prices. The members of the buying centre will rate suppliers against these attributes and identify the best suppliers. In the end, the buyer may select a single supplier or a few suppliers. Advantages of a single supplier may be that special relationships can be formed that allow for better prices and terms, as the buyer and supplier are mutually reliant on each other. However, advantages of having more than one supplier include that buyers can avoid being totally dependent on one supplier, and to allow comparisons of prices and performance of several suppliers over time. Today’s supplier development managers often want to develop a full network of supplier–partners that can help the company bring more value to its customers. The buyer now prepares an order-routine specification. It includes the final order with the chosen supplier or suppliers and lists items such as technical specifications, quantity needed, expected time of delivery, return policies and warranties. In the case of maintenance, repair and operating items, buyers may use blanket contracts rather than periodic purchase orders. A blanket contract creates a long-term relationship in which the supplier promises to resupply the buyer as needed at agreed prices for a set time period. Many large buyers have a vendor-managed inventory, in which they turn over ordering and inventory responsibilities to their suppliers. Under such systems, buyers share sales and inventory information directly with key suppliers. The suppliers then monitor inventories and replenish stock automatically as needed. For example, most major suppliers to large retailers, such as Big W and Target, assume vendor-managed inventory responsibilities. The final stage of the business buying process is the supplier performance review, in which the buyer assesses the supplier’s performance and provides feedback. For example, Coles has issued a set of supplier guidelines and policies and regularly evaluates each supplier in terms of quality, delivery and other performance variables. Recognising the importance of relationship development, Coles also asks suppliers to provide feedback on them as a customer.42 The performance review may lead the buyer to continue, modify or drop the arrangement. The seller’s job is to monitor the same factors used by the buyer to make sure that the seller is giving the expected satisfaction. The eight-stage buying-process model provides a simple view of business buying as it might occur in a new-task buying situation. The actual process is usually much more complex. In the modified rebuy or straight rebuy situation, some of these stages would be compressed or bypassed. Each organisation buys in its own way, and each buying situation has unique requirements.

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Different buying centre participants may be involved at different stages of the process. Although certain buying-process steps usually do occur, buyers do not always follow them in the same order, and they may add other steps. Often, buyers will repeat certain stages of the process. Finally, a customer relationship might involve many different types of purchases ongoing at a given time, all in different stages of the buying process. The seller must manage the total customer relationship, not just individual purchases.

E-procurement: Buying on the internet  (pp. 159–60) Advances in information technology have changed the face of the B2B marketing process. Electronic purchasing, often called e-procurement, has grown rapidly in recent years. Virtually unknown less than a decade ago, online purchasing is standard procedure for most companies today. E-procurement gives buyers access to new suppliers, lowers purchasing costs, and hastens order processing and delivery. In turn, business marketers can connect with customers online to share marketing information, sell products and services, provide customer support services and maintain ongoing customer relationships. Companies can do e-procurement in any of several ways. They can conduct reverse auctions, in which they put their purchasing requests online and invite suppliers to bid for the business. Or they can engage in online trading exchanges, through which companies work collectively to facilitate the trading process. There are a number of public exchanges (such as Community Exchange System Australia) but these are giving way to private trading exchanges, such as Exostar. Exostar connects buyers and sellers in the aerospace and defence industry. Its goal is to improve trading efficiency and reduce costs among industry trading partners. Initially a collaboration among five leading aerospace and defence companies – Boeing, Lockheed Martin, Raytheon, BAE Systems and Rolls-Royce – Exostar has now connected more than 100 000 businesses in 150 countries around the world.43 Companies also can conduct e-procurement by setting up their own company buying sites. For example, the Water Corporation operates a company trading site on which it posts its buying needs and invites bids, negotiates terms and places orders. Or companies can create extranet links with key suppliers or partners. For instance, Gloria Jean’s Coffees uses an extranet to manage relationships with its franchisees.44 B2B e-procurement yields many benefits. First, it shaves transaction costs and results in more efficient purchasing for both buyers and suppliers. E-procurement reduces the time between order and delivery. And a web-powered purchasing program eliminates the paperwork associated with traditional requisition and ordering procedures and helps an organisation keep better track of all purchases. Finally, beyond the cost and time savings, e-procurement frees purchasing people from a lot of drudgery and paperwork. In turn, this enables them to focus on more strategic issues, such as finding better supply sources and working with suppliers to reduce costs and develop new products. B2B marketers can help customers who wish to purchase online by creating well-designed, easy-to-use websites. The rapidly expanding use of e-procurement, however, also presents some problems. For example, at the same time that the web makes it possible for suppliers and customers to share business data and even collaborate on product design, it can also erode decades-old customer–supplier relationships. Many buyers now use the power of the web to pit suppliers against one another and to search out better deals, products and turnaround times on a purchase-by-purchase basis. E-procurement can also create potential security disasters. Although email and home-banking transactions can be protected through basic encryption, the secure environment that businesses

e-procurement

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

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need in order to carry out confidential interactions is sometimes still lacking. Companies are spending millions for research on defensive strategies to keep hackers at bay. Cisco Systems, for example, specifies the types of routers, firewalls and security procedures that its partners must use to safeguard extranet connections. In fact, the company goes even further – it sends its own security engineers to examine a partner’s defences and holds the partner liable for any security breach that originates from its computers.

Business-to-business digital and social media marketing (p. 160) In response to customers’ rapid shift towards online buying, today’s B2B marketers are now using a wide range of digital and social media marketing approaches – from websites, blogs, mobile apps, e-newsletters and proprietary online networks to mainstream social media, such as Facebook, LinkedIn, YouTube, Google+ and Twitter – to engage customers and manage customer relationships anywhere, any time. The use of digital and social media channels in business marketing is not just growing, it is exploding. Digital and social media marketing have rapidly become the new space for engaging business customers. Compared with traditional media and sales approaches, digital and social media can create greater customer engagement and interaction. B2B marketers know they are not really targeting businesses – rather, they are targeting individuals in those businesses who affect buying decisions. And today’s business buyers are always connected via their digital devices – whether they are PCs, tablets or smartphones. Digital and social media play an important role in engaging these always-connected business buyers in a way that personal selling alone cannot. Instead of the old model of sales reps calling on business customers at work or maybe meeting up with them at trade shows, the new digital approaches facilitate anytime, anywhere connections among a wide range of people in the selling and customer organisations, giving both sellers and buyers more control of and access to important information. B2B marketing has always been social network marketing, but today’s digital environment offers an exciting array of new networking tools and applications.

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Student Learning Centre

161

Learning Objective 3. Describe the adoption and diffusion process for new products. (pp. 148–50) The product adoption process is made up of five stages: awareness, interest, evaluation, trial and adoption. New-product marketers must think about how to help consumers move through these stages. With regard to the diffusion process for new products, consumers respond at different rates, depending on consumer

Reviewing the learning objectives This chapter is the last of three chapters that address understanding the marketplace and consumers. Here, we have looked closely at consumer and business buyer behaviour. The Australian and New Zealand consumer market consists of nearly 28 million people who consume over $1 trillion worth of goods and services each year. The business market involves even more dollars and items than the consumer market. Understanding buyer behaviour is one of the biggest challenges marketers face.

Learning Objective 1. Identify the consumer market and the main factors that influence consumer buyer behaviour.  (pp. 132–45) The consumer market consists of all the individuals and households who buy or acquire goods and services for personal consumption. A simple model of consumer behaviour suggests that marketing stimuli and other major forces enter the consumer’s ‘black box’. This black box has two parts: buyer characteristics and the buyer’s decision process. Once in the black box, the inputs result in buyer responses, such as buying attitudes and preferences and purchase behaviour. Consumer buyer behaviour is influenced by four key sets of buyer characteristics: cultural, social, personal and psychological. Marketers who understand these factors can identify interested buyers and shape products and appeals to serve consumer needs better. Culture is the most basic determinant of a person’s wants and behaviour. People in different cultural and social class groups have different product and brand preferences. Social factors – such as small group, social network and family influences – strongly affect product and brand choices, as do personal characteristics, such as age, life-cycle stage, occupation, economic circumstances, lifestyle, personality and self-concept. Finally, consumer buying behaviour is influenced by four main sets of psychological factors – motivation, perception, learning, and beliefs and attitudes. Each of these factors provides a different perspective for understanding the workings of the buyer’s black box.

Learning Objective 2. Identify and discuss the stages in the buyer decision process. (pp. 145–48) When making a purchase, the buyer goes through a decision process consisting of need recognition, information search, evaluation of alternatives, purchase decision and post-purchase behaviour. During need recognition, the consumer recognises a problem or need that could be satisfied by a product or service.

and product characteristics. Consumers may be innovators, early adopters, early majority, late majority or laggards. Each group may require different marketing approaches. Marketers often try to bring their new products to the attention of potential early adopters, especially those who are opinion leaders.

Learning Objective 4. Define the business market and identify the main factors that influence business buyer behaviour. (pp. 150–56) The business market comprises all organisations that buy goods and services for use in the production of other products and services or for the purpose of reselling or renting them to others at a profit. As compared to consumer markets, business markets usually have fewer, larger buyers who are more geographically concentrated. Business demand is derived demand, and the business buying decision usually involves more, and more professional, buyers. Business buyers make decisions that vary with the three types of buying situations: straight rebuys, modified rebuys and new tasks. The decision-making unit of a buying organisation – the buying centre – can consist of many different persons playing many different roles. The business marketer needs to know the following: Who are the main buying centre participants? In what decisions do they exercise influence, and to what degree? What evaluation criteria does each decision participant use? The business marketer also needs to understand the main environmental, organisational, interpersonal and individual influences on the buying process.

Learning Objective 5. List and define the steps in the business buying decision process. (pp. 156–60) The business buying decision process itself can be quite involved, with eight basic stages: problem recognition, general need description, product specification, supplier search, proposal solicitation, supplier selection, order-routine specification and performance review. Buyers who face a new-task buying situation usually go through all stages of the buying process. Buyers making modified or straight rebuys may skip some of the stages. Companies must manage the overall customer relationship, which often includes many different buying decisions in various stages of the buying decision process. Recent advances in information technology have given birth to ‘e-procurement’, by which business buyers are purchasing all kinds of products and services online. Business marketers are increasingly connecting with customers online to share marketing information, sell products and services, provide customer support services and maintain ongoing customer relationships.

Once the need is recognised, the consumer moves into the information search

Discussion questions

stage. With information in hand, the consumer proceeds to alternative evaluation

❶ Nature or nurture? Does it matter to marketing scientists and/or marketing

and assesses brands in the choice set. From there, the consumer makes a

practitioners that there is no firm resolution concerning the degree to

purchase decision and actually buys the product. In the final stage of the buyer

which human behaviour is determined by internal characteristics, such as

decision process, post-purchase behaviour, the consumer takes action based on

our physiological and psychological makeup, or whether it is determined

satisfaction or dissatisfaction. The marketer’s job is to understand the buyer’s

through learned cultural and social responses? Explain your answer. (Learning

behaviour at each stage and the influences that are operating.

Objective 1) (AACSB: Reflective Thinking)

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❷ Consumer purchasing behaviour – so many influences. Figure 5.2 graphically depicts the many influences on consumer purchasing behaviour. Are some influences more important than others? Might marketing management focus on the wrong influences at times? Justify your answer. For example, the early marketers of instant cake mixes could not see that the users had been left with nothing to do, and may have felt guilty about using such a convenient product rather than devoting the time and energy to family care that society of the day saw as necessary. Psychological influences were far stronger than the influence of marketers until they enabled the consumer to ‘add an egg’. (Learning Objective 1) (AACSB: Reflective Thinking) ❸ Are there consumer motives that cannot be expressed, because the consumer cannot admit to them? When consumers buy an oral hygiene product because it removes bad breath, it may be a precautionary measure or it may be because they have been told by their dentist that they have halitosis due to gum disease. However, there are products that consumers buy where they cannot admit the real reason, even to themselves. Might this be the case where an older male buys a bright red sports car? Explain your answer. Suggest other purchases where there might also be hidden motives. (Learning Objective 2) (AACSB: Reflective Thinking) ❹ It is great to be the company that is ahead of the game, bringing new goods and services to market and profoundly changing the way that an industry works – but is it a winning strategy? When Apple launched the iPod and iTunes, it changed the shape of the music industry forever. A few years later, it brought the iPhone and iPad to the market, changing telephony forever and creating a whole new category of electronic devices – the tablet. However, in recent years, Apple has struggled in the face of intense competition in both the mobile phone and tablet markets. Is there room to be a ‘me-too’ marketer and sell established goods and services to the later adopters? Or is out in front, selling to innovators and early adopters, the only place to be? How can companies make the most of differences in innovativeness in consumers by developing different offerings for each segment? (Learning Objective 3) (AACSB: Reflective Thinking) ❺ The changing role of the buying centre. Using the internet as the basis of

Critical thinking exercises ❶ Two households are situated on opposite sides of the same street in your city or town. One male head of household is a self-employed truck driver, while the other is a Malaysian-born university lecturer. Each household comprises two adults and two children in their early teens. The truck driver’s wife is not in paid work, whereas the lecturer’s wife works as a laboratory assistant in a local hospital. The gross income before tax for each household is $175 000 per annum. Work in groups to develop a presentation showing the likely lifestyle for each household. Describe how this impacts on the buying behaviour of each household member. (Learning Objective 1) (AACSB: Communication; Teamwork) ❷ The buying decision process for consumer and business buyers has many similar elements, but there are also differences between the processes for these two distinctly different types of buyers. Refer to Figures 5.5 (consumer buying process) and 5.9 (business buying process), and use these diagrams to draw the buying process for (a) a consumer purchasing a new iPad Air, and (b) a large business buyer, such as global miner BHP Billiton, purchasing the same iPad Air. How are the buying processes similar and different for each type of buyer? (Learning Objectives 2 and 4) (AACSB: Communication; Application of Knowledge) ❸ Business buying occurs worldwide, so marketers need to be aware of cultural factors influencing business customers. In a small group, select a country and develop a multimedia presentation on proper business etiquette and manners, including appropriate appearance, behaviour and communication. Include a map showing the location of the country, as well as a description of its demographics, culture and economic history. (Learning Objective 4) (AACSB: Communication; Diverse and Multicultural Work Environments; Use of IT; Teamwork)

Navigating the key terms Learning Objective 1

Learning Objective 3

consumer buyer behaviour  (p. 132)

adoption process  (p. 149)

consumer market  (p. 132)

new product  (p. 148)

role of the purchasing department or buying centre within the company?

Learning Objective 2

(Learning Objective 4) (AACSB: Reflective Thinking)

attitude  (p. 144)

Learning Objective 4

procurement means that purchasing agents also become responsible for quality as well as costs. How might this additional responsibility change the

❻ Procurement and the small business. How can a small Australian business

belief  (p. 144)

employing fewer than five employees become a part of the supply chain

brand personality (p. 140)

of global businesses? Can an online procurement system help, or is the

cognitive dissonance  (p. 147)

business still too small to be considered part of such a system? What does

cultural group  (p. 134)

the small business need to do to join an online procurement system?

culture  (p. 133)

(Learning Objective 5) (AACSB: Reflective Thinking)

group  (p. 135)

business buyer behaviour  (p. 150) buying centre  (p. 154) derived demand  (p. 151) modified rebuy  (p. 153) new task  (p. 154) straight rebuy  (p. 153)

❼ Vertical integration, outsourcing and the business buying process. Many

learning  (p. 143)

companies that were formerly vertically integrated, producing their own

lifestyle  (p. 138)

raw materials or parts, are now using outside suppliers to produce them

motive (drive)  (p. 141)

instead (outsourcing). Are there any longer-term dangers in outsourcing?

online social networks  (p. 136)

What if the company outsources to the same company that produces for its

opinion leader  (p. 136)

Learning Objective 5

closest competitor? What are your thoughts on how outsourcing and vertical

perception (p. 142)

e-procurement (p. 159)

integration change the business buying process? What implications do you

personality  (p. 140)

product or service value analysis

foresee for marketers? (Learning Objective 5) (AACSB: Reflective Thinking)

social class  (p. 135)

supplier development  (p. 152) systems selling (solutions selling)   (p. 154)

  (p. 157)

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Chapter 5  Buyer behaviour: Understanding consumer and business buyers

Mini cases 5.1  Consumer behaviour Friend or foe? Have you noticed that some of your Facebook friends like certain advertisements?

❶ Which factors are marketers who advertise on Facebook using to

Marketers know what Facebook users like and are using that knowledge to

influence consumers? Would you be influenced by an ad if you saw that

influence users’ friends. Social-context ads are based on data collected on the

your friends ‘liked’ it? (Learning Objective 1) (AACSB: Communication;

‘likes’ and friends of Facebook users. When you click on an ad indicating you

Use of IT; Reflective Thinking)

like it, you are also giving Facebook permission to share that ‘like’ with all of

❷ How would you feel about Facebook using your name in these types

your friends. Marketers like this feature because it appears as though you are

of ads, or advertising integrating itself into conversations with your

endorsing the brand to your friends. The more you click on the ‘Like’ button in

friends? (Learning Objective 1) (AACSB: Communication; Reflective

ads, the greater the chance they will migrate on to your wall and become part

Thinking)

of your conversations rather than stay on the perimeter of the page.

5.2  Business buyer behaviour Genuine spare parts – or are they? Manufacturers of heavy earth-moving equipment, cranes and engines that

performance’. Assume that the genuine company-branded parts are

power heavy transport vehicles are business marketers who attempt to

made for them by the same firm that makes non-genuine parts. Is this

persuade their customers to buy genuine spare parts. As in many other business

an ethical issue? Explain your reasoning. (Learning Objectives 4 and 5)

situations, customers often find that non-genuine spare parts are cheaper than

(AACSB: Communication; Reflective Thinking)

the genuine parts. However, the original manufacturer (sometimes called

❷ In the situation above, there is clearly no material difference between

the original equipment manufacturer, or OEM) may attempt to convince the

genuine or non-genuine parts. What major influences on business

marketplace that genuine parts will not harm their product, while by implication

buyer behaviour might sway a buyer’s decision towards genuine or

non-genuine brands may well cause harm. In many cases, the genuine parts are

non-genuine parts? (Learning Objective 5) (AACSB: Communication;

actually made by the same supplier as the non-genuine brands.

Application of Knowledge)

❶ Consider the situation where the OEM claims that its genuine parts and lubricants will ‘protect your investment’ by offering ‘superior

5.3  Marketing analytics at work Where are the customers? Understanding the buying process of customers is crucial for any business, and

Café and Café Bean – whose owners are worried about their ability to stay in

nowhere more so than in the highly competitive food and hospitality industry.

business given the small number of customers who walk through their doors

Cafés typically have very tight operating margins, so even a few more customers

each day. As the shopping centre owner, you really want both businesses to

each day can mean the difference between a thriving business and a failing

be successful, so you do some research to help the owners understand their

one. Suppose that, in a local shopping centre, there are two cafés – HuggaMug

businesses better. Your research revealed the following information:

HuggaMug Café (%)

Café Bean (%)

Awareness: Percentage of visitors to the shopping centre who mentioned the name of the café (unprompted recall)

67

52

Awareness: Percentage of visitors to the shopping centre who correctly identified the location of the café (prompted recall)

53

86

Perceived quality: For those visitors to the shopping centre who were aware of the café, the percentage agreeing or agreeing strongly that ‘the café sells good food/coffee’

88

74

Perceived value: For those visitors to the shopping centre who were aware of the café, the percentage agreeing or agreeing strongly that ‘the café is good value’

72

71

Satisfaction: Percentage of the café customers who are very likely to visit the café the next time they visit the shopping centre

92

78

Satisfaction: Percentage of the café customers who have recommended the café to others

68

52

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5.3  Marketing analytics at work continued ❶ Review the information provided in the table above, then describe

❷ Based on the information provided, what advice would you give

the problems that each business is facing in terms of the steps in the

the owner of each café to assist them to improve their profitability?

buying process. (Learning Objective 2) (AACSB: Analytical Thinking)

(Learning Objective 2) (AACSB: Application of Knowledge)

5.4 Ethical reflection Old technology for developing markets The world is changing so fast, new products are old even before they are

discounted rate. But is that fair? Surely, consumers in those developing

out of their box. And no product becomes dated more quickly than the

markets would also benefit from the newer technology. It might be argued

mobile phone. With new releases coming one after another, many brands

that this is a form of ‘dumping’. This practice might be acceptable when

have different-generation phones on the market at the same time. Take the

it is a mobile phone, but what about a pharmaceutical product? Should

iPhone, for example. The iPhone 6s and iPhone 6s Plus were still being

the newest technology in medicines only be available to the markets that

sold in most markets when the iPhone 7 and iPhone 7 Plus were released.

can afford it? Or is it reasonable for a company to try to recover the costs

Obviously, Apple wants customers to buy its new phone, but it must also

of new-product development by selling first to the markets that can most

try to sell its earlier-generation stock. One option for Apple would be to

afford high initial prices and then progressively rolling out the product to

ship the ‘older’ phones to developing markets and sell them there at a

different markets?

References

1 The combined GDP figures are from Australian Bureau of Statistics, 1350.0 Australian Economic Indicators, 2012, ; Statistics New Zealand, Retail Trade Survey, 2016, ; The World Bank, Household Final Consumption Expenditure, ; and United States Census Bureau, . These websites provide continuously updated projections of the Australian, New Zealand and world populations and were all accessed July 2016. 2 Don E Schultz, ‘Lines or circles’, Marketing News, 5 November 2007, p. 21; and Elizabeth A Sullivan, ‘Pick your brain’, Marketing News, 15 March 2009, pp. 10–13. 3 For more on the cultures of the Indigenous population of Australia, see ; and for New Zealand, see Te Ahukaramū Charles Royal, ‘Māori’, Te Ara – The Encyclopedia of New Zealand, , all accessed July 2016. 4 Excerpts drawn from private correspondence with Professor Michael McDaniel, Dean, Indigenous Education, Badanami Centre for Indigenous Education, University of Western Sydney, 2007. 5 See Ian Chaston, ‘Older consumer opportunities: Small firm response in a selected group of UK service sector markets’, Service Industries Journal, 31(3), 2011, pp. 371–84; Susi Banks, ‘7.3 million and cashed up – but nobody’s marketing to them’, Marketing Magazine, 7 November 2013, , accessed July 2016; and Kate O’Loughlin, Nancy Humpel & Hal Kendig, ‘Impact of the global financial crisis on employed Australian baby boomers: A national survey’, Australasian Journal on Aging, 29(2), pp. 88–91. 6 See Dick Stroud & Kim Walker, Marketing to the Ageing Consumer, Palgrave McMillan: UK, 2013; and ‘Boom time of America’s new retirees feel entitled to relax – and intend to spend’, Financial Times, 6 December 2007, p. 9. 7 See , accessed July 2016; and Susi Banks, ‘7.3 million and cashed up – but nobody’s marketing to them’, Marketing Magazine, 7 November 2013, , accessed July 2016. 8 For more on social class, see ‘Is Australia as egalitarian as we think it is?’, October 2015, , accessed July 2016; and ‘Social class systems in Australia & the UK [MEDIA]’, The McCrindle Blog, 8 April 2013, , accessed July 2016.

9 Rick Morton, ‘The Australian dream: Soon, fewer than 50 per cent will own home’, The Australian, 20 July 2016, , accessed July 2016. 10 For a discussion of influencers, see Clive Thompson, ‘Is the tipping point toast?’, Fast Company, February 2008, pp. 75–105; Edward Keller & Jonathan Berry, The Influentials, Free Press: New York, NY, 2003; Monique Perry, ‘Aussies still place most trust in earned media’, Nielsen, September 2013, , accessed July 2016; and Esther Han, ‘Analysis paralysis: Why shoppers spoilt for choice often regret purchases’, The Age, 14 July 2016, , accessed July 2016. 11 See The Soup, , accessed July 2016; and ‘Red Cross Blood Service’, , accessed July 2016. 12 See, for example, ‘Aussies spoilt for choice in a world of information overload’, , accessed July 2016. 13 See Britteny Helmrich, ‘10 companies that totally rock customer service on social media’, 15 December 2014, , accessed July 2016; Erica Swallow, ‘How Nike outruns the social media competition’, 22 September 2011, , accessed July 2016; Jessica Smith, ‘Social media and digital: Nike doesn’t just do it. They get it’, , accessed July 2016; and ‘Powderfinger harness Twitter power’, Marketing News, 9 October 2009. 14 ‘Yarra Valley Water posts ad campaign comparing bottled water to air’, news.com.au, 8 November 2013, , accessed July 2016; ‘Yarra Valley Dupé stunt: Who knew a utility company could be so funny?’, Marketing Magazine, 28 October 2013; see the YouTube video, , and the Facebook page, , accessed July 2016. 15 See Dana McCauley & Frank Chung, ‘#YourTaxis Twitter campaign is the social media fail of the year’, news.com.au, 10 November 2015, , accessed July 2016; Mark Ritson, ‘How #YourTaxis got it so very, very wrong’, Sydney Morning Herald, 10 November

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Chapter 5  Buyer behaviour: Understanding consumer and business buyers

2015, , accessed July 2016; and Simon Canning, ‘Annual 2015: Social media fails’, 1 January 2016, , accessed July 2016. 16 See Carolyn Cummins, ‘Who knew? Men do like to shop’, Sydney Morning Herald, 20 July 2016, , accessed July 2016; and ‘No longer a lady’s chore! 51% of grocery shoppers are men – and they spend less during a supermarket trip than women’, Daily Mail Australia, 14 October 2015, , accessed July 2016. 17 See ‘How much influence do teens wield over their parents’ purchase decisions?’, 23 June 2015, , accessed July 2016; ‘Pester power and household purchasing decisions’, 1 March 2016, , accessed July 2016; see also , , and , accessed July 2016. 18 Information from , accessed July 2016. 19 ‘10 years of change – but the outstanding value stays the same’, 16 May 2016, , accessed July 2016; and Alex Hayes, ‘Budget Direct ditches aliens and jingle in first ad campaign from 303Lowe’, 2 January 2015, , accessed July 2016. 20 See Roy Morgan’s website, , accessed July 2016. 21 For information, see Driza-Bone, ; and Harley Davidson, , both accessed July 2016. 22 See Jennifer Aaker, ‘Dimensions of measuring brand personality’, Journal of Marketing Research, August 1997, pp. 347–56; and Vanitha Swaminathan, Karen M Stilley & Rohini Ahluwalla, ‘When brand personality matters: The moderating role of attachment styles’, Journal of Consumer Research, April 2009, pp. 985–1002. 23 Jennifer L Aaker, ‘The malleable self: The role of self-expression in persuasion’, Journal of Marketing Research, 36(2), 1999, pp. 45–57. 24 Quotes from ‘Air New Zealand: The airline with a sense of fun’, A Dangerous Business: One Ordinary Girl . . . Life’s Extraordinary Adventures, 31 October 2012, ; and ‘Anna Farris stars in new Air New Zealand in-flight safety video’, 21 July 2016, ; all accessed July 2016. 25 See, for example, Richard Elliott & Bernard Cova, ‘Interpretive consumer research as cultural critique’, Consumption Markets and Culture, 11(2), 2008, pp. 71–2; and Bernard Cova & Richard Elliott, ‘Everything you always wanted to know about interpretive consumer research but were afraid to ask’, Qualitative Marketing Research: An International Journal, 11(2), 2008, pp. 121–9. 26 See Abraham H Maslow, ‘A theory of human motivation’, Psychological Review, 50, 1943, pp. 370–96. Also see A Maslow, Motivation and Personality, 3rd edn, HarperCollins Publishers: New York, 1987; and Barbara Marx Hubbard, ‘Seeking our future potentials’, Futurist, May 1998, pp. 29–32. 27 Ellen Moore, ‘Letter to my colleagues: We can do better’, Adweek, 22 December 2010, ; and Kelsey Libert & Kristin Tynski, ‘Research: The emotions the make marketing campaigns go viral’, Harvard Business Review, 24 October 2013, ; both accessed August 2016. 28 See Louise Story, ‘Anywhere the eye can see, it’s now likely to see an ad’, New York Times, 15 January 2007; Louise Story, ‘Ads everywhere – and it’s going to get worse’, Sydney Morning Herald, 16 January 2007; Matthew Creamer, ‘Caught in the clutter crossfire: Your brand’, Advertising Age, 1 April 2007, p. 35; Ruth Mortimer, ‘Consumer awareness: Getting the right attention’, Brand Strategy, 10 December 2008, p. 55;

165

and Matt Granfield, ‘A (very, very slightly) scientific study of brand recall in the average consumer’, eCBD Blog, 13 January 2009, , accessed August 2016. 29 Stuart Rogers, ‘How a publicity blitz created the myth of subliminal advertising’, Public Relations Quarterly, 37(4), 1992, pp. 12–17. 30 Bob Garfield, ‘“Subliminal” seduction and other urban myths’, Advertising Age, 18 September 2000, pp. 4, 105; and Lewis Smith, ‘Subliminal advertising may work, but only if you’re paying attention’, Times, 9 March 2007. For more on subliminal advertising, see Alastair Goode, ‘The implicit and explicit role of ad memory in ad persuasion: Rethinking the hidden persuaders’, International Journal of Marketing Research, 49(2), 2007, pp. 95–116; Cynthia Crossen, ‘For a time in the 50s, a huckster fanned fears of an ad “hypnosis”’, Wall Street Journal, 5 November 2007, p. B1; and Beth Snyder Bulik, ‘This brand makes you more creative’, Advertising Age, 24 March 2008, p. 4. 31 See ; and Sophie Langley, ‘New “home-style” baking mixes range launched in Australia’, Australian Food News, 27 November 2013, accessed August 2016. 32 Max Knoblauch, ‘Millennials trust user-generated content 50% more than other media’, 9 April 2014, , accessed August 2016. 33 See Leon Festinger, A Theory of Cognitive Dissonance, Stanford University Press: Stanford, CA, 1957; Cynthia Crossen, ‘“Cognitive dissonance” became a milestone in the 1950s psychology’, Wall Street Journal, 12 December 2006, p. B1; and Anupam Bawa & Purva Kansal, ‘Cognitive dissonance and the marketing of services: Some issues’, Journal of Services Research, October 2008–March 2009, p. 31. 34 The following discussion draws from the work of Everett M Rogers. See his Diffusion of Innovations, 5th edn, Free Press: New York, NY, 2003. 35 Jane Schulze, ‘Viewers slow on digital uptake’, The Australian, 4 May 2009; ‘Digital television in Australian homes 2011’, Australian Communications and Media Authority, 2012, , accessed August 2016; ‘Digital television: FAQ’, Australian Communications and Media Authority, 2016, , accessed August 2016; ‘Revealed: ABC voted Australia’s most trustworthy broadcaster. But who came in last?’, B&T Magazine, 2016, ; see also ‘US HDTV penetration nears 25%’, NielsenWire, 11 December 2008. 36 This classic categorisation was first introduced in Patrick J Robinson, Charles W Faris & Yoram Wind, Industrial Buying Behavior and Creative Marketing, Allyn & Bacon: Boston, MA, 1967. Also see James C Anderson & James A Narus, Business Market Management, 2nd edn, Prentice Hall: Upper Saddle River, NJ, 2004, chapter 3; James C Anderson, James A Narus & Wouter van Rossum, ‘Customer value propositions in business markets’, Harvard Business Review, March 2006, pp. 91–9; and Philip Kotler & Kevin Lane Keller, Marketing Management, 14th edn, Prentice Hall: Upper Saddle River, NJ, 2012, chapter 7. 37 Example adapted from information found at , accessed August 2016. 38 Example adapted from information found at ‘Consumer scams’, Consumer Affairs Victoria, 2016, ; ; and at ‘Melbourne agency Taboo launches Stevie’s Scam School campaign for Consumer Affairs Victoria’, Campaign Brief, 20 March 2012, ; all accessed August 2016. 39 See Frederick E Webster, Jr & Yoram Wind, Organizational Buying Behavior, Prentice-Hall: Englewood Cliffs, NJ, 1972, pp. 33–7. 40 Henry Canaday, ‘What recession?’, Selling Power, January–February 2009, pp. 44–9, , accessed August 2016. 41 Patrick Robinson, Charles Faris & Yoram Wind, Industrial Buying and Creative Marketing, Allyn & Bacon: Boston, MA, 1967. 42 See , accessed August 2016. 43 See and , accessed August 2016. 44 See and , accessed August 2016.

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Designing a customer-driven strategy and mix 6 Customer-driven market strategy: Creating value for target customers 7 Products, services and brands: Offering customer value 8 New products: Developing and managing innovation 9 Pricing: Capturing customer value 10 Placement: Customer value fulfilment 11 Communicating customer value: Advertising and public relations 12 Personal selling and sales promotion: Creating value in relationships 13 Direct and digital marketing: Interactivity and fulfilment

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168 198 230 256 290 340 374 404

Chapter

6

Customer-driven marketing strategy: Creating value for target customers So far, you have learned what marketing involves and the importance of gaining insights into consumers and the marketplace environment. With that as background, you are now ready to delve deeper into marketing strategy and tactics. This chapter takes us further into key customer-driven marketing strategy decisions – the bases upon which markets are broken up into meaningful customer groups (segmentation), how we choose which customer groups to serve (targeting), create market offerings that best serve targeted customers (differentiation) and position the offerings in the minds of consumers (positioning). The chapters that follow explore the tactical marketing tools – the extended marketing mix – by which marketers bring these strategies to life. For a visual representation of the chapter, please see the concept map on the following page.

Learning

Objectives

Learning Objective 1 Define the main steps in designing a customer-driven marketing strategy: market segmentation, targeting, differentiation and positioning. Customer-driven marketing strategy  p. 170 Learning Objective 2 List and discuss the main bases for segmenting consumer and business markets. Market segmentation  pp. 171–80 Learning Objective 3 Explain how companies identify attractive market segments and choose a market-targeting strategy. Market targeting  pp. 180–86 Learning Objective 4 Discuss how companies differentiate and position their products for maximum competitive advantage. Differentiation and positioning  pp. 186–92

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Chapter 6  Customer-driven marketing strategy: Creating value for target customers

169

stomers to ser ve Select cu LO 1

ON ATI rket into T ENtal ma ents M G he to r segm e all

Demographic

Psychographic

Behavioural

Undifferentiated (mass) marketing

Differentiated (segmented) marketing

Concentrated (niche) marketing

Micromarketing (local or individual marketing)

DI

ES T I op O N

FE

n co in cid go De

PO

ing

Discuss how companies differentiate and position their products for maximum competitive advantage. (pp. 186–92)

r t os h i fo e sa tion rl m es e s

F

G RE ID E N UE NTA L T A N I V A CE F Y P OS SIBLE S IA S AN A DV ce ITI E V I N T pr o O p T D I T C tua E E O P M N g IN G w E R lue e f e od hic l pos DIFF va mor sam s i h

Us

LO 4

dif

ti fer differ oning map enc en s tia tors es are

a • es ding ore the h l Decire for m less • r muc • mo ore for ss fo •m • le

Decide o n value proposition

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C com hoos pet ing th itive e righ adva t ntage

BASES FOR SEGMENTATION

Geographical

TARGETING STRATEGIES

LO 3 Explain how companies identify attractive market segments and choose a market targeting strategy. (pp. 180–86)

UST OM E

t targe ents ect Sel et segm rk ma

LO 2 List and discuss the main bases for segmenting consumer and business markets. (pp. 171–80)

E ALU V ATE RE

RS

C

Div SE ide sm

t

Differ TAR en creat tiate t GE e su he T per ma IN ior rke G cu t sto of m FOR TARGETED C

o gt rin e fe valu er

Define the main steps in designing a customer-driven marketing strategy: market segmentation, targeting, differentiation and positioning. (p. 170)

170

Part 3  Designing a customer-driven strategy and mix

Customer-driven marketing strategy  (p. 170)

market segmentation

Analysing how a market is naturally broken into distinct groups of buyers who have different needs, characteristics or behaviours, and who might require tailored products or marketing programs

market targeting (targeting)

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

differentiation

Differentiating the company’s market offering from that offered by competitors, to create superior customer value.

positioning

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

Companies today recognise that they cannot appeal to all buyers in the marketplace, or at least not to all buyers in the same way. Buyers are too numerous, too widely scattered and too varied in their needs and buying practices. Moreover, the companies themselves vary widely in their ability to serve different segments of the market. Instead, like any sound marketer, a company must identify the parts of the market that it can serve best and most profitably. It must design customer-driven marketing strategies that build the right relationships with the right customers. Thus, most companies have moved away from mass marketing and towards target marketing – identifying market segments, selecting one or more of them and developing products and marketing programs tailored to each. Instead of scattering their marketing efforts (the ‘shotgun’ approach), firms focus on the buyers who have greater interest in the values that the firms create and can serve best (the ‘rifle’ approach). Figure 6.1 shows the four main steps in designing a customer-driven marketing strategy. In the first two steps, the company selects the customers that it will serve. Market segmentation involves analysing a market with the aim of directing marketing focus towards smaller segments of buyers with distinct characteristics or behaviours that might require tailored marketing strategies or mixes. The company identifies different ways to segment the market and develops profiles of the resulting market segments. Market targeting (or targeting) consists of evaluating each market segment’s attractiveness and selecting one or more market segments to enter. In the final two steps, the company decides on a value proposition – on how it will create value for target customers. Differentiation involves differentiating the firm’s market offering from that offered by competitors, to create superior customer value. Positioning consists of arranging for a market offering to occupy a clear, distinctive and desirable place in the minds of target consumers relative to competing products. We discuss each of these steps in turn.

DECIDE ON VALUE PROPOSITION

SELECT CUSTOMERS TO SERVE Segmentation

Differentiation

Divide the total market into smaller segments

Differentiate the market offering to create superior customer value

CREATE VALUE FOR TARGETED CUSTOMERS Targeting

Positioning

Select the segment or segments to enter

Position the market offering in the minds of target customers

Figure 6.1  Designing a customer-driven marketing strategy

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Market segmentation (pp. 171–80) Buyers in any market differ in their wants, resources, locations, buying attitudes and buying practices. Through market segmentation, companies divide large, heterogeneous markets into smaller segments that can be reached more efficiently and effectively with products and services that match their unique needs. In this section, we discuss four important segmentation topics: (1) segmenting consumer markets, (2) segmenting business markets, (3) segmenting international markets and (4) requirements for effective segmentation.

Segmenting consumer markets There is no single way to segment a market. A marketer has to try different segmentation variables, alone and in combination, to find the best way to view the market structure. Table 6.1 outlines the main variables

Table 6.1  Bases for identifying and analysing consumer market segments Variable

Typical breakdowns

Geographical Region

Far North Queensland, South-Eastern Queensland, Far North Coast of NSW, NSW Tablelands, Western NSW, Lakes District – Victoria

City size (population)

Under 5000; 5000–20 000; 20 000–50 000; 50 000–100 000; 100 000–250 000; 250 000–500 000; 500 000–1 000 000; 1 000 000–2 000 000; 2 000 000 and over

Density

Urban, suburban, rural

Climate

Northern, Eastern seaboard, Southern and Western

Demographic Age (years)

Under 6, 7–11, 12–19, 20–34, 35–49, 50–64, 65+

Sex

Male, female

Family size (members)

1–2, 3–4, 5+

Family life cycle

Young, single; young, married, no children; young, married, youngest child under 6 years; young, married, youngest child 6 or over; older, married, with children; older, married, no children under 18; older, single; other

Income (annual)

Under $10 000; $10 000–$14 999; $15 000–$19 999; $20 000–$29 999; $30 000–$49 999; $50 000–$99 999; $100 000 and over

Occupation

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

Education

Primary school or less; some high school; high school graduate, some TAFE college; TAFE college graduate; some university; university graduate

Religion

Catholic, Protestant, Orthodox, Jewish, Muslim, other

Nationality

Australian, British, New Zealander, American, Chinese, French, German, Scandinavian, Italian, Greek, Middle Eastern, Japanese, Taiwanese, Vietnamese, South African, other

Psychographic Socioeconomic

Quintiles: AB, C, D, E, FG

Status

Where education, income and occupation levels are used in combination to indicate status

Values, attitudes and lifestyle groupings

Visible Achievement, Something Better, Young Optimists, Socially Aware, Look at Me, A Fairer Deal, Basic Needs, Real Conservatism, Traditional Family Life, Conventional Family Life

Personality

Compulsive, gregarious, authoritarian, ambitious

Behavioural Purchase occasion

Regular occasion, special occasion

Benefits sought

Quality, service, economy

User status

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

Usage rate

Light user, medium user, heavy user

Loyalty status

None, medium, strong, absolute

Readiness stage

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

Attitude towards product

Enthusiastic, positive, indifferent, negative, hostile

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

Geographic segmentation geographic segmentation

Dividing a market into different geographical units, such as nations, regions, states, local government areas, cities or neighbourhoods.

Geographic segmentation calls for dividing the market into different geographical units, such as nations, regions, states, local government areas, cities or even neighbourhoods. A company may decide to operate in one or a few geographical areas, or to operate in all areas but pay attention to geographical differences in needs and wants. Many companies today are localising their products, advertising, promotion and sales efforts to fit the needs of individual regions, cities and even neighbourhoods. For example, retailers such as Coles and Woolworths operate virtually everywhere but sometimes stock specialised products for specific types of geographic locations. For example, a shopper in the Sydney suburb of Double Bay would find smoked eel in the deli cabinet, whereas this product might not be stocked in Melbourne’s Caroline Springs.

Demographic segmentation demographic segmentation

Dividing the market into segments based on variables such as age, gender, family size, family life cycle, income, occupation, education, religion, race, generation and nationality.

age and life-cycle segmentation

Analysing a market with the aim of directing marketing focus based on different age and lifecycle groups.

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

Age and life-cycle stage Consumer needs and wants change with age. Some companies use age and life-cycle segmentation, offering different products or using different marketing approaches for different age and life-cycle groups. Some companies focus on a specific age of life-stage groups. For example, Scienceworks offers young children with inquisitive minds an opportunity to see how various mechanical and scientific apparatus work, including an insight into the workings of the universe through a visit to the planetarium. Marketers must be careful to guard against stereotypes when using age and life-cycle segmentation. Although some 80-year-olds fit the doddering stereotypes, others play tennis. Similarly, whereas some 40-year-old couples are sending their children off to university, others are just beginning new families.

Age and life-cycle segmentation: Victoria’s Scienceworks museum and planetarium target those with enquiring young minds. https://museumvictoria.com.au/scienceworks/visiting/lightning-room/. Copyright Museum Victoria. Photographer: James Geer.

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173

Thus, age is often a poor predictor of a person’s life-cycle, health, work or family status, needs and buying power. Companies marketing to consumers in a family unit usually employ images and appeals to stress the value and benefits of the market offering, rather than the age of the consumer themselves. An example of such segmented advertising is an ad for funeral insurance, where the focus is on unburdening the remaining family members, regardless of age.

Gender

Gender segmentation has long been used as a segmentation variable by clothing, cosmetics, toiletries and magazines marketers. More recently, many mostly women’s cosmetics makers have begun marketing men’s lines. For example, Unilever’s Lynx brand of body washes and deodorant sprays targets men, with product names such as Anarchy, Adrenaline and Africa to denote its various fragrances. Nivea markets the Nivea Men range, which includes moisturisers, shaving and shower gels, post-shave balms and more. Crabtree & Evelyn has evolved from a small, family-run business specialising in soap to an international marketer of fragrances, toiletries and more, in a range that includes many products for men, such as fragrances, soaps, body wash and shaving products. An underdeveloped gender segment can offer new opportunities in markets ranging from consumer electronics to motorcycles. For example, Harley-Davidson has traditionally targeted men aged between 35 and 55, but women are now among its fastest-growing customer segments. Female buyers now account for 12 per cent of new Harley-Davidson purchases, up from only 2 per cent in 1995. In response, the company is boosting its appeal to women buyers – through such initiatives as Harley Davidson riding gear designed specifically for women, creating women-based communities through social media, and more. It recently introduced the SuperLow, a lower-to-the-ground, lighter model geared towards women. And it hired Victoria’s Secret and Sports Illustrated swimsuit edition model, Marisa Miller, as a spokesperson. Her riding exploits can be seen in videos on the Harley-Davidson website and on YouTube. ‘It says, look, this is real stuff,’ says Harley-Davidson CEO, Keith Wandell. ‘A lot of women ride bikes, and here’s a Victoria’s Secret supermodel riding bikes and doing burnouts.’1

gender segmentation

Dividing a market into different segments based on gender.

income Income The marketers of products and services – such as cars, clothing, cosmetics, financial services and segmentation Dividing a market travel – have long used income segmentation. Many companies target affluent consumers with into different income luxury goods and convenience services. For example, for a price, luxury hotels provide amenities to segments. attract specific groups of affluent travellers, such as families, expectant mums and even pet owners. The 196-metre ship The World ‘is the largest privately owned residential yacht on the planet’ and enables its affluent residents to sleep on deck Balinese-style and ‘wake up in a new destination every few days’.2 However, not all companies that use income segmentation target the affluent. For example, many retailers – such as Best & Less and Harris Scarfe – successfully target low- and middle-income groups. The core market for such stores is lower-income families. While the Global Financial Crisis affected Australia less severely than it did most countries at the time, more recently, consumers at all income levels – including affluent consumers – have cut back on their spending and sought Income segmentation: The World successfully markets itself as ‘the greater value from their purchases. In many cases, luxury largest privately owned yacht on the planet’. marketers targeting high-income consumers have been the The World hardest hit (see Marketing in action 6.1).3

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Part 3  Designing a customer-driven strategy and mix

Marketing in Action 6.1

ALDI: Offering a ‘same-for-less’ value proposition

Whether selling fresh food, clothing, personal computers or mobile phones, to

(if you could find one) and carry it to your car. This heroic effort was rewarded by

be successful in the marketplace, organisations need to understand and then

substantial price savings. But you had earned it!

satisfy their customers. Some players in the Australian retail arena have been

Franklins found it had created an offer that did not appeal to the market.

able to leverage segmentation, targeting and positioning concepts to support

It had become confused in its segmentation strategy and, as a result, the brand

their market entry strategies.

became incorrectly positioned in the minds of its core segments. In 2001,

For many years, the large retail chains Coles and Woolworths have dominated the Australian supermarket industry, with the latter considered the market leader.

Franklins was broken up and the parts were sold to other companies, including Coles, Woolworths and a newcomer, ALDI.

These companies were able to segment the marketplace successfully in the knowledge that Australian consumers could be divided into three broad groups – premium, convenience and discount buyers. Armed with this segmentation

ALDI spots the gap down under

information, each player in the market was able to position itself based on its

Franklins’ inability to reposition itself successfully in the marketplace provided a

ability to appeal to specific customer segments.

perfect opportunity for the large German retail conglomerate, ALDI, to enter the

At one time, a third retailer, Franklins, competed with Coles and Woolworths

market. ALDI – the secret grocer in this story – could see that one part of the

but at the price-conscious end of the market. In the early 1990s, Franklins’ senior

Australian retail market (formerly serviced by Franklins), the discount segment,

executives decided they wanted to reposition the business by copying the fresh-

was now not serviced by any of the large retail players.

food-retailing positioning concept that Coles and Woolworths were successfully

Established in the town of Essen in Germany’s Ruhr Valley, with the

applying, but to offer it at a discount price. It was thought that this new target

first foundation stone laid in 1913, the privately owned ALDI operates more

segment for the business would grow the company’s market share and its

than 10 000 stores in 18 countries across Europe, the United States and

profitability.

Australia. The company operates as two separate groups: ALDI North and

Franklins launched a series of fresh-food stores and added fresh-food

ALDI South. ALDI North comprises the northern region of Germany, Belgium,

departments to many of its existing stores. While this strategy seemed a

Denmark, France, Luxembourg and the Netherlands. ALDI South comprises

positive move, problems soon arose. The company could not match the buying

southern Germany, Austria, the United Kingdom, Ireland, the United States

power of its rivals, and management was not effective in containing the higher

and Australia. The company has an annual sales turnover of more than

costs (and therefore the resulting selling prices) associated with fresh-food

50 billion euros (approximately A$72 billion, depending on exchange rates).

retailing. In early 2001, Franklins lost market share in the four states in which

It differs from local retailers by offering a limited range of about 1300 of the

it operated (Queensland, New South Wales, Victoria and South Australia). In its

most popular products, mainly under its private label, ‘ALDI’. By comparison,

key NSW market, its share fell from 25.6 per cent to 24.2 per cent. In the retail

Coles Supermarkets and Woolworths offer up to 20 000 items, largely national

market, where profits are based on large-volume sales and very small margins

brands, but with increasing numbers of products carried under retailer brands.

per item sold, the loss of one percentage point in market share equates to a

From the outset, ALDI was successful in gaining consumer acceptance of

substantial profit reduction, or even financial disaster. Additionally, Franklins’

private-label brands.

fresh-food concept was too highly priced relative to its stated positioning,

While the overall market share of private-label brands stood at about

and so the price-sensitive core segment became alienated. At the same time,

28 per cent in the United Kingdom in 2006, in Australia it was much lower until

neither potential nor existing shoppers accepted that Franklins could sell

recent times. Private-label market share in Australia has risen to some 20 per cent

fresh food. As a consequence, the retailer failed to gain the anticipated new

of supermarket brands according to IBISWORLD market research, and is expected

customers while, at the same time, it was also losing its loyal core of discount-

to grow to 35 per cent within five years. A consumer survey by Canstar Blue

sensitive buyers.

showed that ‘the proportion of Australian shoppers buying private labels increased

Franklins became a victim of its ambition to emulate Woolworths and Coles,

from 44% to 65% in just six months’.

revealing its poor understanding of the requirements of repositioning a strongly

ALDI’s stores are situated mainly in areas where the price-conscious

entrenched brand and retailing concept. One of the original appeals of Franklins

congregate, such as adjacent to the direct factory outlets at Moorabbin airport

to price-conscious consumers was the way in which you had to ‘fight’ your way

in Melbourne; in other words, in the heartland of its selected target market.

through the narrow aisles, strain your back to reach items high on the shelves,

However, ALDI also locates in shopping centres when the opportunity presents

line up and wait at checkouts and, finally, pack your own groceries into a carton

itself.

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aldi.com.au, 16 February 2017

Chapter 6  Customer-driven marketing strategy: Creating value for target customers

Given its experience and timing, ALDI was able to enter the Australian market

private-label brands, and may portend the arrival of international giants, such as

in 2001 with ease since the needs and wants of a large group of consumers were

Tesco and Walmart, if they conquer the more populous markets of China, India

not being met by the existing retailers. If Franklins had been able to continue to

and Russia.

service its natural market segment, ALDI’s penetration of the Australian market would have been much slower and its potential more limited. So, too, did the Coles Group’s loss of focus and confused supermarket positioning help ALDI to grow in 2006/07. The Coles Group made the decision to switch nearly all its Bi-Lo stores to the perceived more-upmarket Coles Supermarkets brands and, in so doing, vacated the price-conscious end of the market. Partway through this change, the Coles Group was purchased by Wesfarmers – owners of the highly successful ‘big box’ hardware retailer, Bunnings – bringing to a halt what would prove to be a poor marketing decision owing to the loss of brand asset value involved. The lesson for marketers is that market segmentation is essential. But, just as importantly, organisations need to assess critically their capabilities to satisfy a selected market segment and determine whether there is a competitive advantage that will enable them to fend off potential new entrants. While ALDI has stuck closely to its position as a discounter of packaged food items, it also features

Sources: See ‘Aldi history’ at , accessed November 2016. Also see Neil Shoebridge, ‘A new brand spanking’, BRW, 6 May 2010; Eli Greenblat, ‘Costco gets another $110 million from US parent for Australian expansion’, Sydney Morning Herald, 30 December 2013; Jeffrey Hutton, ‘Corbett’s fresh idea for rival’, BRW, 18–22 August 2007, p. 9; Jason Baker, GM IBISWorld, ‘Brand in the house’, BRW – ‘Economy Watch’, 19 April 2007; Adelle Ferguson, ‘Envy’, BRW, 14 January 2002; Neil Shoebridge, ‘Franklins’ chief has a job ahead’, BRW, 1 February 1999; Michelle Hannen, ‘Patient ALDI is buying carefully’, BRW, 27 September 2001; Graham Ruddick, ‘Five numbers that show how Aldi has revolutionised grocery shopping’, The Telegraph, 29 September 2014; Frank Chung, ‘Supermarket monsters: How Coles and Woolworths suffocate us’, 18 June 2015, , accessed November 2016; Catie Low, ‘Supermarket chains Woolworths and Coles struggle with private label brands against Aldi’, Sydney Morning Herald, 11 June 2016; ALDI International website, , accessed November 2016. Quoted private-label shares reported in Ronelle Richards, ‘Aldi winning the private label race as Aussie shoppers increasingly shun big name grocery brands: Research’, smartcompany, , accessed November 2016.

Wednesday and Saturday themed product sales, known as ‘Special Buys’, that

Questions

include lawn mowers, televisions and camping gear among many other lines, and

❶ Do you think that shoppers at ALDI see the brands offered there as retailer

has used these to develop and maintain its competitive advantage against its rivals. Although ALDI has made consumers more price conscious, it does not appear to have any intention of competing at the upmarket end of Australian grocery retailing. The company recognises that a move into that arena would lead it into the same trap that Franklins fell into and, in all likelihood, provoke the local chains to retaliate. ALDI may not face its traditional market segments with everything going its way forever. Costco’s arrival in Australia has continued the move towards

(private-label) brands or as ‘regular’ brands? ❷ How is ALDI positioned relative to its competitors in the minds of people you know? ❸ How do the various grocery-market segments perceive private-label brands in your country? Is there room for growth? ❹ What are the reasons behind your answer to Question 3? Do these reasons apply equally to all market segments? Explain your answer.

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Psychographic segmentation Psychographic segmentation divides buyers into different segments based on social class, lifestyle or personality characteristics. People in the same demographic group can have very different psychographic profiles. In Chapter 5, we discussed how the products people buy reflect their lifestyles. As a result, marketers often segment their markets by consumer lifestyles and base their marketing strategies on lifestyle appeals. For example, although both Gloria Jean’s and Starbucks are coffee shops, they offer very different product assortments and store atmospheres. Yet each succeeds because it creates just the right value proposition for its unique mix of customer lifestyles. Starbucks targets more ‘high-brow’ young professionals, whereas Gloria Jean’s targets the ‘average person’. Personality variables: True North offers enhanced levels of comfort and luxury We see lifestyle differences emerging in to those wanting to experience luxury adventure cruises in a style akin to one of attitudes to car ownership as city-dwelling the world’s most exclusive hotels. North Star Cruises professionals turn to sharing cars and bicycles. These are not rental activities in the usual sense as they involve hourly rentals, with pickup and psychographic drop-off points scattered around cities. Businesses such as GreenShareCar, GoGet and FlexiCar segmentation offer many benefits to private car users, while Melbourne Bike Share caters to those wanting to Dividing a market into make short city trips. In both cases, Australian lifestyles differ from European and North American different segments lifestyles in this regard.4 based on social class, lifestyle or personality Marketers also use personality variables to segment markets. For example, cruises to the Kimberley characteristics. region or to West Papua and Papua New Guinea target adventure seekers. While some cruises to the Kimberley region appeal to high-energy couples and families, with their many outdoor activities, True North is designed to allow discerning adventurers to experience the wilderness in surroundings more akin to one of the world’s most exclusive hotels. By contrast, P&O Cruises are varied and the six ships in the fleet offer choices for adventurers, cultural tourists, wilderness and wildlife seekers, beach lovers and sporty types, as well as catering for families both young and old, young couples and active older people, behavioural depending on their needs.5

segmentation

Dividing a market into segments based on consumer knowledge, attitudes, uses or responses to a product.

occasion segmentation

Dividing the market into segments according to occasions when buyers get the idea to buy, actually make their purchase or use the purchased item.

Behavioural segmentation Behavioural segmentation divides buyers into segments based on their knowledge, attitudes, uses or responses to a product. Many marketers believe that behaviour variables are the best starting point for building market segments.

Occasions Buyers can be grouped according to occasions when they get the idea to buy, actually make their purchase or use the purchased item. Occasion segmentation can help firms build up product usage. For example, most consumers of fruit juice drink it in the morning, but marketers such as Boost Juice want juices to be seen as a part of a healthy lifestyle and to be consumed throughout the day.

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Some holidays, such as Mother’s Day and Father’s Day, were originally promoted partly to increase the sale of chocolates and sweets, flowers, cards and other gifts. And many marketers prepare special offers and ads for holiday occasions. For example, chocolate marketers with impulse lines such as Cherry Ripe, Mars bars and Violet Crumble bars, and specialty lines such as Lindt, make up special Easter egg look-alike products to take advantage of the Easter selling period.

Benefits sought A powerful form of segmentation is to group buyers according to the different benefits they seek from the product. Benefit segmentation requires finding the main benefits people look for in the product class, the kinds of people who look for each benefit and the main brands that deliver each benefit. The Athlete’s Foot markets its product lines in Australia and New Zealand according to benefits that different consumers seek from their sporting, leisure and comfort footwear, and must target the benefit segment or segments that it can serve best and most profitably, using appeals that match each segment’s benefit preferences.

benefit segmentation

Analysing a market with the aim of directing marketing focus based on the different benefits that consumers seek from the product.

User status Markets can be segmented into non-users, ex-users, potential users, first-time users and regular users of a product. Marketers want to reinforce and retain regular users, attract targeted non-users and reinvigorate relationships with ex-users. Included in the potential user group are consumers facing life-stage changes – such as newlyweds and new parents – who can be turned into heavy users. For example, Bounty Bags are distributed to Australian mothers-to-be and new mothers by hospital staff or at antenatal classes. The bags contain product samples the new mother may not have used before, such as nappies and baby wipes, as well as parenting magazines and local area health-care information booklets.6 Usage rate Markets can also be segmented into light, medium and heavy product users. Heavy users are often a small percentage of the market but account for a high percentage of total consumption. For example, smartphone users who access the internet may be classified as heavy users based on their use of highbandwidth services such as peer-to-peer file sharing, or on the amount of time they spend in social media communication. Heavy users may require more expensive data plans compared to those required by light users of these services. Either way, the telecommunications companies (telcos) target heavy users, as they provide a higher return on investment. Loyalty status A market can also be segmented by consumer loyalty. Consumers can be loyal to brands (ColdPower), stores (Target) and companies (Toyota). Buyers can be divided into groups according to their degree of loyalty. Some consumers are completely loyal – they buy one brand all the time. For example, as we discussed in the previous chapter, Apple has an almost cult-like following of loyal users. Sony PlayStation users can be almost as fanatical,

Consumer loyalty: Attendees view new MacBook Pro laptop computers on display during an event at Apple Inc.’s California headquarters in 2016. Apple introduced the first overhaul of its MacBook Pro laptop in more than four years, demonstrating dedication to a product that represents a small percentage of revenue. David Paul Morris/Bloomberg via Getty Images

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Behavioural segmentation extended: Using multiple segmentation bases, Roy Morgan Values Segments assist marketing organisations to find out what segments think, feel and aspire to, and how they act. Source: Roy Morgan. Devised by Michele Levine of Roy Morgan Research and Colin Benjamin of the Horizons Network

judging by the fact that some 1 million PS4s were sold in the first 24 hours following the product’s release in November 2013, and over 40 million units were sold worldwide in the three years that followed.7 Other consumers are somewhat loyal – they are loyal to two or three brands of a given product, or favour one brand while sometimes buying others. Still other buyers show no loyalty to any brand. Either they want something different each time they buy, or they buy whatever is a price special. A company can learn a lot by analysing loyalty patterns in its market. It should start by studying its own loyal customers. For example, by studying PS3 and PS4 fanatics, Sony can better pinpoint its target market and develop marketing appeals. Highly loyal customers can be a valuable asset. They often promote the brand and the company through personal word of mouth and via social media. By studying its lessloyal buyers, the company can detect which brands are most competitive with its own. By  looking at customers who are shifting away from its brand, the company can learn about its marketing weaknesses and take action to correct them.

Using multiple segmentation bases Marketers rarely limit their segmentation analysis to only one or a few variables. Rather, they mostly use multiple segmentation bases in an effort to identify smaller, better-defined target groups. Thus, a bank may not only identify a group of wealthy retired adults but also, within that group, distinguish several segments based on their current income, assets, savings and risk preferences, housing and lifestyles. Business information services, such as The Nielsen Company and Roy Morgan, provide multivariable segmentation systems that merge geographic, demographic, lifestyle and behavioural data to help companies segment their markets down to postcodes, neighbourhoods and even households. Such segmentation provides a powerful tool for marketers of all kinds. It can help companies to identify and better understand key customer segments, target them more efficiently and tailor market offerings and messages to their specific needs.

Segmenting business markets Consumer and business marketers use many of the same variables to segment their markets. Business buyers can be segmented geographically, demographically (industry, company size) or by benefits sought, user status, usage rate and loyalty status. Yet, business marketers also use some additional variables, such as customer operating characteristics, purchasing approaches, situational factors and personal characteristics. Almost every company serves at least some business markets. For example, American Express targets businesses in three segments – merchants, corporations and small businesses. It has developed distinct marketing programs for each segment. In the merchants segment, American Express focuses on convincing new merchants to accept the card, and on managing relationships with those merchants that already do. For larger corporate customers, the company offers a corporate card program that includes extensive employee expense and travel management services. It also offers this segment a wide range of asset management, retirement planning and financial education services. Many companies set up separate systems for dealing with larger or multiple-location customers. For example, Progressive, a marketer of office furniture, first segments customers into Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e

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four industries – aged care, commercial, hospitality and health care. Some national, multiplelocation customers have particular requirements that may reach beyond the scope of Progressive’s individual five stores. So, Progressive uses national account managers to help its stores handle its national accounts. Within a given target industry and customer size, the company can segment by purchase approaches and criteria. As in consumer segmentation, many marketers believe that buying behaviour and benefits provide the best basis for segmenting business markets.

Segmenting international markets Few companies have either the resources or the will to operate in all, or even most, of the countries that dot the globe. Although some large companies, such as Coca-Cola or Sony, sell products in more than 200 countries, most international firms focus on a smaller set. Operating in many countries presents new challenges. Different countries, even those that are close together, can vary greatly in their economic, cultural and political makeup. Thus, just as they do within their domestic markets, international firms need to group their world markets into segments with distinct buying needs and behaviours. Companies can segment international markets using one or a combination of several variables. They can segment by geographic location, grouping countries by regions such as Western Europe, the Pacific Rim, the Middle East or Africa. Geographic segmentation assumes that nations close to one another will have many common traits and behaviours. Although this is often the case, there are many exceptions. For example, although the countries in South-East Asia have much in common, they differ culturally and economically. As a case in point, Malaysia and the island state of Singapore are connected, and are interdependent in some ways, but differ culturally, economically and linguistically from each other and from the many other adjacent countries, such as Thailand, Vietnam and Indonesia. World markets can also be segmented on the basis of economic factors. Countries might be grouped by population income levels or by their overall level of economic development. A country’s economic structure shapes its population’s product and service needs and, therefore, the marketing opportunities it offers. For example, many companies are now targeting the BRIC countries (Brazil, Russia, India and China) – fast-growing developing economies with rapidly increasing buying power – along with the socalled ‘bottom of the pyramid’ countries that have vast untapped markets (although without such large individual buying power). Countries can also be segmented by political and legal factors, such as the type and stability of government, receptivity to foreign firms, monetary regulations and amount of bureaucracy. Cultural factors can also be used, grouping markets according to common languages, religions, values and attitudes, customs and behavioural patterns. Segmenting international markets based on geographic, economic, political, cultural and other factors assumes that segments should consist of clusters of countries. However, as communications technologies, such as satellite television, the internet and social media, continue to connect consumers around the world, marketers can define and reach segments of like-minded consumers no matter where in the world they are. Using intermarket segmentation (also called cross-market segmentation), marketers form segments of consumers who have similar needs and buying behaviours even though they are located in different countries. For example, Lexus targets the world’s well-to-do – the ‘global elite’ segment – regardless of their country. Coca-Cola creates special programs to target teens, core consumers of its soft drinks the world over. And Swedish furniture giant IKEA targets the aspiring global middle class – it sells good-quality furniture that ordinary people worldwide can afford.

intermarket segmentation

Forming segments of consumers who have similar needs and buying behaviour even though they are located in different countries.

Requirements for effective segmentation Clearly, there are many ways to segment a market, but not all segmentations are effective. For example, buyers of table salt could be divided into blond and brunette customers. But hair colour obviously does not affect the purchase of salt. Furthermore, if all salt buyers bought the same amount of salt each

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month, believed that all salt is the same and wanted to pay the same price, the company would not benefit from segmenting this market. To be useful, market segments must be: • Measurable: The size, purchasing power and profiles of the segments can be measured. Certain segmentation variables are difficult to measure. For example, there are approximately 30.5 million left-handed people in the United States – almost equalling the entire population of Canada. Yet, few products are targeted towards this left-handed segment. The main problem may be that the segment is hard to identify and measure. There are no data on the demographics of lefties, and neither the United States Census Bureau, the Australian Bureau of Statistics nor Statistics New Zealand keep track of left-handedness in their surveys. Private data companies keep reams of statistics on other demographic segments but not on left-handers. • Accessible: The market segments can be effectively reached and served. Suppose a fragrance company finds that heavy users of its brand are single men and women who stay out late and socialise a lot. Unless this group lives or shops at certain places and is exposed to certain media, its members will be difficult to reach. • Substantial: The market segments are large or profitable enough to serve. A segment should be the largest possible homogeneous group worth pursuing with a tailored marketing program. It would not pay, for example, for an automobile manufacturer to develop cars especially for people whose height is greater than two metres. • Differentiable: The segments are conceptually distinguishable and respond differently to different marketing mix elements and programs. If married and unmarried women respond similarly to a sale on perfume, they do not constitute separate segments. • Actionable: Effective programs can be designed for attracting and serving the segments. For example, although one small airline identified seven market segments, its staff was too small to develop separate marketing programs for each segment.

Linking the concepts Pause for a bit and think about segmentation. As a consumer yourself, think about your own personal experience when you shop. ● Identify specific companies, other than the examples already mentioned, that practise the different types of segmentation just discussed.

● How do the stores you shop at use the segmentation concepts you are reading about here? And why do they do this? ● Using the segmentation bases you have just read about, segment the Australian footwear market. Describe each of the major segments and sub-segments. Keep these segments in mind as you read the next section on market targeting.

Market targeting (pp. 180–86) Market segmentation reveals the firm’s market segment opportunities. The firm now has to evaluate the various segments and decide how many and which segments it can serve best. We now look at how companies evaluate and select target segments.

Evaluating market segments In evaluating different market segments, a firm must look at three factors: (1) segment size and growth, (2) segment structural attractiveness, and (3) company objectives and resources. The company must first collect and analyse data on current segment sales, growth rates and expected profitability for various segments. It will be interested in segments that have the right size and growth characteristics. But ‘right size and growth’ is a relative matter. The largest, fastest-growing segments are not always the most

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attractive ones for every company. Smaller companies may lack the skills and resources needed to serve the larger segments. Or they may find these segments too competitive. Such companies may target segments that are smaller and less attractive, in an absolute sense, but that are potentially more profitable for them. The company also needs to examine major structural factors that affect long-run segment attractiveness.8 For example, a segment is less attractive if it already contains many strong and aggressive competitors. The existence of many actual or potential substitute products may limit prices and the profits that can be earned in a segment. The relative power of buyers also affects segment attractiveness. Buyers with strong bargaining power relative to sellers will try to force prices down, demand more services and set competitors against one another – all at the expense of seller profitability. Finally, a segment may be less attractive if it contains powerful suppliers who can control prices or reduce the quality or quantity of ordered goods and services. Even if a segment has the right size and growth and is structurally attractive, the company must consider its own objectives and resources. Some attractive segments can be dismissed quickly because they do not align with the company’s long-run objectives. Or the company may lack the skills and resources needed to succeed in an attractive segment. For example, given current economic and resource conditions, the economy segment of the motor vehicle market is large and growing. Even so, given its company objectives and resources, it would make little sense for luxury-performance car maker BMW to enter this segment and compete head-on with the likes of Hyundai and Proton. A company should enter only those segments in which it can create superior customer value and gain advantages over competitors.

Selecting target market segments After evaluating different segments, the company must decide which and how many segments it will target. A target market consists of a set of buyers who share common needs or characteristics that the company decides to serve. Market targeting can be carried out at several different levels. Figure 6.2 shows that companies can target very broadly (undifferentiated marketing), very narrowly (micromarketing) or somewhere in between (differentiated or concentrated marketing).

Undifferentiated marketing Using an undifferentiated marketing (or mass marketing) strategy, a firm might decide to ignore market segment differences and target the whole market with one offer. This mass-marketing strategy focuses on what is common in the needs of consumers, rather than on what is different. The company designs a product and a marketing program that will appeal to the largest number of buyers. As noted earlier in the chapter, most modern marketers have strong doubts about this strategy. Difficulties arise in developing a product or brand that will satisfy all consumers. Moreover, mass marketers often have trouble competing with more-focused firms that do a better job of satisfying the needs of specific segments and niches.

Undifferentiated (mass) marketing

Differentiated (segmented) marketing

TARGETING BROADLY

Concentrated (niche) marketing

target market

A set of buyers sharing common needs or characteristics that the company decides to serve.

undifferentiated (mass) marketing

A market-coverage strategy in which a firm decides to ignore market segment differences and go after the whole market with one offer.

Micromarketing (local or individual marketing)

TARGETING NARROWLY

Figure 6.2  Market targeting strategies

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Differentiated marketing differentiated (segmented) marketing

A market-coverage strategy in which a firm decides to target several market segments and designs separate offers for each.

Using a differentiated marketing (or segmented marketing) strategy, a firm decides to target several market segments and designs separate offers for each. Toyota Corporation produces several brands of cars – from Toyota (Corolla, Camry and Aurion) and Lexus (IS, GS and LS models) – each targeting its own segments of car buyers. Procter & Gamble markets various household-care brands, not to mention such beauty and grooming brands as Head & Shoulders, Olay, Pantene and Wella, which compete with each other and with competitor Unilever’s brands on supermarket shelves. Unilever’s personal-care brands include Dove, Impulse, Lifebuoy, Lux, Lynx, Pears, Rexona, Sunsilk and Vaseline. Multibrand distributor Unilever uses differential marketing to offer a range of personal-care brands that tap into consumer lifestyles and aspirations; check out its website at . By offering product and marketing variations to segments, companies such as Toyota, P&G and Unilever, among others, hope for higher sales and a stronger position within each market segment. Developing a stronger position within several segments creates more total sales than does undifferentiated marketing across all segments. But differentiated marketing also increases the costs of doing business. A firm usually finds it more expensive to develop and produce, say, 10 units of 10 different products rather than 100 units of one product. Developing separate marketing plans for the separate segments requires extra marketing research, forecasting, sales analysis, promotion planning and channel management. And trying to reach different market segments with different advertising campaigns increases promotion costs. Thus, the company must weigh increased sales against increased costs when deciding on a differentiated marketing strategy.

Concentrated marketing Using a concentrated marketing (or niche marketing) strategy, instead of going after a small share of a large market, the firm goes after a large share of one or a few smaller segments or niches. For A market-coverage example, NightOwl’s vision is ‘more choice, more value’.9 It has been in business for over 40 years and has strategy in which a stores in Queensland, New South Wales and Victoria. The segment the firm targets is buyers of grocery firm goes after a large and convenience demand products, who may buy at any time in the 24 hours that most stores are open. share of one or a few segments or niches. Through concentrated marketing, the firm achieves a strong market position because of its greater knowledge of consumer needs in the niches it serves and the special reputation it acquires. It can market more effectively by fine-tuning its products, prices and programs to the needs of carefully defined segments. It can also market more efficiently, targeting its products or services, channels and communications programs towards only consumers that it can serve best and most profitably. Whereas segments are fairly large and normally attract several competitors, niches are smaller and may attract only one or a few competitors. Niching lets smaller companies focus their limited resources on serving niches that may be unimportant to or overlooked by larger competitors. Many companies start as nichers to get a foothold against larger, more-resourceful competitors and then grow into broader competitors. In contrast, as markets change, some megamarketers develop niche products to create sales growth. For example, in recent years, as consumers have grown more health conscious, the demand for carbonated soft drinks has declined while the Concentrated marketing: NightOwl’s franchise stores serve the market segment seeking grocery and convenience products market for energy drinks and juices has grown. To meet this 24 hours a day. shifting demand, mainstream cola marketers PepsiCo and © LADO/Shutterstock.com Coca-Cola have both developed or acquired their own niche

concentrated (niche) marketing

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products, ranging from low-kilojoule carbonated soft drinks (CSDs) to enhanced waters, energy drinks and juices.10 Today, the low cost of setting up shop on the internet makes it even more profitable to serve seemingly minuscule niches. Small businesses, in particular, are realising riches from serving small niches on the web. Consider Etsy: Etsy is ‘the world’s handmade marketplace’ – selling everything from handmade soaps to vintage fedoras, and even Vampire hunting kits. Sometimes referred to as eBay’s funky little sister, the Etsy online crafts-fair website is a far cry from the old-fashioned street-corner flea market. Thanks to the reach and power of the web, Etsy now counts 1.6 million active sellers, more than 26 million active buyers and over 35 million listings in nearly every country in the world. It reported a 33 per cent revenue growth in the third quarter of 2016, with annual gross merchandise sales of over US$2.4 billion. Etsy’s vibrant marketplace is more than an e-business site; it is a thriving community. For example, it sponsors actual and virtual meet-ups organised by location (from Syracuse to Saskatchewan and Singapore), medium (papier-mâché, mosaic), and interest area (Chainmailers Guild, Lizards and Lollipops). Etsy’s mission is ‘to reimagine commerce in ways that build a more fulfilling and lasting world’. It aims to build a platform where ‘creative entrepreneurs can find meaningful work selling their goods in both global and local markets, where thoughtful consumers can discover those goods and build relationships with the people who make and sell them’.11 Concentrated marketing can be highly profitable. At the same time, it involves higher-than-normal risks. Companies that rely on one or a few segments for all of their business will suffer greatly if the segment turns sour. Or larger competitors may decide to enter the same segment with greater resources. For these reasons, many companies prefer to diversify in several market segments.

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

Local marketing

Local marketing involves tailoring brands and promotions to the needs and wants of local customer groups – cities, neighbourhoods and even specific stores. For example, large retailers customise their merchandise on a regional basis to meet the needs of local shoppers. Advances in communications technology have given rise to a new high-tech version of locationbased marketing. By coupling mobile phone services with GPS devices, many marketers are now targeting customers wherever they are with what they want. For example, Starbucks’ Mobile Order and Pay feature on a mobile app uses a customer’s proximity to a store to enable the customer to order ahead, then just walk in and collect their purchase.12 Local marketing has some drawbacks, particularly in relatively small markets such as Australia and New Zealand. It can drive up manufacturing and marketing costs by reducing economies of scale. It can also create logistics problems as companies try to meet the varied requirements of different regional and local markets. Further, a brand’s overall image might be diluted if the product and message vary too much in different localities. Still, as companies face increasingly fragmented markets, and as new supporting technologies develop, the advantages of local marketing often outweigh the drawbacks. Local marketing helps a company to

micromarketing

The practice of tailoring products and marketing programs to the needs and wants of specific individuals and local customer segments – includes local marketing and individual marketing

local marketing

Tailoring brands and promotions to the needs and wants of local customer segments – cities, neighbourhoods and even specific stores.

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market more effectively in the face of pronounced regional and local differences in demographics and lifestyles. It also meets the needs of the company’s first-line customers – retailers – who prefer more finely tuned product assortments for their neighbourhoods.

individual marketing

Tailoring products and marketing programs to the needs and preferences of individual customers – also labelled ‘one-to-one marketing’, ‘customised marketing’ and ‘marketsof-one marketing’.

Individual marketing In the extreme, micromarketing becomes individual marketing – tailoring products and marketing programs to the needs and preferences of individual customers. Individual marketing has also been labelled one-to-one marketing, mass customisation and markets-of-one marketing. The widespread use of mass marketing has obscured the fact that, for centuries, consumers were served as individuals: the tailor custom-made a suit, the cobbler designed shoes for an individual, the cabinetmaker made furniture to order. Today, however, new technologies are permitting many companies to return to customised marketing. More-detailed databases, robotic production and flexible manufacturing, and interactive communication media, such as smartphones and the internet, have all combined to foster ‘mass customisation’. Mass customisation is the process through which firms interact one-to-one with masses of customers to design products and services tailor-made to individual needs. Dell creates custom-configured computers. Visitors to Nike’s NikeID website can personalise their sneakers by choosing from hundreds of colours and putting an embroidered word or phrase on the tongue. Marketers are also finding new ways to personalise promotional messages. For example, in overseas markets, plasma screens placed in shopping malls can now analyse shoppers’ faces and place ads based on an individual shopper’s gender, age or ethnicity: Watch an advertisement on a video screen in a mall, health club or grocery store and there is a growing chance that the ad is watching you too. Small cameras can now be embedded in or around the screen, tracking who looks at the screen and for how long. With surprising accuracy, the system can determine the viewer’s gender, approximate age range and, in some cases, ethnicity – and change the ads accordingly. That could mean razor ads for men, cosmetics ads for women and videogame ads for teens. Or a video screen might show a motorcycle ad for a group of men, but switch to a minivan ad when women and children join them. ‘This is proactive merchandising,’ says a media executive. ‘You’re targeting people with smart ads.’13 Business-to-business marketers are also finding new ways to customise their offerings. For example, John Deere manufactures seeding equipment that can be configured in more than 2 million versions to individual customer specifications. The seeders are produced one at a time, in any sequence, on a single production line. Mass customisation provides a way to stand out against competitors. Unlike mass production, which eliminates the need for human interaction, one-to-one marketing has made relationships with customers more important than ever. Just as mass production was the marketing principle of the past century, interactive marketing is becoming a marketing principle for the 21st century. The world appears to be coming full circle – from the good old days when customers were treated as individuals, to mass marketing when nobody knew your name, and back again.

Choosing a targeting strategy Companies need to consider many factors when choosing a market-targeting strategy. Which strategy is best depends on company resources. When the firm’s resources are limited, concentrated marketing makes the most sense. The best strategy also depends on the degree of product variability. Undifferentiated marketing is more suited to uniform products, such as grapefruit or steel. Products that can vary in design, such as cameras and cars, are more suited to differentiation or concentration. The product’s life-cycle stage also must be considered. When a firm introduces a new product, it may be practical to launch only one version, and undifferentiated marketing or concentrated marketing may

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make the most sense. In the mature stage of the product life cycle, however, differentiated marketing often makes more sense. Another factor is market variability. If most buyers have the same tastes, buy the same amounts and react the same way to marketing efforts, undifferentiated marketing is appropriate. Finally, competitors’ marketing strategies are important. When competitors use differentiated or concentrated marketing, undifferentiated marketing can be a high-risk strategy. Conversely, when competitors use undifferentiated marketing, a firm can gain an advantage by using differentiated or concentrated marketing, focusing on the needs of buyers in specific segments.

Socially responsible target marketing Smart targeting helps companies to be more efficient and effective by focusing on the segments that they can satisfy best and most profitably. Targeting also benefits consumers – companies serve specific groups of consumers with offers carefully tailored to their needs. However, target marketing sometimes generates controversy and concern. The biggest issues usually involve the targeting of vulnerable or disadvantaged consumers with controversial or potentially harmful products. For example, over the years, marketers in a wide range of industries – from cereal and toys to fast food and fashion – have been heavily criticised for their marketing efforts directed towards children. Critics worry that premium offers and high-powered advertising appeals presented through the mouths of lovable animated characters will overwhelm children’s defences. Various state and Commonwealth consumer affairs departments and citizen action groups have accused tobacco and beer companies of targeting underage smokers and drinkers. One US study found that more than a third of alcohol radio ads are more likely to be heard by underage listeners than by adults on a per capita basis.14 To encourage responsible advertising, the Australian Association of National Advertisers (AANA) publishes the industry Code of Ethics as the cornerstone of the self-regulatory system. This is supplemented by the Code of Advertising and Marketing to Children; Food and Beverages Code; Environmental Claims Code; and Wagering Advertising & Marketing Communication Code – to which all accredited agencies are expected to adhere.15 In effect, they have published extensive children’s advertising guidelines that recognise the special needs of child audiences. Still, critics believe that more should be done. Some have even called for a complete ban on advertising to children. Cigarette, beer, carbonated soft-drink and fast-food marketers have also generated controversy in recent years by their attempts to target low-income minority consumers, who are more likely than others to be heavy consumers. The growth of the internet and other carefully targeted direct media has raised fresh concerns about potential targeting abuses. The internet allows increased pinpointing of audiences and, in turn, more precise targeting. This might help makers of questionable products or deceptive advertisers to more readily victimise the most vulnerable audiences. Unscrupulous marketers may send tailor-made deceptive messages directly to the computers of millions of unsuspecting consumers despite spam filters and government legislation. Not all attempts to target children, minorities or other special segments draw such criticism. In fact, most provide benefits to targeted consumers. A Melbourne-based technology start-up company, Kisa, markets the KisaPhone directly to seniors who need a simpler mobile phone that has larger personalised tactile buttons, a dedicated SOS button for emergency services and a louder ringtone.16 And Colgate makes a large selection of toothbrush shapes and toothpaste flavours for children. Such products help make tooth brushing more fun and get children to brush for longer and more often. Thus, in target marketing, the issue is not really who is targeted but, rather, how and for what. Controversies arise when marketers attempt to profit at the expense of targeted segments – when they unfairly target vulnerable segments or target them with questionable products or tactics. Socially responsible marketing calls for segmentation and targeting that serve not just the interests of the company but also the interests of those targeted.

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Linking the concepts It is time to pause and review. ● At the last ‘Linking the concepts’, you segmented the Australian footwear market. Refer to Figure 6.2 (Market targeting strategies) and select two companies that serve the footwear market. Describe their segmentation and targeting strategies. ● Identify two companies serving the footwear market, one that targets many different segments and another that

focuses on only one or a few segments. How does each company that you chose differentiate its market offering and image? How effectively has each company established this differentiation in the minds of targeted consumers? The final section in this chapter deals with such positioning issues.

Differentiation and positioning (pp. 186–92)

product position

The complex set of perceptions, impressions and feelings that consumers have for the product compared with competing products.

Beyond deciding which segments of the market it will target, the company must decide on a value proposition – or how it will create differentiated value for targeted segments and what positions it wants to occupy in those segments. A product’s position is the way the product is defined by consumers on important attributes – that is, the place the product occupies in consumers’ minds relative to competing products. ‘Products are created in the factory, but brands are created in the mind,’ says a positioning expert.17 In the motor vehicle market, the Nissan Micra and Suzuki Swift are positioned on economy, Lexus and Mercedes-Benz on luxury, and Audi, BMW and Porsche on performance. Volvo positions powerfully on safety. And Toyota positions its fuel-efficient hybrid Camry and Prius models as a high-tech solution to the energy shortage. Consumers are overloaded with information about products and services. They cannot re-evaluate products every time they make a buying decision. To simplify the buying process, consumers organise products, services and companies into categories and ‘position’ them in their minds. A product’s position is the complex set of perceptions, impressions and feelings that consumers have for the product compared with competing products. Essentially, it is the way the product is defined by consumers on important attributes: the place the product occupies in consumers’ minds relative to competing products. Consumers position products with or without the help of marketers. But marketers do not want to leave their products’ positions to chance. They must plan positions that will give their products the greatest advantage in selected target markets, and they must design marketing mixes to create these planned positions.

Positioning maps In planning their differentiation and positioning strategies, marketers often prepare perceptual positioning maps, which show consumer perceptions of their brands versus competing products on important buying dimensions. Figure 6.3 shows a hypothetical positioning map for carbonated beverages in the 15- to 18-year-old segment. The position of each circle on the map indicates the brand’s perceived positioning on two dimensions – social acceptability with peers, and sweetness. The size of each circle indicates the brand’s relative market share. Thus, this age group perceives Coca-Cola as being the carbonated beverage to be seen consuming when drinking with friends. Pepsi is seen as being sweeter and less socially acceptable by this age group, while Solo is seen as low on sweetness and less socially acceptable. The perception of the Solo brand is perhaps understandable given its positioning in advertising with an older age group. Given the larger market share achieved by Coke, as shown by the size of the circle, we could conclude that among this age group, Coke is closest to the ideal brand.

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High

Social acceptability

Coca-Cola

Pepsi

Solo

Low

Sweetness

High

Figure 6.3  Positioning map: Carbonated beverages (15- to 18-year-olds)

Choosing a differentiation and positioning strategy Some firms find it easy to choose a differentiation and positioning strategy. For example, a firm well known for quality in certain segments will go for this position in a new segment if there are enough buyers seeking quality. But in many cases, two or more firms will go after the same position. Then, each will have to find other ways to set itself apart. Each firm must differentiate its offer by building a unique bundle of benefits that appeals to a substantial group within the segment. Above all else, a brand’s positioning must serve the needs and preferences of well-defined target markets. The differentiation and positioning task consists of three steps: (1) identifying a set of differentiating competitive advantages upon which to build a position; (2) choosing the right competitive advantages; and (3) selecting an overall positioning strategy. The company must then effectively communicate and deliver the chosen position to the market.

Identifying possible value differences and competitive advantages To build profitable relationships with target customers, marketers must understand customer needs better than competitors do and deliver more customer value. To the extent that a company can differentiate and position itself as providing superior customer value, it gains competitive advantage. But solid positions cannot be built on empty promises. If a company positions its product as offering the best quality and service, it must actually differentiate the product so that it delivers the promised quality and service. Companies must do much more than simply shout out their positions in ad slogans and taglines. They must first live the slogan. For example, if a department store conducts research and finds that customers place high value on an easier shopping experience, then it should ensure that the stores do indeed offer this experience. It would be wise to remake the stores to actually deliver the promised positioning – even if this meant a long delay to get it right.18

competitive advantage

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

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To find points of differentiation, marketers must think through the customer’s entire experience with the company’s product or service. An alert company can find ways to differentiate itself at every customer contact point. In what specific ways can a company differentiate itself or its market offer? It can differentiate along the lines of product, services, channels, people or image. Through product differentiation brands can be differentiated on features, performance, or style and design. Thus, Bose positions its speakers on their striking design and sound characteristics. By using the Heart Foundation’s Heart Smart tick, retailers differentiate different cuts of meat as being a healthy food choice. And so do brands such as McCain with their Potato Cubes, among other products. Beyond differentiating its physical product, a firm can also differentiate the services that accompany the product. Some companies gain services differentiation through speedy, convenient or careful delivery. For example, Lexus makes fine cars but is perhaps even better known for the quality service that creates outstanding ownership experiences for Lexus owners. In an age where customer satisfaction with airline service is in constant decline, Singapore Airlines sets itself apart through extraordinary customer care and the grace of its flight attendants. ‘When you’re able to meet the expectations of your customers, that’s normal service. However, if there’s an opportunity that arises to go beyond the expectation of a customer . . . to anticipate what a customer wants . . . To me, that’s good service,’ says a crewmember of the international airline. ‘I treat the aircraft as my home and every passenger that walks in through that door is my guest that I welcome into my home,’ says another.19 Firms that practise channel differentiation gain competitive advantage through the way they design their channel’s coverage, expertise and performance. Amazon.com sets itself apart with its smooth-functioning direct channel. Companies can also gain a strong competitive advantage through people differentiation – hiring and training better people than their competitors do. Singapore Airlines enjoys an excellent reputation, largely because of its flight attendants. People differentiation requires that a company selects its customer-contact people carefully and trains them well. For example, Disney trains its theme-park people thoroughly to ensure they are competent, courteous and friendly – from the hotel check-in agents, to the monorail drivers, to the ride attendants, to the people who sweep Main Street, USA. Each employee is carefully trained to understand customers and to ‘make people happy’. Even when competing offers look the same, buyers may perceive a difference based on company or brand image differentiation. A company or brand image should convey the product’s distinctive benefits and positioning. Developing a strong and distinctive image calls for creativity and hard work. A company cannot develop an image in the public’s mind overnight using only a few advertisements. If Sofitel means quality, this image must be supported by everything the company says and does in its luxury hotels. Symbols – such as McDonald’s’ golden arches, the Nike swoosh, the Commonwealth Bank’s yellow-and-black rendition of the Southern Cross constellation or Google’s colourful logo – can provide strong company or brand recognition and image differentiation. The company might build a brand around a famous person, as Nike did with its Air Jordan basketball shoes and Tiger Woods golfing products. Some companies even become associated with colours, such as IBM (blue), Cadbury Commonwealth Bank logo: One of Australia’s most widely recognised brands is a rendition of the Southern Cross (purple) or Coca-Cola (red). The chosen symbols, characters constellation. and other image elements must be communicated through Commonwealth Bank advertising that conveys the company’s or brand’s personality.

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

How many differences to promote Many marketers think that companies should aggressively promote only one benefit to the target market. Advertising executive Rosser Reeves, for example, believes a company should develop a unique selling proposition (USP) for each brand and stick to it. Each brand should pick an attribute and tout itself as ‘number one’ on that attribute. Buyers tend to remember number one better, especially in our society where we receive so many communications each day.20 Thus, Big W promotes its everyday savings and Commonwealth Bank promotes its positive power for customers with its ‘can’ campaign. Other marketers think that companies should position themselves on more than one differentiator. This may be necessary if two or more firms are claiming to be best on the same attribute. Today, in a time when the mass market is fragmenting into many small segments, companies are trying to broaden their positioning strategies to appeal to more segments. For example, Microsoft recently introduced a campaign for its Windows 10 PC, featuring ‘Meet the bug chicks’ (see ). The ad shows how two entomologists can use the new PC, which features a touch screen that one of the actors is jealous of because ‘I don’t have a touch screen on my Mac’. Clearly, many buyers want these multiple benefits. The challenge will be for Microsoft to convince consumers that their one brand can do it all. However, as companies increase the number of claims for their brands, they risk disbelief and a loss of clear positioning. Which differences to promote Not all brand differences are meaningful or worthwhile; not every difference makes a good differentiator. Each difference has the potential to create company costs as well as customer benefits. A difference is worth establishing to the extent that it satisfies the following criteria: • Important: The difference delivers a highly valued benefit to target buyers. • Distinctive: Competitors do not offer the difference, or the company can offer it in a more distinctive way. • Superior: The difference is superior to other ways in which customers might obtain the same benefit. • Communicable: The difference is communicable and visible to buyers. • Pre-emptive: Competitors cannot easily copy the difference. • Affordable: Buyers can afford to pay for the difference. • Profitable: The company can introduce the difference profitably. Many companies have introduced differentiations that failed one or more of these tests. When the Westin Stamford Hotel in Singapore once advertised that it was the world’s tallest hotel, it was a distinction that was not important to most tourists – in fact, it turned many off. Polaroid’s Polarvision, which produced instantly developed home movies failed too. Less-for-much less: Accor revolutionised the budget hotel sector by Although Polarvision was distinctive and even pre-emptive, launching the standardised HotelF1 product, emphasising value and consistency. it was inferior to another way of capturing motion – namely, Nik Wheeler/Corbis camcorders.

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Thus, choosing competitive advantages upon which to position a product or service can be difficult, yet such choices may be crucial to the brand’s success. Choosing the right differentiators can help a brand to stand out from the pack of competitors, as the example of Accor Group’s HotelF1, which offers a ‘less-for-much-less’ value strategy, illustrates (see Mini case 6.2).

Selecting an overall positioning strategy value proposition

The full positioning of a brand – the full mix of benefits upon which it is positioned.

The full positioning of a brand is called the brand’s value proposition – the full mix of benefits upon which the brand is differentiated and positioned. It is the answer to the customer’s question, ‘Why should I buy your brand?’. Volvo’s value proposition hinges on safety but also includes reliability, roominess and styling, all for a price that is higher than average but seems fair for this mix of benefits. Figure 6.4 shows possible value propositions upon which a company might position its products. In the figure, the five green cells represent winning value propositions – differentiation and positioning that give the company competitive advantage. The blue cells, however, represent losing value propositions. The centre yellow cell represents, at best, a marginal proposition. In the following sections, we discuss the five winning value propositions upon which companies can position their products: (1) more for more, (2) more for the same, (3) the same for less, (4) less for much less and (5) more for less.

More for more ‘More-for-more’ positioning involves providing the most prestigious product or service and charging a higher price to cover the higher costs. Sofitel Luxury Hotels, Mont Blanc writing instruments, Mercedes-Benz motor vehicles, Miele cooking appliances – each claims superior quality, craftsmanship, durability, performance or style, and charges a price to match. The market offering not only is high in quality, but also gives prestige to the buyer. It symbolises status and a loftier lifestyle. Often, the price difference exceeds the actual increment in quality. Sellers offering ‘only the best’ can be found in every product and service category, from hotels, restaurants, food and fashion, to cars and household appliances. Consumers are sometimes surprised, even delighted, when a new competitor enters a category with an unusually high-priced brand. When Apple premiered its iPhone, it offered higher-quality user features than a traditional mobile phone, with a hefty price tag to match.

BENEFITS

More

The same

Less

More

PRICE The same

Less

More for more

More for the same

More for less

The same for less

Less for much less

Figure 6.4  Possible value propositions

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In general, companies should be on the lookout for opportunities to introduce a ‘more-for-more’ brand in any underdeveloped product or service category. Yet, ‘more-for-more’ brands can be vulnerable. They often invite imitators who claim the same quality but at a lower price. For example, in the eyes of many users, smartphones, such as the Google Pixel and Samsung Galaxy S7 Edge, offer even more desirable features than the iPhone does. Also, luxury goods that sell well during good times may be at risk during economic downturns, when buyers become more cautious in their spending. The gloomy economy of recent years hit premium brands, such as Starbucks, the hardest.

More for the same Companies can attack a competitor’s more-for-more positioning by introducing a brand offering comparable quality but at a lower price. For example, Toyota introduced its Lexus line with a ‘morefor-the-same’ value proposition versus Mercedes-Benz and BMW. Its first North American ad headline read: ‘Perhaps the first time in history that trading a $72,000 car for a $36,000 car could be considered trading up.’ It communicated the high quality of its new Lexus through rave reviews in car magazines and through a widely distributed video that showed side-by-side comparisons of Lexus and Mercedes-Benz automobiles. It published surveys showing that Lexus dealers were providing customers with better sales and service experiences than Mercedes-Benz dealerships were. Many Mercedes-Benz owners switched to Lexus, and the Lexus repurchase rate rose to 60 per cent, twice the industry average. More recently, by introducing more advanced technologies and architecture, Lexus is targeting those who might seek greater performance, design and fun and who might otherwise have become an Audi or BMW customer. The same for less Offering ‘the same for less’ can be a powerful value proposition – everyone likes a good deal. Discount stores such as Big W, and ‘category killers’ such as Bunnings, use this positioning. They do not claim to offer different or better products. Instead, they offer many of the same brands as department stores and specialty stores do but at deep discounts based on superior purchasing power and lower-cost operations. Other companies develop imitative but lower-priced brands in an effort to lure customers away from the market leader. For example, AMD makes less-expensive versions of Intel’s market-leading microprocessor chips. Less for much less A market almost always exists for products that offer less and therefore cost less. Few people need, want or can afford ‘the very best’ in everything they buy. In many cases, consumers will gladly settle for lessthan-optimal performance or give up some product features in exchange for a lower price. For example, many travellers seeking lodgings prefer not to pay for what they consider unnecessary extras, such as a pool, attached restaurant or mints on the pillow. Hotel chain Accor suspends some of these amenities in its HotelF1 hotels and charges less accordingly (see Mini case 6.2). ‘Less-for-much-less’ positioning involves meeting consumers’ lower performance or quality requirements at a much lower price. For example, Two Dollar shops offer more affordable goods at very low prices. The Reject Shop and Costco warehouse stores offer less merchandise selection and consistency and much lower levels of service; as a result, they charge rock-bottom prices. Tigerair and Jetstar also practise less-for-much-less positioning. More for less Of course, the winning value proposition would be to offer ‘more for less’. Many companies claim to do this. And, in the short run, some companies can actually achieve such lofty positions. Yet, in the long run, companies will find it very difficult to sustain such best-of-both positioning. Offering more usually costs more, making it difficult to deliver on the ‘for-less’ promise. Companies that try to deliver both may lose out to more-focused competitors.

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When all is said and done, each brand must adopt a positioning strategy designed to serve the needs and wants of its target markets. ‘More for more’ will draw one target market, ‘less for much less’ will draw another, and so on. Thus, in any market, there is usually room for many different companies, each successfully occupying different positions. The important thing is that each company must develop its own winning positioning strategy, one that makes it special to its target consumers.

Developing a positioning statement positioning statement

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

Company and brand positioning should be summed up in a positioning statement. The statement should follow the form: To (target segment and need) our (brand) is (concept) that (point of difference).21 For example: ‘For every athlete, Nike’s experience and expertise ensures that you have the perfect shoe for your sport.’ Note that the positioning first states the product’s membership in a category (athletics, sport) and then shows its point of difference from other members of the category (experience, expertise, perfection). Placing a brand in a specific category suggests similarities that it might share with other products in the category – but the case for the brand’s superiority is made on its points of difference.

Communicating and delivering the chosen position Once it has chosen a position, the company must take strong steps to deliver and communicate the desired position to target consumers. All the company’s marketing mix efforts must support the positioning strategy. Positioning the company calls for concrete action, not just talk. If the company decides to build a position on better quality and service, it must first deliver that position. Designing the marketing mix involves working out the tactical details of the positioning strategy. Thus, a firm that seizes on a morefor-more position knows that it must produce high-quality products, charge a high price, distribute through high-quality dealers and advertise in high-quality media. It must hire and train more service people, find retailers who have a good reputation for service, and develop sales and advertising messages that broadcast its superior service. This is the only way to build a consistent and believable more-formore position. Companies often find it easier to come up with a good positioning strategy than to implement it. Establishing or changing a position usually takes a long time. In contrast, positions that have taken years to build can quickly be lost. Once a company has built the desired position, it must take care to maintain it through consistent performance and communication. It must closely monitor and adapt the position over time to match changes in consumer needs and competitors’ strategies. However, the company should avoid abrupt changes that might confuse consumers. Instead, a product’s position should evolve gradually as it adapts to the ever-changing marketing environment.

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Student Learning Centre Reviewing the learning objectives

193

approaches, situational factors and personal characteristics. The effectiveness of segmentation analysis depends on finding segments that are measurable, accessible, substantial, differentiable and actionable.

Learning Objective 3. Explain how companies identify attractive market segments and choose a market-targeting strategy. (pp. 180–86) To target the best market segments, the company first evaluates each segment’s

In this chapter, you have learned about the main elements of a customer-driven

size and growth characteristics, structural attractiveness, and compatibility with

marketing strategy: segmentation, targeting, differentiation and positioning.

company objectives and resources. It then chooses one of four market-targeting

Marketers know that they cannot appeal to all buyers in their markets, or at

strategies – ranging from very broad to very narrow targeting. The seller can

least not to all buyers in the same way. Therefore, most companies today practise

ignore segment differences and target broadly using undifferentiated (or mass)

target marketing – identifying market segments, selecting one or more of them,

marketing. This involves mass-producing, mass-distributing and mass-promoting

and developing products and marketing mixes tailored to each.

the same product in much the same way to all consumers. Or the seller can adopt differentiated marketing – developing different market offers for several

Learning Objective 1. Define the main steps in designing a customer-driven marketing strategy: market segmentation, targeting, differentiation and positioning. (p. 170) Customer-driven marketing strategy begins with selecting which customers to serve and deciding on a value proposition that best serves the targeted customers. It consists of four steps. Market segmentation is the act of analysing the bases upon which it might be best to divide a market into distinct segments of buyers with different needs, characteristics or behaviours who might require separate products or marketing mixes. Once the groups have been identified, market targeting evaluates each market segment’s attractiveness and selects one or more segments to serve. Market targeting consists of designing strategies to build the right relationships with the right customers. Differentiation involves actually differentiating the market offering to create superior customer value. Positioning consists of positioning the market offering in the minds of target customers.

Learning Objective 2. List and discuss the main bases for segmenting consumer and business markets. (pp. 171–80) There is no single way to segment a market. Therefore, the marketer tries different variables to see which provide the best segmentation opportunities. For consumer marketing, the main segmentation variables are geographic, demographic, psychographic and behavioural. In geographic segmentation, the market is

segments. Concentrated (or niche) marketing involves focusing on only one or a few market segments. Finally, micromarketing is the practice of tailoring products and marketing programs to suit the tastes of specific individuals and locations. Micromarketing includes local marketing and individual marketing. Which targeting strategy is best depends on company resources, product variability, product life-cycle stage, market variability and competitive marketing strategies.

Learning Objective 4. Discuss how companies differentiate and position their products for maximum competitive advantage. (pp. 186–92) Once a company has decided which segments to enter, it must decide on its differentiation and positioning strategy. The differentiation and positioning task consists of three steps: (1) identifying a set of possible differentiations that create competitive advantage; (2) choosing advantages upon which to build a position; and (3) selecting an overall positioning strategy. The brand’s full positioning is called its value proposition – the full mix of benefits upon which the brand is positioned. In general, companies can choose from one of five winning value propositions upon which to position their products: more for more, more for the same, the same for less, less for much less, or more for less. Company and brand positioning are summarised in positioning statements that state the target segment and need, positioning concept and specific points of difference. The company must then effectively communicate and deliver the chosen position to the market.

divided into different geographical units, such as nations, regions, states, local

Discussion questions

government areas, cities or neighbourhoods. In demographic segmentation, the

❶ Market segmentation and market targeting. How does market

market is divided into groups based on demographic variables, including age,

segmentation differ from market targeting? (Learning Objective 1) (AACSB:

gender, family size, family life cycle, income, occupation, education, religion, race,

Communication; Reflective Thinking)

generation and nationality. In psychographic segmentation, the market is divided

❷ Marketers do not segment markets … they are already segmented. Do you

into different groups based on social class, lifestyle or personality characteristics.

agree with this statement? Explain your reasoning. (Learning Objective 1)

In behavioural segmentation, the market is divided into groups based on consumers’ knowledge, attitudes, uses or responses to a product.

(AACSB: Communication; Reflective Thinking) ❸ Demographic and psychographic segmentation. Compare and contrast

Business marketers use many of the same variables to segment their

demographic segmentation and psychographic segmentation. Which is

markets. But business markets also can be segmented by business consumer

more useful to marketers? Justify your answer. (Learning Objective 2)

demographics (industry, company size), operating characteristics, purchasing

(AACSB: Communication; Reflective Thinking)

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❹ Positioning strategies. Some managers say that positioning is far more

❸ Hydrographics presents an idea for a new business in Australia and New

important than segmentation or targeting. What is your view of this

Zealand. First, research hydrographics at . Using the steps described in the chapter, identify relevant

Reflective Thinking)

target markets, then develop a customer-driven marketing strategy. Describe

❺ Market targeting levels. Name and describe the levels at which market

your strategy and conclude with a positioning statement for this business.

targeting can be carried out. Give an example of a company using

(Learning Objectives 3 and 4) (AACSB: Communication; Use of IT; Analytical

each. (Learning Objective 3) (AACSB: Communication; Reflective

Thinking; Reflective Thinking)

Thinking) ❺ Target market of one. The argument some put forward is that by using the internet and the web, every customer can be treated as an individual and receive a custom-made product. Do you agree or disagree? Justify your

Navigating the key terms

answer. (Learning Objectives 2, 3 and 4) (AACSB: Communication; Use of IT;

Learning Objective 1

occasion segmentation  (p. 176)

Reflective Thinking)

(see Figure 6.1 for abridged

psychographic segmentation  (p. 176)

definitions)

Critical thinking exercises ❶ Visit a supermarket and examine the brands of breakfast cereal on offer. Using the bases for segmenting consumer markets, identify the segmentation variables a specific brand, such as Uncle Toby’s Calcium Plus, appears to be using. Summarise the segmentation and targeting strategy

differentiation  (p. 170) market segmentation  (p. 170) market targeting (targeting)  (p. 170) positioning  (p. 170)

for this brand. Identify other brands with a similar positioning strategy(ies).

Learning Objective 2

(Learning Objective 1) (AACSB: Communication; Reflective Thinking)

age and life-cycle segmentation 

❷ Various companies, such as Toyota, Nissan and BMW, are introducing

(p. 172)

Learning Objective 3 concentrated (niche) marketing  (p. 182) differentiated (segmented) marketing  (p. 182) individual marketing  (p. 184) local marketing  (p. 183) micromarketing  (p. 183) target market  (p. 181) undifferentiated (mass) marketing 

hybrid technology-powered cars to suit the needs of various target markets.

behavioural segmentation  (p. 176)

In a small group, identify the various models of hybrid cars offered in your

benefit segmentation  (p. 177)

marketplace. Discuss the likely profiles of the target markets for these

demographic segmentation  (p. 172)

vehicles. For example, do you think that BMW’s i8 is targeting a different

gender segmentation  (p. 173)

competitive advantage  (p. 187)

target market from Mitsubishi Motor’s MiEV electric car? Justify your answer.

geographic segmentation  (p. 172)

positioning statement  (p. 192)

(Learning Objective 2) (AACSB: Communication; Analytical Thinking;

income segmentation  (p. 173)

product position  (p. 186)

Reflective Thinking)

intermarket segmentation  (p. 179)

value proposition  (p. 190)

(p. 181)

Learning Objective 4

Mini cases 6.1 Target marketing Targeting markets of one to make many Australia’s population really is much more homogeneous than

would not be sustainable due to the size and composition of the

the populations of many other countries, even the United States.

local market.

Yes, there are conclaves of various cultural groups in both urban and

US department stores also allow customisation to suit local markets.

regional areas. For example, Griffith, in regional New South Wales,

For example, Macy’s – the second-largest US department-store chain

has a large Italian population, which explains the focus on such

– permits its 1600 distant managers around the country to meet local

agricultural pursuits as vineyards and wine production. However,

needs with specialised assortments. In one Christmas trading period,

there are so many cultural groups in Australia that there is more of

Macy’s in Memphis stocked Elvis Presley Christmas ornaments, as it

a blending than occurs in the United States, where one might find

seems the locals still cannot get enough of their hometown King of Rock

even Walmart – the world’s largest chain – offering particular formats

’n’ Roll.

tailored to specific types of geographic locations. Australian retailers

Today, though, many organisations practise mass customisation – using

do follow some US practices, such as offering smaller Woolworths

technology to tailor offers made to a mass market. If you visit the website

stores and even smaller Coles Express stores where full-size stores

of Macy’s Memphis from a country such as Australia or New Zealand, you

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will find that their web servers use the IP lookup services to identify where

❸ Have you experienced ‘target markets of one’, either as a marketer or

you are located and offer you flat-fee shipping on a Christmas present

as a consumer? In what ways are these ‘target markets of one’ similar

purchase.

to or different from the examples provided in this mini case study?

Catering to markets of one is a similar value-adding marketing strategy, as Amazon.com’s marketing exemplifies. If you buy Kindle

(Learning Objectives 1, 2 and 3) (AACSB: Communication; Analytical Thinking; Reflective Thinking)

ebooks on a regular basis, you will no doubt develop a list of favourite authors and favourite genres. Let us take the example of a digital-book reader who is hooked on books set in the Florida Keys – Key West, in particular – and the surrounding Caribbean islands. Having read one of the Matt Royal series by H. Terrell Griffin, the reader will find that Amazon uses collaborative filtering technology to generate a list of recommended books by various authors, and then uses this information to recommend similar books to other readers of any books set in the Keys and the Caribbean. Amazon will even advise the reader when a new book is to be published, thus allowing pre-orders. In this way, target markets of one add up to become many. This form of consumer-to-consumer advocacy is also practised by Tripadvisor.com, when travellers advise of their positive and negative experiences in places they have stayed, eaten and played. So, when you next buy an ebook, visit a restaurant or engage in some other activity and leave a review, remember that you are helping others as well as yourself, and turning markets of one into many.22 ❶ Do you agree with the authors’ contention that Australia’s population is much more homogeneous than that of the United States? (Hint: See .) (Learning Objectives 1, 2 and 3) (AACSB: Analytical Thinking; Reflective Thinking; Diverse and David Grossman/Alamy

Multicultural Environments) ❷ Can you provide other examples of mass customisation? If so, what is/are the basis(es) for identifying segments that are targeted by the marketing organisations concerned? (Learning Objectives 1, 2 and 3) (AACSB: Analytical Thinking; Reflective Thinking)

6.2 Differentiation Ibis Budget offers a ‘less-for-much-less’ value proposition Not everyone can afford to stay at three- to five-star hotels. What are the

budget. France-based Accor is one of the world’s largest hotel groups, with

alternatives – caravan parks, motels, pubs or bed and breakfast places?

over 4000 hotels in 100 countries, including over 700 hotels in the Asia-

As good as these can be, we can never foresee the standard of the next

Pacific under the brands of Raffles, Fairmont, Sofitel, onefinestay, Pullman,

accommodation as we travel from place to place. The market segmentation

MGallery, Swissotel, Grand Mercure, Sebel, Novotel, Mercure, Mama Shelter,

and positioning studies of key hotel chains have indicated a series of

adagio, Ibis and HotelF1.

distinctive segments in the marketplace – for example, the luxury segment,

While Accor is unique among hotel groups in that it covers the full

the business-traveller segment, the value-for-money segment, the segment

spectrum of the market, the group has, in particular, been a pioneer in the

that values leisure activities, and those who value proximity to main city

mid-market, economy and budget sectors. After identifying a significant gap

landmarks and attractions. Are there other segments? Yes!

and opportunity in the budget travel segment, Accor developed a brand-

The Accor Group realised some years ago that the need for budget

new concept, first in France (its home base), specifically targeted and

accommodation was not successfully serviced by any of the large hotel

positioned for this market segment. The HotelF1 concept (as it is branded

groups. And, as the tourism market expanded with low airfares, an ever-

in France), which culminated in the opening of Ibis Budget branded hotels

growing number of travellers were those with young children on a shoestring

in Australia, Belgium, the United Kingdom, Spain, India and more than

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6.2 Differentiation continued 17 other countries, is based on providing a highly affordable and standardised

would preclude them from booking overnight accommodation or perhaps

product in key commercial areas, close to major transport arteries.

from planning a holiday trip at all.23

The brand has been called the ‘McDonald’s of hotel accommodation’,

❶ Identify the target markets that might find Ibis Budget Hotels appealing.

with most rooms identical (offering a queen-size bed and bunk beds plus

(Learning Objectives 2, 3 and 4) (AACSB: Analytical Thinking; Reflective

en suite bathroom with extra-large showers), including an all-you-can-

Thinking; Diverse and Multicultural Environments)

eat breakfast and with a daily tariff displayed in front of the hotel’s entry.

❷ How does Accor differentiate its Ibis Budget Hotels offering from other

The Ibis Budget offer is based on price per room. Each room can sleep up to

offerings in its portfolio? (Learning Objectives 2, 3 and 4) (AACSB:

three (sometimes four) people, and the tariff in Australia is usually between $69 and $109 per night, depending on the location. The main objective

Communication; Analytical Thinking; Reflective Thinking) ❸ Looking at the range of accommodation options provided by the

behind developing this new concept was to be able to extend into the

Accor group (do visit their website), might the positioning of the Ibis

previously underserviced market of budget travellers. It focuses on individuals,

Budget Hotel chain cannibalise sales from other chains managed by

couples and families travelling to a destination and needing to stop over

this group? Why, or why not? (Learning Objectives 2, 3 and 4) (AACSB:

for the night, particularly along major transport routes. Standard hotel rates

Communication; Analytical Thinking; Reflective Thinking)

6.3  Marketing analytics at work Defence Health Defence Health () was established in 1953

July 2016 saw Defence Health attract their 120  000th member.

to support members of the Australian Defence Forces (ADF) and the wider

According to the Australian Department of Defence, there are currently

defence community in their private health-insurance needs. The members

about 60 000 active ADF personnel, with approximately 45 000 reservists

they serve include members of the ADF, their partners, children and extended

standing by. As of December 2015, there were 170 000 registered returned

families, as well as returned servicemen and servicewomen, and those who

servicemen and servicewomen. There are also 18 000 staff who work in the

have supported ADF serving personnel, such as past and present staff of the

Department of Defence to support the ADF.24

Department of Defence and other Defence-related departments. They pride

❶ Assuming the annual cost of private health insurance is $900 and

themselves on understanding the extra needs their members have – for

that potential customers purchase one policy per year, use the chain

example, when one parent is deployed overseas and on the move, there

ratio method described in Appendix 3, Analytic measure 6.2 (‘Demand

can be long periods when there is only one parent in the home. Defence

estimates’), to calculate the market potential for private health insurance

Health provide tailor-made private health-insurance packages to meet

in the ADF market. (Learning Objective 3) (AACSB: Analytical Thinking)

their members’ particular needs. The many industry and consumer awards

❷ Discuss the factors used to evaluate the attractiveness of the ADF and

they have won indicate their members are quite satisfied by their market

community segment described here. (Learning Objectives 2, 3) (AACSB:

offerings.

Communication, Analytical Thinking; Reflective Thinking)

6.4  Ethical reflection Targeting very young consumers You would never know that consumers are more frugal these days if you

a T-shirt, jeans, a belt with the trademark double-G, a raincoat and boots

looked at the new children’s lines from fashion houses such as Fendi,

will set Mum and Dad back about $1500. A Burberry tailored coat for

Versace and Gucci. Toddler high fashion is not new, but designers are

a baby runs at $710, a bargain compared to Mum’s matching $2895

taking it to new levels and extending it beyond special-occasion clothing

coat. The CEO of the Young Versace brand sees growth in this market and

to everyday wear. In the past, some of the little girls marching down

anticipates this brand making up 10 per cent of the company’s global

fashion runways carried dolls with matching outfits. But this year, many

sales in only a few years.

of the children’s fashions are geared around matching their parents’

What (if any) ethical issues are relevant to this type of target marketing?

clothing. Jennifer Lopez and her little ones helped Gucci launch a line

How do you feel about this type of target marketing from a personal point

for babies and children aged 2 to 8 years. A Gucci children’s outfit with

of view?

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References

1 Mark Clothier, ‘Why Harley is showing its feminine side’, Bloomberg Businessweek, 4–10 October 2010, pp. 25–6; ; ; ; and ; all accessed November 2016. 2 Quotes from ‘The World: Residences at sea’ website. See , accessed November 2016. 3 John Waggoner, ‘Even the wealthy feel tapped out’, USA Today, 2 February 2009, p. B1. 4 GreenShareCar, ; FlexiCar, ; GoGet, ; Melbourne Bike Share, ; all accessed November 2016; also see Emily Stewart, ‘Bike sharing … why Europe is streets ahead of Australia’, ABC News, 7 August 2013. 5 Information from P&O Cruises, , accessed November 2016. 6 See Bounty Bags, , accessed November 2016. 7 See James Vincent, ‘PS4 sales top one million in most successful console launch ever’, Belfast Telegraph, 19 November 2013; Julia Alexander, ‘Sony has sold more than 40 million PlayStation 4 units worldwide’, 26 May 2016, , accessed November 2016. 8 See Michael Porter, Competitive Advantage, Free Press: New York, 1985, pp. 4–8, 234–6. For more recent discussions, see Kenneth Sawka & Bill Fiora, ‘The four analytical techniques every analyst must know: 2. Porter’s five forces analysis’, Competitive Intelligence Magazine, May–June 2003, p. 57; and Philip Kotler & Kevin Lane Keller, Marketing Management, 14th edn, Prentice Hall: Upper Saddle River, NJ, 2012, p. 232. 9 See NightOwl at , accessed November 2016. 10 For the full range of Coca-Cola Amatil’s drink brands, see ; for the full range of PepsiCo’s drink brands, see ; both accessed November 2016. 11 Adapted from information found in Linda Tischler, ‘The fast company 50 – 2009: Etsy’, Fast Company, 11 February 2009; Max Chafkin, ‘Rob’s world’, Inc., April 2011, pp. 56–64; and , , accessed November 2016. 12 See Michael Jones, ‘3 ways location-based marketing is shaping retail in 2016’, Forbes, 3 May 2016, ; and ; accessed November 2016. 13 Adapted from information found in ‘When you watch these ads, the ads check you out’, New York Times, 31 January 2009. See also , accessed November 2016. 14 Katy Bachman, ‘Study: Radio alcohol ads reaching young ears’, Mediaweek, 18 September 2007. 15 See the Australian Association of National Advertisers codes concerning standards under self-regulation which complement government regulations, , accessed November 2016. 16 See , accessed November 2016. 17 Jack Trout, ‘Branding can’t exist without positioning’, Advertising Age, 14 March 2005, p. 28. 18 Based on information found in Michael Myser, ‘Marketing made easy’, Business 2.0 Magazine, 7 June 2006, pp. 43–4. 19 Quotes from Singapore Airlines, ‘Understanding your needs’, , accessed November 2016. 20 Also see Andrew S C Ehrenberg, Gerald J Goodhardt & T Patrick Barwise, ‘Double jeopardy revisited’, Journal of Marketing, 54, July 1990, pp. 82–91. 21 See Bobby J Calder & Steven J Reagan, ‘Brand design’, in Dawn Iacobucci (ed.), Kellogg on Marketing, John Wiley & Sons: New York, NY, 2001, p. 61. For more discussion, see Philip Kotler & Kevin Lane Keller, Marketing Management, 14th edn, Prentice Hall: Upper Saddle River, NJ, 2012, chapter 10. 22 See Macy’s Memphis website at ; also see ‘Islands’ at , accessed November 2016. 23 ‘Accor launches its first Formule 1 hotel in India, plans to open 10 more by the end of 2013’, India Hospitality Review, 2 April 2013; see also Accor Hotels at , HotelF1 at , Ibis Budget Hotels at , and Ibis Budget Australia at ; all accessed November 2016. 24 See The Australian Government Department of Defence, Defence Portfolio Budget Statements 2015–16, Commonwealth of Australia: Canberra, 2015, ; and Returned Services League of Australia, National Annual Report 2015, ; both accessed November 2016.

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Chapter

7

Products, services and brands: Offering customer value In their quest to create customer relationships, marketers must build and manage products and brands that connect with customers. This chapter begins with a deceptively simple question: What is a product? After addressing this question, we look at ways to classify products in consumer and business markets. We then discuss the important decisions that marketers make regarding individual products, product lines and product mixes. Next, we examine the characteristics and marketing requirements of a special form of product – services. Finally, we look into the critical issue of how marketers build and manage brands. For a visual representation of the chapter, please see the concept map on the following page.

Learning

Objectives

Learning Objective 1 Define product and the main classifications of products and services. What is a product?  pp. 200–5 Learning Objective 2 Describe the decisions companies make regarding their individual products and services, product lines and product mixes. Product and service decisions  pp. 205–13 Learning Objective 3 Identify the four characteristics that affect the marketing of a service and the additional marketing considerations that services require. Services marketing  pp. 213–18 Learning Objective 4 Describe the brand strategy companies use to build and manage their brands. Branding strategy: Building strong brands  pp. 218–24

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Chapter 7  Products, services and brands: Offering customer value

e product classifi ing th cat d n e ion t x E Ser vic es

ds Goo

Com mo dit ies

LO 2

CUSTOMER Quality VALUE Design

uct

Warranty

ng

li n e a

Lab

Packaging

elli

n d pro d u ct m ix d

e

ng

io cis

ns

lity Brand positioning

BRANDING

Brand development

nd hip Bra sors n spo

Bra n sele d nam ctio e n

Var ia

i rab

epa

bili

ty

SERVICES Peris hability Ins

Describe the brand strategies companies use to build and manage their brands. (pp. 218–24)

ility

Intangib

od

ndi

Pr su odu c pp t or t

ct du s Pro ib ute a ttr

LO 3

Packaging

Product support Bra

Pr

LO 4

Delivery After-sale Actual product and service credit Brand Features name CORE

level

Describe the decisions companies make regarding their individual products and services, product lines and product mixes. (pp. 205–13)

Identify the four characteristics that affect the marketing of a service and the additional marketing considerations that services require. (pp. 213–18)

Augmented product

INTANGIBLE

TANGIBLE

Define product and the main classifications of products and services. (pp. 200–5)

E

ces en eri xp

LO 1

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Part 3  Designing a customer-driven strategy and mix

What is a product? (pp. 200–5) product

Anything that can be offered to a market for attention, acquisition, use or consumption that might satisfy a want or need.

service

An activity, benefit or satisfaction offered for sale that is essentially intangible and does not result in the ownership of anything.

We define a product as anything that can be offered to a market for attention, acquisition, use or consumption that might satisfy a want or need. Products include more than just tangible objects, such as cars, computers or mobile phones. Broadly defined, ‘products’ also include services, events, persons, places, organisations and ideas, or mixes of these. Throughout this book, we use the term product broadly to include any or all of these entities. Thus, an Apple iPhone, a Volkswagen Golf, a caffé latte at Gloria Jean’s, a trip to Auckland, your Pinterest page and a check-up from your family doctor are all products. Because of their importance in the world economy, we give special attention to services. Services are a form of product that consists of activities, benefits or satisfactions offered for sale that are essentially intangible and do not result in the ownership of anything. Examples are banking, hotel, airline, retail, wireless communication and home-repair services. We look at services more closely later in this chapter.

Products, services and experiences

Product is a key element in the overall market offering. Marketing-mix planning begins with building an offering that brings value to target customers. This offering becomes the basis upon which the company builds profitable customer relationships. A company’s market offering often includes both tangible goods and services. At one extreme, the offer may consist of a pure tangible good, such as soap, toothpaste or salt – little or no services accompany the product. At the other extreme are pure services, for which the offer consists primarily of a service. Examples include a doctor’s consultation or financial services. Between these two extremes, however, many combinations of goods and services are possible. Today, as products and services become more commoditised, many companies are moving to a new level in creating value for their customers. To differentiate their offers, beyond simply making products and delivering services, they are creating and managing customer experiences with their brands or company. Experiences have always been an important part of marketing for some companies. Disney has long manufactured dreams and memories through its movies and theme parks. And Nike has long declared, ‘It’s not so much the shoes but where they take you.’ Today, however, all kinds of firms are recasting their traditional goods and services to create experiences. For example, a visit to Bunnings Warehouse involves a lot more than just picking up paint or garden equipment. Homemakers roam through the store pushing shopping carts big enough to carry an armchair and sipping a coffee purchased from the in-store barista while their children are happily engaged at the in-store playground. The store offers over 45 000 hardware, homemaking and garden goods, along with services ranging from colour consultations for decorators to courtesy trailer hire, gas bottle refills and key cutting. Not unexpectedly, the store also provides a full range of DIY brochures and in-store DIY training sessions. But who would have thought they would hold a workshop with the local police to engrave tools and advise tradespeople how to reduce theft? On its website, Creating experiences: Bunnings Warehouse creates customer experiences by offering everything from paint and hardware to Bunnings claims that ‘Lowest prices are just the beginning . . .’ entertainment for children. and that it aims to provide the ‘best service’ to ‘earn the right to Simon Kenny/AAP serve our customers tomorrow and into the future’.1

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Companies that market experiences realise that customers are really buying much more than just products and services. They are buying what those offers will do for them. ‘A brand, product, or service is more than just a physical thing. Humans that connect with the brand add meaning and value to it,’ says one marketing executive. ‘Successfully managing the customer experience is the ultimate goal,’ adds another.2

Levels of products and services Product planners need to think about products and services on three levels (see Figure 7.1). Each level adds more customer value. The most basic level is the core customer value, which addresses the question: What is the buyer really buying? When designing products, marketers must first define the core, problem-solving benefits or services that consumers seek. A woman buying lipstick buys more than lip colour. Charles Revson of Revlon saw this early: ‘In the factory, we make cosmetics; in the store, we sell hope.’ And people who buy a Samsung Galaxy S7 Edge smartphone are buying more than a mobile phone, email device or camera. They are buying freedom and on-the-go connectivity to information, people and communities. At the second level, product planners must turn the core benefit into an actual product. They need to develop product and service features, design, a quality level, a brand name and packaging. For example, the Samsung Galaxy S7 Edge is an actual product. Its name, parts, styling, features, packaging and other attributes have all been combined carefully to deliver the core customer value of staying connected. Finally, product planners must build an augmented product around the core benefit and actual product by offering additional consumer services and benefits. The Galaxy S7 Edge offers more than just a communications device. It provides consumers with a complete solution to mobile connectivity problems. Thus, when consumers buy a Galaxy S7 Edge, the company and its dealers also might give buyers a warranty on parts and workmanship, instructions on how to use the device, quick repair services when needed, and a toll-free telephone number and website to use if they have problems or questions. Consumers see products as complex bundles of benefits that satisfy their needs. When developing products, marketers first must identify the core customer value that consumers seek from the product. They must then design the actual product and find ways to augment it in order to create this customer value and the most-satisfying customer experience.

Augmented product After-sale Delivery Actual product service and credit Brand Features name CORE

CUSTOMER VALUE Quality Design level

Packaging

Product support

Warranty

Figure 7.1  Three levels of products

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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, persons, places and ideas.

Consumer products Consumer products are products and services bought by final consumers for personal consumption. Marketers usually classify these products and services further based on how consumers go about buying them. Consumer products include Core, actual and augmented product: People who buy a Samsung convenience products, shopping products, specialty products and unsought Galaxy S7 Edge smartphone are buying more than a mobile phone, email device or camera. Owners are invited to ‘enjoy products. These products differ in the ways consumers buy them more freedom to explore, stay connected, and capture the and, therefore, in how they are marketed (see Table 7.1). adventure’. Convenience products are consumer products and services Bloomberg/Contributor/Getty that customers usually buy frequently, immediately, and with a minimum of comparison and buying effort. Examples include consumer product laundry detergent, sweets, magazines and fast food. Convenience products are usually low priced, and A product bought by marketers place them in many locations to make them readily available when customers need them. final consumers for Shopping products are less-frequently purchased consumer products and services that customers compare personal consumption. carefully on suitability, quality, price and style. When buying shopping products and services, consumers spend much time and effort in gathering information and making comparisons. Examples include furniture, clothing, used cars, major appliances, and hotel and airline services. Shopping products marketers usually distribute their products through fewer outlets, but provide deeper sales support to help customers in their comparison efforts. Specialty products are consumer products and services with unique characteristics or brand identification for which a significant group of buyers is willing to make a special purchase effort. Examples include specific brands of cars, high-priced photographic equipment, designer clothes, and the services of medical

Table 7.1  Marketing considerations for consumer products Marketing considerations Convenience

Type of consumer product Shopping

Specialty

Unsought

Customer buying behaviour

Frequent purchase, little planning, little comparison or shopping effort, low customer involvement

Less frequent purchase, much planning and ­shopping effort, comparison of brands on price, quality, style

Strong brand preference and loyalty, special purchase effort, little comparison of brands, low price sensitivity

Little product awareness, knowledge (or, if aware, little or even negative interest)

Price

Low price

Higher price

High price

Varies

Distribution

Widespread distribution, convenient locations

Selective distribution in fewer outlets

Exclusive distribution in only one or a few outlets per market area

Varies

Promotion

Mass promotion by the producer

Advertising and personal selling by both producer and resellers

More carefully targeted promotion by both producer and resellers

Aggressive advertising and personal selling by producer and resellers

Examples

Toothpaste, magazines, laundry detergent

Major appliances, ­televisions, furniture, clothing

Luxury goods, such as Rolex watches or fine crystal

Life insurance, Red Cross blood donations

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203

or legal specialists. A Lamborghini car, for example, is a specialty product because buyers are usually willing to travel great distances to buy one. Buyers normally do not compare specialty products. They invest only the time needed to reach dealers carrying the wanted products. Unsought products are consumer products that the consumer either does not know about or knows about but does not normally think of buying. Most major new innovations are unsought until the consumer becomes aware of them through advertising. Classic examples of known but unsought products and services are life insurance, pre-planned funeral services and blood donations to the Red Cross. By their very nature, unsought products require a lot of advertising, personal selling and other marketing efforts (see Marketing in action 7.1 later in this chapter).

Industrial products Industrial products are those purchased for further processing or for use in conducting a business. Thus, the distinction between a consumer product and an industrial product is based on the purpose for which the product is bought. If a consumer buys a lawn mower for use around the home, the lawn mower is a consumer product. If the same consumer buys the same lawn mower for use in a landscaping business, the lawn mower is an industrial product. The three groups of industrial products and services include materials and parts, capital items, and supplies and services. Materials and parts include raw materials and manufactured materials and parts. Raw materials consist of farm products (wheat, cotton, livestock, fruits, vegetables) and natural products (fish, timber, crude petroleum, iron ore). Manufactured materials and parts consist of component materials (iron, yarn, cement, wires) and component parts (small motors, tyres, castings). Most manufactured materials and parts are sold directly to industrial users. Price and service are the main marketing factors; branding and advertising tend to be less important. Capital items are industrial products that aid in the buyer’s production or operations, including installations and accessory equipment. Installations consist of major purchases such as buildings (factories, offices) and fixed equipment (generators, drill presses, large computer systems, elevators). Accessory equipment includes portable factory equipment and tools (hand tools, fork lifts) and office equipment (computers, printers, desks). They have a shorter life than installations and simply aid in the production process. The final group of industrial products is supplies and services. Supplies include operating supplies (lubricants, coal, paper, pencils) and repair and maintenance items (paint, nails, brooms). Supplies are the convenience products of the industrial field because they are usually purchased with a minimum of effort or comparison. Business services include maintenance and repair services (window cleaning, computer repair) and business advisory services (legal, management consulting, advertising). Such services are usually supplied under contract.

industrial product

A product bought by individuals and organisations for further processing or for use in conducting a business.

Organisations, persons, places, events and ideas In addition to tangible products and services, marketers have broadened the concept of a product to include other market offerings – organisations, persons, places, events and ideas. Organisations often carry out activities to ‘sell’ the organisation itself. Organisation marketing consists of activities undertaken to create, maintain or change the attitudes and behaviour of target

Corporate image advertising: BOQ styles itself as a lovable bank, using humour and cartoons, and by explaining that ‘we’ve learned that love has to be earned’. Bank of Queensland

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consumers towards an organisation. Both profit and not-forprofit organisations practise organisation marketing; business firms sponsor public relations or corporate image advertising campaigns to market themselves and polish their images. For example, banker BOQ tackles ‘bank hate’ head-on, using humour and cartoons that ask: ‘Is it possible to love a bank?’ In their corporate image campaign, they reply: ‘We’ve learned love has to be earned.’ Similarly, not-for-profit organisations, such as churches, universities, charities, museums and performing arts groups, market their organisations in order to raise funds and attract members or patrons.3 People can also be thought of as products. Person marketing consists of activities undertaken to create, maintain or change attitudes or behaviour towards particular people. People such Person marketing: Amaysim invited customers to ‘go hassle free’ with TV actor David Hasselhoff, who changed his name to David as politicians, entertainers and sports figures, and professionals Hoff, explaining he wanted less hassle in his life. Amaysim used the such as doctors, lawyers and architects, use person marketing well-known actor to share its commitment to hassle-free mobile to build their reputations. And businesses, charities and other phone plans with the tag-line: ‘less hassle, more hoff ’. organisations use well-known personalities to help sell their Craig Greenhill/Newspix products or causes. For example, Amaysim used American actor David Hasselhoff to invite mobile phone users to remove one hassle from their life. The actor nicknamed ‘the Hoff’ announced he was officially changing his name to David Hoff amid much media speculation. Amaysim later revealed the social media campaign as the focus for its commitment to deliver hassle-free phone experiences to its customers: ‘less hassle, more hoff’.4 The skilful use of marketing can turn a person’s name into a powerhouse brand. Consider the TV chefs who have achieved the status almost of rock stars for their many ardent fans. These days, it is hard to shop for kitchen products without encountering goods endorsed by these culinary all-stars. For example, celebrity chef Donna Hay endorses a kitchen cupboard filled with jams and bake-at-home cakes. A quick tour of her online store reveals that her product endorsements extend to an assortment of kitchen tools and bakeware, and on into the dining room and laundry with fine china and fabric conditioner.5 Place marketing involves activities undertaken to create, maintain or change attitudes or behaviour towards particular places. Cities, states, regions and even entire nations compete to attract tourists, new residents, conventions, company offices and factories. Tourism New Zealand advertises the country as ‘100% pure New Zealand’, and Destination NSW invites visitors to ‘Love every second in Sydney’. Vivid Sydney is one of the very successful ‘seconds in time’ that form part of Destination NSW’s place marketing campaign. Attracting visitors from all over the world, the Vivid Sydney website provides information about spectacular light shows, as well as music and ideas events. Information is also available on accommodation and travel to Vivid events. Visitors are encouraged to download a smartphone app to help them ‘experience everything Vivid Sydney has to offer’.6 Ideas can also be marketed. In one sense, all marketing is the marketing of an idea, whether it is the social marketing general idea of brushing your teeth or the specific idea that Colgate Total toothpaste offers superior The use of commercial protection because it ‘fights plaque bacteria for up to 12 hours’. Political marketing is also a type of marketing concepts and tools to influence idea marketing. Political parties use mass media, social media such as YouTube, Twitter and Facebook, behaviours that and direct marketing approaches to get their message across to the converted and unconverted alike. benefit individuals and Here, however, we narrow our focus to the marketing of social ideas. This area has been called social communities for the greater social good. marketing, defined by the Australian Association of Social Marketing as the use of commercial

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Place marketing: Destination NSW’s Vivid Sydney event includes an app so visitors can manage the experience and so that they can ‘Love every second in Sydney’. Provided courtesy of Destination NSW

marketing concepts and tools to ‘influence behaviours that benefit individuals and communities for the greater social good’.7 Social marketing programs include public health campaigns to reduce smoking, drug abuse and obesity. Other social marketing efforts include environmental campaigns to promote wilderness protection, clean air and conservation. Still others address issues such as family planning, human rights and racial equality. But social marketing involves much more than just advertising; it uses every other element of the marketing mix to achieve its social change objectives.

Product and service decisions (pp. 205–13) Marketers make product and service decisions at three levels: individual product decisions, product line decisions and product mix decisions. We discuss each of these in turn.

Individual product and service decisions Figure 7.2 shows the important decisions in the development and marketing of individual products and services, including product and service attributes, branding, packaging, labelling and product support services.

Product and service attributes Developing a product or service involves defining the benefits that it will offer. These benefits are communicated and delivered by product attributes such as quality, features and style and design.

Product quality

Product quality is one of the marketer’s main positioning tools. Quality has a direct impact on product or service performance; thus, it is closely linked to customer value and satisfaction. In the narrowest sense, quality can be defined as ‘freedom from defects’. But most customer-centred companies go beyond this narrow definition. Instead, they define quality in terms of creating customer value and satisfaction. The American Society for Quality defines quality as the characteristics of a product or service that bear on its

Product attributes

Branding

Packaging

Labelling

product quality

The characteristics of a product or service that bear on its ability to satisfy stated or implied customer needs.

Product support services

Figure 7.2  Individual product decisions

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Marketing in Action 7.1

Headspace and the unsought product

Let’s face it, some goods and services are not at the top of our shopping list.

both online and in the real world. Headspace ‘built’ a stigma! Actually, they built

Life insurance or a will, smoke detectors and security alarms, a gravestone, a

an enormous panelled dome at a railway station in Melbourne. For five days,

thermometer or survival gear – these are all examples of goods and services we

travellers were invited to ‘take away’ the stigma by removing a panel. Each panel

just don’t want to think about needing. They are unsought products. Even though

had a message about mental health and how to get help. Following the outdoor

we do not really want these products they are often needed. For example, every

event, the campaign launched online, with a digital ‘stigma’ to break down.

home should have a smoke detector (and, often, more than one) – it’s the law!

The opportunity to break down the digital stigma not only encourages visitors to

But many home owners do not think about installing a smoke detector until their

access the website but also provides those visitors with a story and information

real estate agent reminds them they cannot sell their home without one. So local

about youth mental health. The campaign was promoted via television, radio,

governments and smoke-detector manufacturers and distributors can spend a

social and digital media, and flyers. Comedian Dave Hughes, who experienced

great deal of time and money reminding us to install smoke detectors and to

mental health issues at the age of 21, also supported the campaign.

check regularly that they are working. Smoke detectors are just one of many unsought products that marketers play a big role in bringing to our attention.

The Big Stigma campaign aimed to change the way people think about mental wellbeing and to encourage young people to get information and help

Headspace aims both to help young people with mental health matters and to

when needed. In marketing terms, the goal was to shift the services and support

improve the ‘wellbeing of young Australians’. Each year, many young people face

provided by Headspace from unsought to a service actively sought out by young

health and wellbeing issues that compromise their mental wellness, and many

people. Let’s take a closer look at how they did this.

face these problems alone – they don’t seek help. Sometimes this is because

Headspace is a service – a service that is not only unsought but also intangible.

they do not realise they need help but, more often than not, it is because they

It is difficult for young people to understand what the service will provide.

are embarrassed or because of a perceived stigma. For young people, support for

The Big Stigma campaign brings the issue of youth mental health into the open,

mental wellbeing is an unsought service.

and makes it more real. Each panel removed from the Big Stigma represents

Recently, Headspace launched a campaign to tackle this issue head on.

another person who has heard the message and who understands the

The campaign aimed to break down the stigma by creating an engaging experience,

issues a bit better. With more people talking about youth mental health,

Unsought products: Many young people do not reach out to get the help they need with their mental wellbeing. Headspace’s Big Stigma campaign aimed to change attitudes and to encourage young people to get the help they need. Headspace

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getting help becomes a real possibility for more young people. When they arrive at Headspace, either online or in person, they learn they can get help with everything from applying for jobs or managing stress and anxiety, to accessing support for dealing with alcohol and/or drug problems, relationship issues, bullying and violence. The online site and drop-in centres are friendly, open spaces with lots of easy-to-access information. The website also shares stories from Headspace users to show how getting help makes a difference. These stories create links and, importantly, they show the young person that others just like them have been, or perhaps still are, on a similar journey to their own. Sources: In Australia, people aged 12–25 seeking help for a mental health problem should contact Headspace at and, in New Zealand, the Mental Health Foundation provides support for people of all ages at ; Debra J Rickwood, Kelly R Mazzer & Nic R Telford, ‘Social influences on seeking help from mental health services, in-person and online, during adolescence and young adulthood’, BMC Psychiatry, 15(40), 2015, ; ‘Experiential campaign combats stigma around youth mental health’, Marketing Magazine, 20 June 2016, ; ‘CHE Proximity and Headspace launch campaign to remove mental health stigma’, B&T, 17 June 2016, ; see also Headspace websites at and , accessed June 2016.

Questions ❶ Go to the website for Headspace, . What features do you see on the website that make the service something young people might want to use? ❷ Marketing an unsought product requires attention to changing attitudes and increasing awareness. What differences (if any) are there between marketing an unsought good and marketing an unsought service? What needs to be considered when marketing an unsought product that is entirely new – like Stan (the entertainment service) was a few years ago? How do you think the role of the marketer changes when marketing an unsought product?

ability to satisfy stated or implied customer needs. Similarly, Siemens defines quality this way: ‘Quality is when our customers come back and our products don’t.’8 Total quality management (TQM ) is an approach in which all the company’s people are involved in constantly improving the quality of products, services and business processes. For most top companies, customer-driven quality has become a way of doing business. Today, companies are taking a ‘return on quality’ approach, viewing quality as an investment and holding quality efforts accountable for bottom-line results. Product quality has two dimensions – level and consistency. In developing a product, the marketer must first choose a quality level that will support the product’s positioning. Here, product quality means performance quality – the ability of a product to perform its functions. For example, a Rolls-Royce provides higher performance quality than a Holden: it has a smoother ride, provides more ‘creature comforts’ and lasts longer. Companies rarely try to offer the highest possible performance-quality level – few customers want or can afford the high levels of quality offered in products such as a Rolls-Royce automobile, B&W Nautilus speakers or a Rolex watch. Instead, companies choose a quality level that matches target market needs and the quality levels of competing products. Beyond quality level, high quality also can mean high levels of quality consistency. Here, product quality means conformance quality – freedom from defects and consistency in delivering a targeted level of performance. All companies should strive for high levels of conformance quality. In this sense, a Holden can have just as much quality as a Rolls-Royce. Although a Holden does not perform at the same level as a Rolls-Royce, it can deliver just as consistently the quality that customers pay for and expect.

Product features A product can be offered with varying features. A stripped-down model, one without any extras, is the starting point. The company can create higher-level models by adding more features. Features are a competitive tool for differentiating the company’s product from competitors’ products. Being the first producer to introduce a valued new feature is one of the most effective ways to compete. How can a company identify new features and decide which ones to add to its product? The company should periodically survey buyers who have used the product and ask these questions: How do you like the product? Which specific features of the product do you like most? Which features could we add to improve the product? The answers provide the company with a rich list of feature ideas. The company can then

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assess each feature’s value to customers versus its cost to the company. Features that customers value highly in relation to costs should be added.

Product style and design Another way to add customer value is through distinctive product style and design. Design is a larger concept than style. Style simply describes the appearance of a product. Styles can be eye-catching or yawn-producing. A sensational style may grab attention and produce pleasing aesthetics, but it does not necessarily make the product perform better. Unlike style, design is more than skin deep – it goes to the very heart of a product. Good design contributes to a product’s usefulness as well as to its looks. Good design does not start with brainstorming new ideas and making prototypes. Design begins with observing customers and developing a deep understanding of their needs. More than simply creating product or service attributes, Product design: Sonos created a wireless, internet-enabled speaker system that is stylish and easy to use and fills a whole house with it involves shaping the customer’s product-use experience. great sound. Product designers should think less about product attributes T3 Magazine/Contributor/Getty Images and technical specifications and more about how customers will use and benefit from the product. Sonos created a wireless, internet-enabled speaker system that is easy to use and fills a whole house with great sound. In the past, setting up a whole-house entertainment or sound system required routing wires through walls, floors and ceilings, creating a big mess and lots of expense. And if you moved, you could not take the system with you. Using smart design based on consumer needs, Sonos created a wireless speaker system that is not just stylish but also easy to set up, easy to use and easy to move to meet changing needs. Smart design has paid off handsomely for Sonos. Founded in 2002, over just the past two years the company’s sales have nearly tripled to an estimated US$1 billion a year.9

Branding brand

A name, term, sign, symbol or design, or a combination of these, that identifies the products or services of one seller or group of sellers and differentiates them from those of competitors.

Perhaps the most distinctive skill of professional marketers is their ability to build and manage brands. A brand is a name, term, sign, symbol or design, or a combination of these, that identifies the maker or seller of a product or service. Consumers view a brand as an important part of a product, and branding can add value to a product. Customers attach meanings to brands and develop brand relationships. Brands have meaning well beyond a product’s physical attributes. For example, consider Coca-Cola. In one interesting taste test of Coca-Cola versus Pepsi, 67 subjects were hooked up to brain-­wavemonitoring machines while they consumed both products. When the soft drinks were unmarked, consumer preferences were split down the middle. But when the brands were identified, subjects choose Coke over Pepsi by a margin of 75 per cent to 25 per cent. When drinking the identified Coke brand, the brain areas that lit up most were those associated with cognitive control and memory – a place where culture concepts are stored. That did not happen as much when drinking Pepsi. Why? According to one brand strategist, it is because of Coca-Cola’s long-established brand imagery – the almost 100-year-old contour bottle and cursive font, and its association with iconic images ranging from the Polar Bears to Santa Claus. Pepsi’s imagery is not quite as deeply rooted. The conclusion: consumer preference is not based on taste alone. Coke’s iconic brand appears to make a difference.10 Branding has become so strong that, today, hardly anything goes unbranded. Salt is packaged in branded containers, common nuts and bolts are packaged with a distributor’s label, and automobile parts – spark plugs, tyres, filters – bear brand names that differ from those of the car makers. Even fruits,

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vegetables, dairy products and poultry are branded – Sweet Cheeks mangos, Super Tom tomatoes, Perfection milk and Steggles chickens. Branding helps buyers in many ways. Brand names help consumers identify products that might benefit them. Brands also say something about product quality and consistency – buyers who always buy the same brand know they will get the same features, benefits and quality each time they buy. Branding also gives the seller several advantages. The brand name becomes the basis on which a whole story can be built about a product’s special qualities. The seller’s brand name and trademark provide legal protection for unique product features that otherwise might be copied by competitors. And branding helps the seller to segment markets. For example, Toyota Motor Corporation can offer the major Lexus and Toyota brands, each with numerous sub-brands – such as Camry, Corolla, Prius and Yaris – not just one general product for all consumers. Building and managing brands are perhaps the marketer’s most important tasks. We discuss branding strategy in more detail later in the chapter.

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Branding: Turners & Growers – marketers of fresh produce – distribute a number of premium brands, from Bonita bananas to Beekist tomatoes. Image provided by Turners & Growers Ltd

Packaging Packaging involves designing and producing the container or wrapper for a product. Traditionally, the primary function of the package was to hold and protect the product. In recent times, however, numerous factors have made packaging an important marketing tool as well. Increased competition and clutter on retail store shelves means that packages must now perform many sales tasks – from attracting attention, to describing the product, to making the sale. Companies are realising the power of good packaging to create immediate consumer recognition of a brand. For example, an average supermarket stocks about 44 000 items The typical shopper makes three out of four purchase decisions in stores and passes by some 300 items per minute. In this highly competitive environment, the package may be the seller’s last and best chance to influence buyers. Thus, for many companies, the package itself has become an important promotional medium.11 Poorly designed packages can cause headaches for consumers and lost sales for the company. Think about all those hard-to-open packages, such as DVD cases sealed with impossibly sticky labels, packaging with finger-splitting wire twisties or sealed plastic clamshell containers that cause ‘wrap rage’ and send thousands of people to the hospital each year with lacerations and puncture wounds. Another packaging issue is overpackaging – such as when a tiny USB flash drive in an oversized cardboard and plastic display package is delivered in a giant corrugated shipping carton. Overpackaging creates an incredible amount of waste, frustrating those who care about the environment. Amazon now offers Frustration-Free Packaging to alleviate both wrap rage and overpackaging. The online retailer works with more than 2000 companies, such as Fisher-Price, Mattel, Unilever, Microsoft and others, to create smaller, easy-to-open, recyclable packages that use less packaging material and no frustrating plastic clamshells or wire ties. It currently offers more than 200 000 such items and to date has shipped more than 75 million of them to 175 countries. In the process, the initiative has eliminated nearly 6 square kilometres of cardboard and over 11 000 tonnes of packaging waste.12 Innovative packaging can give a company an advantage over competitors and boost sales. Distinctive packaging may even become an important part of a brand’s identity. For example, an otherwise plain brown carton imprinted with the familiar curved arrow from the Amazon.com logo – variously interpreted as ‘a to z’ or even a smiley

packaging

The activities of designing and producing the container or wrapper for a product.

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face – leaves no doubt as to who shipped the package sitting at your doorstep. And Tiffany’s distinctive blue boxes have come to embody the exclusive jewellery retailer’s premium legacy and positioning. As the company puts it, ‘Glimpsed on a busy street or resting in the palm of a hand, Tiffany Blue Boxes make hearts beat faster and epitomize Tiffany’s great heritage of elegance, exclusivity, and flawless craftsmanship.’13 In recent years, product safety has also become a major packaging concern. We have all learned to deal with hard-to-open ‘childproof’ packaging. And after the rash of product-tampering scares during the 1980s, most drug producers and food makers now put their products in tamper-resistant packages. In making packaging decisions, the company also must heed growing environmental concerns. Fortunately, many companies have gone ‘green’ by reducing their packaging and using environmentally responsible packaging materials.

Labelling Labels range from simple tags attached to products to complex graphics that are part of the package. They perform several functions. At the very least, the label identifies the product or brand, such as the name ‘Bonita’ stuck on bananas. The label might also describe several things about the product – who made it, where it was made, when it was made, its contents, how it is to be used and how to use it safely. Finally, the label might help to promote the brand, support its positioning and connect with customers. For many companies, labels have become an important element in broader marketing campaigns. Labels and brand logos can support the brand’s positioning and add personality to the brand. In fact, brand labels and logos can become a crucial element in the brand–customer connection. Customers often become strongly attached to logos as symbols of the brands they represent. Consider the feelings evoked by the logos of companies such as Coca-Cola, Google, Twitter, Apple and Nike. Logos must be redesigned from time to time. For example, Optus has redesigned their brand and company logos to make them more approachable, upbeat and engaging. An Optus company representative explains: ‘[It] isn’t so much about the new logo; it’s about the entire brand experiences our customers have with us.’ The new brand representation, featuring a bubbly font and a friendly new brand character, is designed to connect more closely with the customer. It is a big contrast to the old logo, which was more ‘formal, structured and quite cold’. Underpinning the new brand position is the ‘declaration of Yes’ – a promise about what Optus does to be better for its customers.14 Along with the positives, labelling also raises concerns. There has been a long history of legal concerns about packaging and labels. Labels can mislead customers, fail to describe important ingredients or fail to include needed safety warnings. As a result, several federal and state laws regulate labelling. These laws set mandatory labelling requirements, encourage voluntary industry packaging standards and allow federal agencies to set packaging regulations in specific industries. For example, the Food Standards Australia New Zealand Act 1991 establishes the Australia New Zealand Food Standards Code, which sets out labelling and packaging requirements for a wide range of foods. Labelling has been affected in recent times by unit pricing (stating the price per unit of standard measure), open dating (stating the expected shelf life of the product) and nutritional labelling (stating the nutritional values in the product). Legislation requires sellers to provide detailed nutritional information on food products, and regulates the use of health-related terms, such as low fat, light and high fibre. Sellers must ensure that their labels contain all the required information.

Packaging: Distinctive packaging may become an important part of a brand’s identity. An otherwise plain brown carton imprinted with only the familiar curved arrow from the Amazon.com logo – variously interpreted as ‘a to z’ or even a smiley face – leaves no doubt as to who shipped the package sitting at your doorstep. Lux Igitur/Alamy

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Product support services Customer service is another element of product strategy. A company’s offer usually includes some support services, which can be a minor or a major part of the total offering. Later in the chapter, we discuss services as products in themselves. Here, we discuss services that augment actual products. Support services are an important part of the customer’s overall brand experience. For example, Crumpler makes a range of quality, street-smart bags. But the company knows that good marketing does not stop with making the sale. Keeping customers happy after the sale is the key to building lasting relationships. They do this in a relaxed and fun-filled way, offering customers a reassuring order follow-up service, and explaining that ‘sometimes stuff happens’. They even offer customers a ‘Til Death Do Us Part’ warranty! They ‘repair or replace the parts in question – no questions asked’. ‘Second thoughts? No dramas’ for Crumpler customers with their exchange service. So, Crumpler goes to great lengths to make great bags and to provide outstanding after-sale service.15 The first step in designing support services is to survey customers periodically to assess the value of current services and to obtain ideas for new ones. Once the company has assessed the quality of various support services to customers, it can take steps to fix problems and add new services that will both delight customers and yield profits to the company. Many companies now use a sophisticated mix of phone, email, fax, internet and interactive voice and data technologies to provide support services that were not possible previously. For example, Bosch Australia offers a complete set of sales and after-sale services. It promises ‘We are here to help’. Customers can click on to the Bosch customer care portal for a range of online resources for their products, including service videos and instruction manuals, as well as service bookings and even recipes, all of which can be accessed 24/7.16

Product line decisions Beyond decisions about individual products and services, product strategy also calls for building a product line. A product line is a group of products that are closely related because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlets or fall within given price ranges. For example, Nike produces several lines of athletic shoes and apparel, and Marriott offers several lines of hotels. The main product line decision involves product line length – the number of items in the product line. The line is too short if the manager can increase profits by adding items; the line is too long if the manager can increase profits by dropping items. Managers need to analyse their product lines periodically to assess each product item’s sales and profits and to understand how each item contributes to the line’s overall performance. A company can expand its product line in two ways: by line filling or by line stretching. Product line filling involves adding more items within the present range of the line. There are several reasons for product line filling: reaching for extra profits, satisfying dealers, using excess capacity, being the leading full-line company and plugging holes to keep out competitors. However, line filling is overdone if it results in cannibalisation and customer confusion. The company should ensure that new items are noticeably different from existing ones. Product line stretching occurs when a company lengthens its product line beyond its current range. As shown in Figure 7.3, the company can stretch its line downward, upward or both ways. Companies located at the upper end of the market can stretch their lines downward. A company may stretch downward to plug a market hole that otherwise would attract a new competitor or to respond to a competitor’s attack on the upper end. Or it may add low-end products because it finds faster growth taking place in the low-end segments. Companies can also stretch their product lines upward. Sometimes, companies stretch upward in order to add prestige to their current products. Or they may be attracted by a faster growth rate or higher margins at the higher end. Over the past few years, Samsung has both stretched and filled its Galaxy line of premium smartphone and tablet mobile devices. Samsung started the Galaxy line with a 4-inch smartphone, and then quickly added a 10.1-inch tablet. It now offers a bulging Galaxy line that includes a size for any need or preference.

product line

A group of products that are closely related because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlets or fall within given price ranges.

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High

High

High

Present products Price

New products Price

Present products Price

New products

New products

Present products

Low

New products

Low Low

High

Low Low

High

Low

High

Quality

Quality

Quality

Stretching downward

Stretching upward

Stretching both ways

Figure 7.3  Product line stretching decisions

To top things off, Samsung offers the Gear VR, a headset that combines with a smartphone to provide a virtual reality experience for gamers, and the Gear Fit2, a wearable activity-tracking device. The Galaxy line still caters heavily to the top end of its markets. But to address the fastest-growing smartphone segment – phones that sell for less than $300 – Samsung has introduced the lower-priced Galaxy J1 models. As a result, through artful stretching and filling, Samsung’s successful Galaxy line has broadened its appeal, improved its competitive position and boosted growth.17

product mix (product portfolio)

Product mix decisions

The set of all product lines and items that a particular seller offers for sale.

An organisation with several product lines has a product mix. A product mix (or product portfolio) consists of all the product lines and items that a particular seller offers for sale. Some companies manage very complex product portfolios. For example, Sony’s diverse portfolio consists of a number of product businesses worldwide: Sony Electronics, Sony Computer Entertainment (games), Sony Pictures Entertainment (movies, television shows), Sony Music Entertainment (music, DVDs) and Sony Financial Services (life insurance, banking and other offerings). Each main Sony business consists of several product lines. For example, Sony Electronics includes cameras and camcorders, computers, televisions and home entertainment products, mobile electronics and others. In turn, each of these lines contains many individual items. Sony’s television and home entertainment line includes televisions, DVD players, home audio components, digital home products and more. Altogether, Sony’s product mix includes a diverse collection of hundreds of products. A company’s product mix has four important dimensions: width, length, depth and consistency. Product mix width refers to the number of different product lines the company carries. Sony markets a wide range of consumer and industrial products around the world, from televisions and PlayStation consoles to semiconductors. Product mix length refers to the total number of items the company carries within its product lines. Sony typically carries many products within each line. The personal audio line, for instance, includes the expected digital media players, headphones and wireless speakers, as well as digital voice recorders and radios, along with a wide range of accessories.18 Product mix depth refers to the number of versions offered of each product in the line. Sony has a very deep product mix. For example, it makes and markets just about any kind of television you would ever want to buy – LED, LCD, High Definition, Android TV, 2D or 3D – each in almost any imaginable size. Finally, the consistency of the product mix refers to how closely related the various product lines are in terms of end use, production requirements, distribution channels or some other way. Within each major business, Sony’s

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product lines are fairly consistent in that they perform similar functions for buyers and go through the same distribution channels. Company-wide, however, Sony markets a very diverse mix of products. Managing such a broad and diverse product portfolio requires skill. These product mix dimensions are the basis of the company’s product strategy. The company can increase its business in four ways. (1) It can add new product lines, widening its product mix. In this way, its new lines build on the company’s reputation in its other lines. (2) The company can lengthen its existing product lines to become a more full-line company. (3) The company can add more versions of each product and thus deepen its product mix. (4) Finally, the company can pursue more product line consistency – or less – depending on whether it wants to have a strong reputation in a single field or in several fields. From time to time, a company may also have to streamline its product mix to pare out marginally performing lines and to regain its focus. As consumers rethink their brand preferences and priorities, marketers must do the same. They need to align their product mixes with changing customer needs and profitably create better value for customers.

Linking the concepts To get a better sense of how large and complex a company’s product offering can become, investigate Procter & Gamble’s (P&G’s) product mix. ● Using P&G’s website , its annual report or other sources, develop a list of all the company’s

product lines and individual products. What surprises you about this list of products? ● Is P&G’s product mix consistent? What products has P&G dropped or sold recently? What overall strategy or logic appears to have guided the shaping of this product mix?

Services marketing (pp. 213–18) Services have grown dramatically in recent years. Services now account for nearly 70 per cent of GDP in Australia and New Zealand. Three in every four people are employed in the sector, and that number is growing.19 Service industries vary greatly. Governments offer services through courts, employment services, hospitals, military services, police and fire departments, the postal service and schools. Private not-for-profit organisations offer services through museums, charities, churches, universities, foundations and hospitals. A large number of business organisations offer services – airlines, banks, hotels, insurance companies, consulting firms, medical and legal practices, entertainment and telecommunications companies, real-estate firms, retailers and others.

Nature and characteristics of a service A company must consider four special service characteristics when designing marketing programs: (1) intangibility, (2) inseparability, (3) variability and (4) perishability (see Figure 7.4). Service intangibility means that services cannot be seen, tasted, felt, heard or smelled before they are bought. For example, people undergoing cosmetic surgery cannot see the result before the purchase. Airline passengers have nothing but a ticket and the promise that they and their luggage will arrive safely at the intended destination, hopefully at the same time. To reduce uncertainty, buyers look for ‘signals’ of service quality. They draw conclusions about quality from the place, people, price, equipment and communications that they can see. Therefore, the service provider’s task is to make the service tangible in one or more ways and to send the right signals about quality. One analyst calls this evidence management, in which the service organisation presents its customers with organised, honest evidence of its capabilities. NRMA Insurance practises good evidence management. No one really wants to buy insurance; it is difficult to work out what you need and it is difficult to compare alternative offerings. To make it easy for customers, NRMA provides plain-English policy booklets, a phone helpline to explain benefits, free iPhone apps, a broad range of safety and security information, and, of course, user-friendly quotes, payments and claims systems.20

service intangibility

A major characteristic of services – they cannot be seen, tasted, felt, heard or smelled before they are bought.

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Intangibility

Inseparability

Services cannot be seen, tasted, felt, heard or smelled before purchase

Services cannot be separated from their providers

SERVICES

Variability

Perishability

Quality of services depends on who provides them and when, where and how

Services cannot be stored for later sale or use

Figure 7.4  Four service characteristics

service inseparability

A major characteristic of services – they are produced and consumed at the same time and cannot be separated from their providers.

service variability

A major characteristic of services – their quality may vary greatly, depending on who provides them and when, where and how.

service perishability

A major characteristic of services – they cannot be stored for later sale or use.

Physical goods are produced, then stored, later sold and, still later, consumed. In contrast, services are first sold, then produced and consumed at the same time. In services marketing, the service provider is the product. Service inseparability means that services cannot be separated from their providers, whether the providers are people or machines. If a service employee provides the service, then the employee becomes a part of the service. Because the customer is also present as the service is produced, provider–customer interaction is a special feature of services marketing. Both the provider and the customer affect the service outcome. Service variability means that the quality of services depends on who provides them, as well as when, where and how they are provided. For example, some hotels – say, Sofitel – have reputations for providing better service than others. Still, within a given hotel, one registration-counter employee may be cheerful and efficient, whereas another standing just a metre or so away may be unpleasant and slow. Even the quality of a single Sofitel employee’s service varies according to his or her energy and frame of mind at the time of each customer encounter. Service perishability means that services cannot be stored for later sale or use. Some doctors charge patients for missed appointments because the service value existed only at that point and disappeared when the patient did not show up. The perishability of services is not a problem when demand is steady. However, when demand fluctuates, service firms often experience problems. For example, because of rush-hour demand, public transportation companies have to own much more equipment than they would if demand were spread evenly throughout the day. Thus, service firms often design strategies for producing a better match between demand and supply. Hotels and resorts charge lower prices in the off-season to attract more guests. And restaurants hire parttime employees to serve during peak periods.

Marketing strategies for service firms Service perishability: Service providers in the hospitality sector offer off-season and last-minute rates to manage demand. Courtesy Helloworld Ltd

Just like manufacturing businesses, good service firms use marketing to position themselves strongly in chosen target markets. AAMI reminds its policy holders, ‘Lucky you’re with AAMI’; Uber

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promises to ‘Get there’ and to ‘Move Sydney’; and the Cancer Council Australia explains that they ‘Fund breakthrough cancer research, not your tax bill’. These and other service firms establish their positions through traditional marketing mix activities. However, because services differ from tangible products, they often require additional marketing approaches.21

The service–profit chain In a service business, the customer and frontline service employee interact to create the service. Effective interaction, in turn, depends on the skills of frontline service employees and on the support processes backing these employees. Thus, successful service companies focus their attention on both their customers and their employees. They understand the service–profit chain, which links service firm profits with employee and customer satisfaction. This chain consists of five links:22 • Internal service quality: superior employee selection and training, a quality work environment and strong support for those dealing with customers, which results in . . . • Satisfied and productive service employees: more satisfied, loyal and hardworking employees, which results in . . . • Greater service value: more effective and efficient customer value creation and service delivery, which results in . . . • Satisfied and loyal customers: satisfied customers who remain loyal, repeat purchase and refer other customers, which results in . . . • Healthy service profits and growth: superior service firm performance. Therefore, reaching service profits and growth goals begins with taking care of those who take care of customers. The management team at Kent Relocation Services understands this. The global removal and relocations company is based in Australia and aims to offer ‘best practice solutions’ to its global clients. With over 40 000 removals each year, this service provider maintains a 95 per cent satisfaction record because of its outstanding service. The management team ensures the highest standard of work by paying their staff well – some 15–20 per cent above the industry average – and by providing a range of benefits designed to ensure its people are happy. 23 Thus, service marketing requires more than just traditional external marketing using the four Ps. Figure 7.5 shows that service marketing also requires internal marketing and interactive marketing. Internal marketing means that the service firm must orient and motivate its customer-contact employees and

service–profit chain

The chain that links service firm profits with employee and customer satisfaction.

internal marketing

Orienting and motivating customercontact employees and supporting service people to work as a team to provide customer satisfaction.

Employees

g tin

Int e

rke

rna

ma

lm

al

ark

n ter

Ex

eti ng

Company

Interactive marketing

Customers

Figure 7.5  Three types of service marketing

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interactive marketing

Interacting with customers and others in the marketing channel on a one-to-one basis in person or remotely via digital technologies.

supporting service people to work as a team to provide customer satisfaction. Marketers must get everyone in the organisation to be customer-centred. In fact, internal marketing must precede external marketing. For example, Coles Supermarkets starts by hiring the right people and carefully orienting and inspiring them to give unparalleled customer service. Interactive marketing means that service quality depends heavily on the quality of the buyer–seller interaction during the service encounter. In product marketing, product quality often depends little on how the product is obtained. But in services marketing, service quality depends on both the service deliverer and the quality of the delivery. Therefore, service marketers have to master interactive marketing skills. Thus, Coles explains its services values to all job applicants and provides comprehensive customer-service training options to staff. In today’s marketplace, companies must know how to deliver interactions that are not only ‘high-touch’ but also ‘high-tech’. For example, customers can log on to the Coles website and shop online. They can also follow Coles on Twitter, pin to Pinterest, like on Facebook and check out recipes and product reviews on the website. Customers seeking more personal interactions can contact service representatives by phone or visit a local Coles store. Thus, Coles has mastered interactive marketing at all three levels – calls, clicks and personal visits. Today, as competition and costs increase, and as productivity and quality decrease, more service marketing sophistication is needed. Service companies face three main marketing tasks: They want to increase their service differentiation, service quality and service productivity. We discuss each of these below.

Managing service differentiation In these days of intense price competition, service marketers often complain about the difficulty of differentiating their services from those of competitors. To the extent that customers view the services of different providers as similar, they care less about the provider than the price. The solution to price competition is to develop a differentiated offer, delivery and image. The offer can include innovative features that set one company’s offer apart from competitors’ offers. Some hotels offer no-wait kiosk registration; car-rental, banking and business-centre services in their lobbies; and free high-speed internet connections in their rooms. Some retailers differentiate themselves by offerings that take you well beyond the products they stock. For example, Kellyville Pets is not your average pet shop – it is a destination, with in-store events and entertainment, a café and training for both pets and pet owners, making it your one-stop shop for all your pet’s needs. Service companies can differentiate their service delivery by having more able and reliable customer-contact people, by developing a superior physical environment in which the service product is delivered, or by designing a superior delivery process. For example, many grocery chains now offer online shopping and home delivery as a better way for their customers to shop rather than having to drive, park, wait in line and carry groceries home. And banks allow you to access your account information from almost anywhere – from the ATM to your mobile phone. Finally, service companies also can work on Managing service differentiation: Kellyville Pets is not your average pet shop – it is a differentiating their images through symbols destination – with in-store events, a café and training for both pets and pet owners. and branding. Camp Quality adopted ‘the Courtesy of Kellyville Pets, 1-15 Millcroft Way, Beaumont Hills, NSW 2155 face of giggle’ as its symbol in its advertising.

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The smiling face represents their brand by reminding the community of Camp Quality’s programs, which help build optimism and resilience for children living with cancer and their families.24 Other well-known service symbols include Qantas’s flying kangaroo, MGM’s lion, McDonald’s’ golden arches and Weta Workshop’s weta (insect) symbol.

Managing service quality A service firm can differentiate itself by delivering consistently higher quality than its competitors provide. Like manufacturers before them, most service industries have now joined the customer-driven quality movement. And like product marketers, service providers need to identify what target customers expect in regards to service quality. Unfortunately, service quality is more difficult to define and judge than product quality. For instance, it is harder to agree on the quality of a haircut than on the quality of a hair straightener. Customer retention is perhaps the best measure of quality – a service firm’s ability to hang on to its customers depends on how consistently it delivers value to them. Top service companies set high service-quality standards. They watch service performance closely, both their own and that of competitors. They do not settle for merely good service; they set targets that they aim to meet each year. Australia Post commits to provide over 10 000 street posting boxes (they have nearly 16 000), to deliver 94 per cent of domestic letters on time (they deliver over 94.8 per cent on time) and to maintain at least 2500 postal outlets in rural areas (and they do this, too).25 Unlike product manufacturers who can adjust their machinery and inputs until everything is perfect, service quality will always vary, depending on the interactions between employees and customers. As hard as they try, even the best companies will have an occasional late delivery, burned steak or grumpy employee. However, good service recovery can turn angry customers into loyal ones. In fact, good recovery can win more customer purchasing and loyalty than if things had gone well in the first place. The following story, which was posted online, illustrates just how important service recovery is. After many years of great service from their local KwikKopy printer, a management consultant collected a print job needed for the next day. Opening the package at 6 o’clock that night the consultant was dismayed to find the job had been very poorly done. A call to the printer produced instant action. The printer collected the faulty work and returned to the consultant’s home later that evening with the printing completed to the high quality the consultant had come to expect. The quick action of the printer meant that the online story was filled with praise for the standard of service, rather than frustration with the initial outcome.26 These days, social media, such as Facebook and Twitter, can help companies remedy or remove customer dissatisfaction with service. As discussed in Chapter 4, many companies now monitor the digital space to identify customer issues quickly and respond in real-time. A quick and thoughtful response can turn a dissatisfied customer into a brand advocate.27

Managing service productivity With their costs rising rapidly, service firms are under great pressure to increase service productivity. They can do so in several ways. They can train current employees to work more effectively or hire new ones who will work harder or more skilfully. Or they can increase the quantity of their service by giving up some quality. The provider can ‘streamline the service’ by standardising production, as in McDonald’s’ assembly-line approach to fast-food retailing. Finally, the service provider can harness the power of technology. Although we often think of technology’s power to save time and costs in manufacturing companies, it also has great – and often untapped – potential to make service workers more productive. However, companies must avoid pushing productivity to the point that doing so reduces quality. Attempts to streamline a service or to cut costs can make a service company more efficient in the short run. But such changes can also reduce its longer-term ability to innovate, maintain service quality or respond to consumer needs and desires. For example, some airlines have learned this lesson the hard way as they

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attempt to economise in the face of rising costs. They stopped offering even the little things for free – such as in-flight snacks – and began charging extra for everything. The result is an aircraft full of dissatisfied customers who avoid the airline whenever they can. In their attempts to improve productivity, these airlines mangled customer service. Thus, in attempting to improve service productivity, companies must be mindful of how they create and deliver customer value. In short, they should be careful not to take the ‘service’ out of service.

Linking the concepts Let’s pause here for a moment. We have said that although services are ‘products’ in a general sense, they have special characteristics and marketing needs. To get a better grasp of this concept, select a traditional product brand, such as Nike or Honda. Next, select a service brand, such as Jetstar or McDonald’s. Then compare the two.

● How are the characteristics and marketing needs of the product and service brands you selected similar? ● How do the characteristics and marketing needs of the two brands differ? How are these differences reflected in each brand’s marketing strategy? Keep these differences in mind as we move into the final section of the chapter.

Branding strategy: Building strong brands (pp. 218–24) Some analysts see brands as the main enduring asset of a company, outlasting the company’s specific products and facilities. A former CEO of McDonald’s declared, ‘If every asset we own, every building, and every piece of equipment were destroyed in a terrible natural disaster, we would be able to borrow all the money to replace it very quickly because of the value of our brand . . . The brand is more valuable than the totality of all these assets.’28 Thus, brands are powerful assets that must be carefully developed and managed. In this section, we examine the key strategies for building and managing product and service brands.

Brand equity

brand equity

The differential effect that knowing the brand name has on customer response to the product or its marketing.

Brands are more than just names and symbols. They are a key element in the company’s relationships with consumers. Brands represent consumers’ perceptions and feelings about a product and its performance – everything that the product or service means to consumers. In the final analysis, brands exist in the heads of consumers. As one well-respected marketer once said, ‘Products are created in the factory, but brands are created in the mind.’29 A powerful brand has high brand equity. Brand equity is the differential effect that knowing the brand name has on customer response to the product and its marketing. It is a measure of the brand’s ability to capture consumer preference and loyalty. A brand has positive brand equity when consumers react more favourably to it than they do to a generic or unbranded version of the same product. A brand has negative brand equity if consumers react less favourably to it than they do to an unbranded version. Brands vary in the amount of power and value they hold in the marketplace. Some brands – such as Coca-Cola, Nike, Disney, Bonds, McDonald’s, Harley-Davidson and others – become larger-than-life icons that maintain their power in the market for years, even generations. Other brands create fresh consumer excitement and loyalty, brands such as Google, YouTube, Apple, eBay, Twitter and Wikipedia. These brands win in the marketplace not simply because they deliver unique benefits or reliable service. Rather, they succeed because they forge deep connections with customers. Ad agency Young & Rubicam’s Brand Asset Valuator measures brand strength along four consumer perception dimensions: differentiation (what makes the brand stand out), relevance (how consumers

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feel it meets their needs), knowledge (how much consumers know about the brand) and esteem (how highly consumers regard and respect the brand). Brands with strong brand equity rate high on all of these dimensions. A brand must be distinct, or consumers will have no reason to choose it over other brands. But the fact that a brand is highly differentiated does not necessarily mean consumers will buy it. The brand must stand out in ways that are relevant to consumers’ needs. But even a differentiated, relevant brand is far from being a shoo-in. Before consumers will respond to the brand, they must first know about and understand it. And that familiarity must lead to a strong, positive consumer–brand connection.30 Thus, positive brand equity derives from consumer feelings about and connections with a brand. Consumers sometimes bond very closely with specific brands. As perhaps the ultimate expression of brand devotion, a surprising number of people – and not just Harley-Davidson fans – have their favourite brand tattooed on their bodies. Whether it is contemporary new brands, such as Facebook or Amazon, or old classics like Harley or Converse, strong brands are built around an ideal of engaging consumers in some relevant way. A brand with high brand equity is a very valuable asset. Brand valuation is the process of estimating the total financial value of a brand. Measuring such value is difficult. However, according to one estimate, the brand value of Apple is a whopping US$170 billion, with Google at $US120 billion and Coca-Cola at US$78 billion. Other brands rating among the world’s most valuable include Microsoft, McDonald’s, Toyota, IKEA, Facebook, Amazon and Louis Vuitton.31 Table 7.2 shows Australia’s most valuable brands in 2016. High brand equity provides a company with many competitive advantages. A powerful brand enjoys a high level of consumer brand awareness and loyalty. Because consumers expect stores to carry the brand, the company has more leverage in bargaining with resellers. Because the brand name carries high credibility, the company can more easily launch line and brand extensions. A powerful brand offers the company some defence against fierce price competition. Above all, however, a powerful brand forms the basis for building strong and profitable customer relationships. The fundamental asset underlying brand equity is customer equity – the value of the customer relationships that the brand creates. A powerful brand is important, but what it really represents is a profitable set of loyal customers. The proper focus of marketing is building customer equity, with brand management serving as a major marketing tool. Companies need to think of themselves not as portfolios of products, but as portfolios of customers.

Table 7.2  Australia’s top-ranked brands, 2016 2016

2015

Rank

Brand value (US$m)

Rank

Brand value (US$m)

Brand

1

10 707

2

8 708

Telstra

2

7 755

1

8 964

Woolworths

3

7 458

4

6 664

ANZ

4

7 186

4

7 520

Commonwealth Bank of Australia

5

5 846

7

5 673

Westpac

6

5 550

8

5 139

National Australia Bank

7

5 275

5

6 107

BHP Billiton

8

4 826

6

5 828

Coles

9

3 622

10

3 087

Optus

10

3 076

9

4 229

Rio Tinto

Source: Brand Finance, Brand Directory Australia, 2016

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Building strong brands Branding poses challenging decisions to the marketer. Figure 7.6 shows that the major brand strategy decisions involve brand positioning, brand name selection, brand sponsorship and brand development.

Brand positioning Marketers need to position their brands clearly in target customers’ minds. They can position brands at any of three levels.32 At the lowest level, they can position the brand on product attributes. For example, P&G invented the disposable nappy category with its Pampers brand. Early Pampers marketing focused on such attributes as fluid absorption, fit and disposability. In general, however, attributes are the least desirable level for brand positioning. Competitors can easily copy attributes. More importantly, customers are not interested in attributes as such; they are interested in what the attributes will do for them. A brand can be better positioned by associating its name with a desirable benefit. Thus, Pampers can go beyond technical product attributes and talk about the resulting containment and skin-health benefits from dryness. Some successful brands positioned on benefits are Volvo (safety), FedEx (guaranteed on-time delivery), Nike (performance) and Instagram (capturing and sharing moments). The strongest brands go beyond attribute or benefit positioning. They are positioned on strong beliefs and values, engaging customers on a deep, emotional level. An Australian study showed that emotionally connected consumers purchased 40 to 60 per cent more than an average buyer. So it is not surprising that brand managers remind us that Qantas ‘Feels like Home’ and that ‘Hearts Align’ with Pedigree.33 Advertising agency Saatchi & Saatchi suggests that brands should strive to become lovemarks, products or services that ‘inspire loyalty beyond reason’. Brands ranging from Apple, Disney, Nike and Coca-Cola to Google and Pinterest have achieved this status with many of their customers. Lovemark brands pack an emotional wallop. Customers do not just like these brands; they have strong emotional connections with them and love them unconditionally.34 When positioning a brand, the marketer should establish a mission for the brand and a vision of what the brand must be and do. A brand is the company’s promise to deliver a specific set of features, benefits, services and experiences consistently to buyers of the brand. The brand promise must be simple and honest. Hotel Formule1, for example, offers clean rooms, low prices and good service, but does not promise expensive furniture or large bathrooms. In contrast, Sofitel offers luxurious rooms and a truly memorable experience, but does not promise low prices.

Brand name selection A good name can add greatly to a product’s success. However, finding the best brand name is a difficult task. It begins with a careful review of the product and its benefits, the target market and proposed marketing strategies. After that, naming a brand becomes part science, part art and a measure of instinct.

BRAND POSITIONING

BRAND NAME SELECTION

BRAND SPONSORSHIP

BRAND DEVELOPMENT

Attributes Benefits Beliefs and values

Selection Protection

Manufacturer’s brand Private brand Licensing Co-branding

Line extensions Brand extensions Multibrands New brands

Figure 7.6  Major brand strategy decisions

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Desirable qualities for a brand name include the following: • The brand name should suggest something about the product’s benefits and qualities: Click Clack (food storage), Acuvue (contact lenses), Snapchat (photo and video sharing), Lean Cuisine (diet meals). • It should be easy to pronounce, recognise and remember: Omo, Twitter, JetStar. • The brand name should be distinctive: Fruche, Big W, Nest. • It should be extendable: Amazon.com began as an online bookseller but chose a name that would allow expansion into other categories. • The name should translate easily into foreign languages. The official name of Microsoft’s Bing search engine in China is bi ying, which literally means ‘very certain to respond’ in Chinese.35 • It should be capable of registration and legal protection. A brand name cannot be registered if it infringes on existing brand names. Choosing a new brand name is not easy. After a decade or two of choosing quirky names (Yahoo!, Google) or trademark-proof made-up names (Novartis, Aventis, Lycos), today’s style is Brand name selection: Johnson to build brands around names that have real meaning. For example, names like Vitaminwater & Johnson are careful to protect the iconic brand name ‘BAND(beverages) and Blackboard (eLearning software) are simple and make intuitive sense. But with AID® Brand Adhesive Bandages’ trademark applications soaring, available new names can be hard to find. by always using both the Once chosen, the brand name must be protected. Many firms try to build a brand name registered trademark symbol and the word ‘brand’. that will eventually become identified with the product category. Brand names such as Kleenex, © Sheila Fitzgerald/Shutterstock.com Velcro, Nugget, BluTac and Formica have succeeded in this way. However, their very success may threaten the company’s rights to the name. Many originally protected brand names – such as cellophane, aspirin, nylon, kerosene, linoleum, yo-yo, trampoline, escalator, kiwi fruit and shredded wheat – are now generic names that any seller can use. To protect their brands, marketers present them carefully using the word ‘brand’ and the registered trademark symbol, as in ‘BAND-AID® Brand Adhesive Bandages’.

Brand sponsorship A manufacturer has four sponsorship options. The product may be launched as a national brand (or manufacturer’s brand ), such as when Sony and Kellogg sell their output under their own brand names (Sony Bravia HDTV or Kellogg’s Corn Flakes). Or the manufacturer may sell to resellers who give the product a private brand (also called a store brand or distributor brand ). Although most manufacturers create their own brand names, others market licensed brands. Finally, two companies can join forces and co-brand a product. We discuss each of these options in turn.

National brands versus store brands National brands (or manufacturers’ brands) have long dominated the retail scene. In recent times, however, an increasing number of retailers and wholesalers have created their own store brands (or private brands). Store brands have been gaining strength for more than two decades, but recent tighter economic times have created a store-brand boom. Today, over 65 per cent of Australians buy store brands.36 In fact, store brands are growing much faster than national brands. In Australia nearly one-quarter of all grocery sales are private-label products. Food lines dominate the private-label brands in Australia and New Zealand, although other categories are increasing in importance. Private-label apparel, such as Basque and Basque Women (Myer) and Target Collection, is also becoming increasingly popular. Many large retailers skilfully market a deep assortment of store-brand merchandise spanning a broad range of categories. For example, Costco, the world’s largest warehouse club, with eight stores in Sydney, Melbourne, Brisbane, Adelaide and Canberra, offers a staggering array of goods and services under its Kirkland Signature brand.37 In the so-called battle of the brands between national and private brands, retailers have many advantages. They control what products they stock, where they go on the shelf, what prices they charge and which products they will feature in local circulars. Retailers often price their store brands lower than comparable

store brand (private brand)

A brand created and owned by a reseller of a product or service.

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national brands, thereby appealing to the budget-conscious shopper in all of us. Although store brands can be hard to establish, and costly to stock and promote, they also yield higher profit margins for the reseller. And they give resellers exclusive products that cannot be bought from competitors, resulting in greater store traffic and loyalty. To compete with store brands, national brands must sharpen their value propositions. Many national brands are fighting back by rolling out more discounts to defend their market share. In the long run, however, leading brand marketers must compete by investing in new brands, new features and quality improvements that set them apart. They must design strong advertising programs to maintain high awareness and preference. And they must find ways to ‘partner’ with major distributors in a search for distribution economies and improved joint performance.

Licensing Most manufacturers take years and spend millions to create their own brand names. However, some companies license names or symbols previously created by other manufacturers, names of well-known celebrities, or characters from popular movies and books. For a fee, any of these can provide an instant and proven brand name. Apparel and accessories sellers pay large royalties to adorn their products – from blouses to ties, and linens to luggage – with the names or initials of well-known fashion innovators such as Calvin Klein, Tommy Hilfiger, Gucci or Armani. Sellers of children’s products attach an almost endless list of character names to clothing, toys, school supplies, linens, dolls, lunch boxes, cereals and other items. Licensed character names range from classics, such as Sesame Street, Disney, Star Wars, Winnie-the-Pooh, Scooby Doo, Hello Kitty and Dr Seuss characters, to the more recent Dora the Explorer, Little Einsteins and Angry Birds characters. And currently a number of top-selling retail toys are products based on television shows and movies, such as the Doc McStuffins Doctor’s Bag Playset, from the television show of the same name about a girl who runs a clinic for her toys. Name and character licensing has grown rapidly in recent years. Annual retail sales of licensed products worldwide have grown from only US$4 billion in 1977 to US$55 billion in 1987 and more than US$262 billion today. Licensing can be a highly profitable business for many companies. For example, Disney is the world’s largest licensor with a studio full of hugely popular characters, from the Disney Princesses and Disney Fairies to heroes from Toy Story and Cars and classic characters such as Mickey Mouse and Minnie Mouse. Disney characters recently reaped a reported US$52 billion in annual worldwide merchandise sales.38 Co-branding

co-branding

Co-branding occurs when two established brand names of different companies are used on the same

The practice of using the established brand names of two different companies on the same product.

product. For example, financial services firms often partner with other companies to create co-branded credit cards, such as when ANZ MasterCard and Aussie Home Loans joined forces to create the Aussie Credit Card. Behind the Lyrics is a new brand co-created by Genius and Spotify. Genius brings to the table the world’s largest collection of song lyrics and crowd-sourced music knowledge, while Spotify brings the music. Spotify iPhone users will be able to add the Genius Behind the Lyrics experience to their songs with the new brand. More than just co-branding, these companies are ‘co-making’ these products.39 Co-branding offers many advantages. Because each brand operates in a different category, the combined brands create broader consumer appeal and greater brand equity. Co-branding can take advantage of the complementary strengths of two brands. It also allows a company to expand its existing brand into a category it might otherwise have difficulty entering alone. For example, the Nike + iPod arrangement gives Apple a presence in the sports and fitness market. At the same time, it helps Nike to bring new value to its customers. Co-branding also has limitations. Such relationships usually involve complex legal contracts and licences. Co-branding partners must carefully coordinate their advertising, sales promotion and other

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marketing efforts. Finally, when co-branding, each partner must trust that the other will take good care of its brand. If something damages the reputation of one brand, it can tarnish the co-brand as well.

Brand development A company has four choices when it comes to developing brands (see Figure 7.6). It can introduce line extensions, brand extensions, multibrands or new brands.

Line extensions

Line extensions occur when a company extends existing brand names to new forms, colours, sizes, ingredients or flavours of an existing product category. Thus, the Kellogg’s line of cereals includes Corn Flakes, Just Right and Nutri-Grain, and several other variations. A company might introduce line extensions as a low-cost, low-risk way to introduce new products. Or it might want to meet consumer desires for variety, to use excess production capacity or simply to command more shelf space from resellers. However, line extensions involve some risks. An overextended brand name might lose its specific meaning. For example, you can now pick from an array of seven different Holden Commodore models – from the basic Evoke to the top-of-the-line sports model SS V-Series Redline Edition. It is unlikely that many customers will fully appreciate the differences across the many similar models, and these can cause consumer confusion or even frustration. Another risk is that sales of an extension may come at the expense of other items in the line. A line extension works best when it takes sales away from competing brands, not when it ‘cannibalises’ the company’s other items. Brand extensions A brand extension extends a current brand name to new or modified products in a new category. For example, both Woolworths and Coles have extended their brand to include petrol, credit cards and even insurance. But did you know that Woolworths has moved into the mobile phone market with Woolworths Mobile and has partnered with Big W, Ezibuy and eBay to offer their customers an in-store collection service with ‘Simply Collect’?40 A brand extension gives a new product instant recognition and faster acceptance. It also saves the high advertising costs usually required to build a new brand name. At the same time, a brand extension strategy involves some risk. Brand extensions such as Heinz pet food and Life Savers chewing gum met early deaths. The extension may confuse the image of the main brand. And if a brand extension fails, it may harm consumer attitudes towards the other products carrying the same brand name. Furthermore, a brand name may not be appropriate to a particular new product, even if it is well-made and satisfying: Would you consider flying on Hooters Air or wearing an Evian water-filled padded bra (both failed)?

line extension

Extending an existing brand name to new forms, colours, sizes, ingredients or flavours of an existing product category.

brand extension Extending an existing brand name to new product categories.

Multibrands Companies often market many different brands in a given product category. For example, in Australia, Nestlé sells 14 brands in its chocolate and confectionery line (including Allens, Kit Kat, Life Savers, Smarties, Milkybar and Chokito). But Nestlé does not just sell confectionery; their categories include everything from coffee, with the iconic Nespresso, to breakfast cereals (Uncle Tobys) and medicated lozenges (Quick-Eze, Soothers), as well as baby formulas, baking ingredients, recipe bases and sauces. Multibranding offers a way to establish different features that appeal to different customer segments, lock up more reseller shelf space and capture a larger market share. A major drawback of multibranding is that each brand might obtain only a small market share, and none may be very profitable. The company may end up spreading its resources over many brands instead of building a few brands to a highly profitable level. These companies should reduce the number of brands they sell in a given category and set up tighter screening procedures for new brands.

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New brands A company might believe that the power of its existing brand name is waning and a new brand name is needed. Or it may create a new brand name when it enters a new product category for which none of the company’s current brand names are appropriate. For example, Nissan created the separate luxury car brand Infiniti to attract the premium car buyer. As with multibranding, offering too many new brands can result in a company spreading its resources too thinly. And in some industries, such as consumer packaged goods, consumers and retailers have become concerned that there are already too many brands, with too few differences between them. Thus, Procter & Gamble, Kraft and other large consumer-product marketers are now pursuing megabrand strategies – weeding out weaker or slower-growing brands and focusing their marketing dollars only on brands that can achieve the number-one or number-two market share positions with good growth prospects in their categories.

Managing brands Companies must manage their brands carefully. First, the brand’s positioning must be continuously communicated to consumers. Major brand marketers often spend huge amounts on advertising to create brand awareness and build preference and loyalty. For example, worldwide, Coca-Cola spends almost US$3 billion annually to advertise its many brands, General Motors spends nearly US$3.4 billion, Unilever spends US$7.9 billion and P&G spends an astounding US$11.5 billion.41 Such advertising campaigns can help to create name recognition, brand knowledge and maybe even some brand preference. However, the fact is that brands are not maintained by advertising but by the customers’ brand experiences. Today, customers come to know a brand through a wide range of contacts and touch points. These include advertising, but also personal experience with the brand, word of mouth, company websites and Facebook pages, and many others. The company must put as much care into managing these touch points as it does into producing its ads. ‘Managing each customer’s experience is perhaps the most important ingredient in building [brand] loyalty,’ states one branding expert. ‘Every memorable interaction . . . must be completed with excellence and . . . must reinforce your brand essence.’ A former Disney executive agrees: ‘A brand is a living entity, and it is enriched or undermined cumulatively over time, the product of a thousand small gestures.’42 The brand’s positioning will not take hold fully unless everyone in the company lives the brand. Therefore, the company needs to train its people to be customer-centred. Even better, the company should carry on internal brand-building to help employees understand and be enthusiastic about the brand promise. Many companies go even further by training and encouraging their distributors and dealers to serve their customers well. Finally, companies need to periodically audit their brands’ strengths and weaknesses. They should ask: Does our brand excel at delivering benefits that consumers truly value? Is the brand properly positioned? Do all of our consumer touch points support the brand’s positioning? Do the brand’s managers understand what the brand means to consumers? Does the brand receive proper, sustained support? The brand audit may turn up brands that need more support, brands that need to be dropped or brands that must be rebranded or repositioned because of changing customer preferences or new competitors.

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Student Learning Centre

225

present range of the line. All product lines and items offered to customers by a particular seller make up the product mix. The mix can be described by four dimensions: width, length, depth and consistency. These dimensions are the tools for developing the company’s product strategy.

A product is more than a simple set of tangible features. Each product or service

Learning Objective 3. Identify the four characteristics that affect the marketing of a service and the additional marketing considerations that services require. (pp. 213–18)

offered to customers can be viewed on three levels. The core customer value

Services are characterised by four key characteristics: they are intangible,

consists of the core problem-solving benefits that consumers seek when they

inseparable, variable and perishable. Each characteristic poses problems and

buy a product. The actual product exists around the core and includes the quality

marketing requirements. Marketers work to find ways to make the service

level, features, design, brand name and packaging. The augmented product is the

more tangible, to increase the productivity of providers who are inseparable

actual product plus the various services and benefits offered with it, such as a

from their products, to standardise the quality in the face of variability, and

warranty, free delivery, installation and maintenance.

to improve demand movements and supply capacities in the face of service

Reviewing the learning objectives

Learning Objective 1. Define product and the main classifications of products and services. (pp. 200–5)

perishability. Good service companies focus attention on both customers and employees. They understand the service–profit chain, which links service firm profits with

Broadly defined, a product is anything that can be offered to a market for

employee and customer satisfaction. Services marketing strategy calls not only

attention, acquisition, use or consumption that might satisfy a want or need.

for external marketing but also for internal marketing to motivate employees and

Products include physical objects, but also services, events, persons, places,

interactive marketing to create service delivery skills among service providers.

organisations, ideas or mixes of these entities. Services are products that

To succeed, service marketers must create competitive differentiation, offer high

consist of activities, benefits or satisfactions offered for sale that are essentially

service quality and find ways to increase service productivity.

intangible, such as banking, hotel, tax-preparation and home-repair services.

– are usually classified according to consumer shopping habits (convenience

Learning Objective 4 Describe the brand strategy companies use to build and manage their brands. (pp. 218–24)

products, shopping products, specialty products and unsought products).

Some analysts see brands as the major enduring asset of a company. Brands are

Industrial products – purchased for further processing or for use in conducting a

more than just names and symbols – they embody everything that the product or

business – include materials and parts, capital items, and supplies and services.

service means to consumers. Brand equity is the positive differential effect that

Other marketable entities – such as organisations, persons, places and ideas –

knowing the brand name has on customer response to the product or service.

can also be thought of as products.

A brand with strong brand equity is a very valuable asset.

Products and services fall into two broad classes based on the types of consumers that use them. Consumer products – those bought by final consumers

Learning Objective 2. Describe the decisions companies make regarding their individual products and services, product lines and product mixes. (pp. 205–13)

In building brands, companies need to make decisions about brand positioning, brand name selection, brand sponsorship and brand development. The most powerful brand positioning builds around strong consumer beliefs and values. Brand name selection involves finding the best brand name based on a careful review of product benefits, the target market and proposed marketing

Individual product decisions involve product attributes, branding, packaging,

strategies. A manufacturer has four brand sponsorship options: it can launch

labelling and product support services. Product attribute decisions involve

a national brand (or manufacturer’s brand), sell to resellers who use a private

product quality, features, and style and design. Branding decisions include

brand, market licensed brands or join forces with another company to co-brand

selecting a brand name and developing a brand strategy. Packaging provides

a product. A company also has four choices when it comes to developing brands.

many key benefits, such as protection, economy, convenience and promotion.

It can introduce line extensions, brand extensions, multibrands or new brands.

Package decisions often include designing labels, which identify, describe

Companies must build and manage their brands carefully. The brand’s

and possibly promote the product. Companies also develop product support

positioning must be continuously communicated to consumers. Advertising

services that enhance customer service and satisfaction and safeguard against

can help. However, brands are not maintained by advertising but by the

competitors.

customers’ brand experiences. Customers come to know a brand through a

Most companies produce a product line rather than a single product.

wide range of contacts and interactions. The company must put as much care

A product line is a group of products that are related in function, customer-

into managing these touch points as it does into producing its ads. Companies

purchase needs or distribution channels. Line stretching involves extending a line

must periodically audit their brands’ strengths and weaknesses. In some cases,

downward, upward or in both directions to occupy a gap that might otherwise

brands may need to be repositioned because of changing customer preferences

be filled by a competitor. In contrast, line filling involves adding items within the

or new competitors.

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Part 3  Designing a customer-driven strategy and mix

Discussion questions ❶ Services and experiences. The distinction made between goods, services and experiences is an interesting view of the progression that has occurred over time, as organisations have become more sophisticated in developing offerings for the marketplace. In truth, most services are experiential. The key point to experiential offerings is the staging of the events that keep the customer coming back. It is necessary to consider the management of service organisations separately from manufacturing organisations, and the other classifications mentioned should also be considered for their similarities as well as their differences. How would you distinguish between services and experiences? (Learning Objective 1) (AACSB: Reflective Thinking) ❷ Relationships with consumers. Evert Gummesson defines relationship marketing as ‘marketing seen as relationships, networks, and interaction’. He cites Grönroos’s definition of marketing with a relationship focus: ‘Marketing is to establish, maintain, and enhance relationships with customers and other partners, at a profit, so that the objectives of the parties are met. This is achieved by mutual exchange and fulfilment of promises.’ It is understandable that business users form relationships with 43

the firms they buy from, since they are dependent on their suppliers and buy directly from them. Consumers deal with self-service intermediaries, 44

such as Coles Supermarkets, where they have contact with few people other than at the checkout. What part might relationships play in the

a year I need to update my maps, surely it must be perishable? Are not the measures similar to, and in some cases, the same as, those employed in measuring service quality for an ‘almost pure’ service? Considering all of the above, are service characteristics really so different from branded goods? Justify your answer. (Learning Objective 3) (AACSB: Reflective Thinking) ❺ Brand distinctiveness. Gillette reportedly spent US$160 million on research and development for its Mach3 product, which it advertised onpack and off-pack in Australia and New Zealand as ‘The First Triple Blade Razor . . . The Closest Shave . . . In Fewer Strokes . . . With Less Irritation’. Next came Schick Quattro, with four blades and two conditioning strips with aloe and vitamin E to help prevent nicks and cuts (or to help the skin repair itself?), a pivoting head that rotates so as to offer optimal blade contact, anti-clog technology for improved rinsing and a travel stand for quick air-drying. Gillette followed with its five-blade Fusion shaving system, and both products now compete with battery-operated moving shaving heads. Arguably, the brands now copycat each other. But how do they compete from here on in? Does each manufacturer simply add more blades and more strips until the device becomes so heavy it is unusable? Considering all of the above, how can apparent ‘copycat’ brands compete effectively in the marketplace? (Learning Objective 4) (AACSB: Reflective Thinking)

marketing of branded products, given the differences between the process

Critical thinking exercises

of marketing business-to-business products compared with marketing of

❶ Branding is not just for products and services; destinations are getting in on

consumer products? Do you think consumers might form relationships

the action, too. In a small group, come up with a brand identity proposal for

with the brands themselves? Explain your answer. (Learning Objective 2)

your town, city or state. Present your idea to the rest of the class and explain

(AACSB: Reflective Thinking)

the meaning you are trying to convey. (Learning Objective 1) (AACSB:

❸ Private labels. For the last decade, the two main supermarket retailers in

Communication; Application of Knowledge)

Australia have been competing aggressively with their range of services,

❷ Choose one product category (such as chocolate chip cookies), and then

their private-label (store) brands and price. During this time, there has been

identify at least the brands in that category, including national brands

significant growth in private labels, with European supermarket chain, ALDI,

and private-label brands. For each brand, compare the product attributes,

entering the market, as well as growth in other sectors (see the case study

including price and quality; product features; and its style and design

‘Supermarket wars’ in Appendix 1). Do you think retailers are committed to

(appearance). Record these comparisons in a table and compare your views

their own private labels? Explain your answer. What evidence do you see

with those of your classmates. What might be the reason for you and your

that retailers recognise the need to use advertising to build brand equity

classmates to have different opinions? Which brands might have higher

in these private-label brands? (Learning Objective 2) (AACSB: Reflective

brand equity? Justify your answer. (Learning Objectives 2 and 4) (AACSB: Communication, Reflective Thinking)

Thinking) ❹ Service characteristics. This issue makes for interesting class debates.

❸ Search online to find five examples of service-provider attempts to reduce

Here, we consider several points that force us to think deeply about the

service intangibility. Present one of your examples to the rest of the class and

nature of a product. The characteristics of services include intangibility,

justify your views. (Learning Objective 3) (AACSB: Communication; Use of IT)

inseparability (they are personal in nature), variability and perishability. What is the significance of these points at a practical level? For example, a concept such as ‘being ethical in business’, which might be marketed

Navigating the key terms

within an organisation, is intangible, yet it is not a service. What is

Learning Objective 1

it? What could be more personal and involving than buying a house?

consumer product  (p. 202)

Learning Objective 2 brand  (p. 208)

Yet, a house is not a service. Some people use fluoride toothpaste for 10 or

industrial product  (p. 203)

packaging  (p. 209)

15 years and still get tooth decay – surely this is an example of variability

product  (p. 200)

product line  (p. 211)

in the outcomes from using a physical product? So, what makes service

service  (p. 200)

product mix (product portfolio)  (p. 212)

encounters more variable than this? If I buy a GPS navigator and after

social marketing  (p. 204)

product quality  (p. 205)

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Chapter 7  Products, services and brands: Offering customer value

227

Learning Objective 3

service intangibility  (p. 213)

Learning Objective 4

co-branding  (p. 222)

interactive marketing  (p. 216)

service perishability  (p. 214)

brand equity  (p. 218)

line extension  (p. 223)

internal marketing  (p. 215)

service variability  (p. 214)

brand extension  (p. 223)

store brand  (private brand)  (p. 221)

service inseparability  (p. 214)

service–profit chain  (p. 215)

Mini cases 7.1  Industrial products Opening doors with Grifco Grifco makes industrial door openers – those gadgets that make a

also offers after-sales support for installers and customers, both online and

door open and close – and they have been doing so for over 50 years.

in person.

The first openers were mechanical, and today Grifco make some of the best

❶ What type of industrial good are Grifco’s door openers? What factors

electronic door-opening systems in the world. Think for a moment about all

did you consider in classifying this good? (Learning Objective 1)

the different places industrial businesses might need door openers: from

(AACSB: Communication; Application of Knowledge)

manufacturing plants to shop fronts, warehouses and fire stations. Some

❷ An industrial product is a complex bundle of benefits in much the same

door openers need to be fire-proof, others need to be ignition-proof and

way as a consumer product is. Marketers must identify the core customer

still others need to be able to handle very heavy use. Grifco sell them all.

value, create an actual product and choose how to augment that

They also promise their customers personalised sales service, reliable and

product. Identify the core value, as well as the actual and augmented

efficient products of exceptional quality, and a huge array of spare parts

product, for Grifco door openers (see ). (Learning

and accessories. The service does not stop with the sale – the company

Objective 1) (AACSB: Communication; Application of Knowledge)

7.2 Packaging Vote 1 for ‘The Original’ Farmers Union Iced Coffee brand was launched in 1977. It is one of

❶ Involving loyal customers in packaging decisions seems like a good

the largest-selling brands in the category and Australia’s only national­

idea, but it could also be a problem for the brand manager if there

iced-coffee brand. Brand owner Lion Pty Limited has asked its loyal Iced

is no clear favourite package design. What are the advantages and

Coffee brand customers to join them in redesigning the packaging for the

disadvantages of involving customers in package design decisions?

market-leading brand. Brand devotees have been asked to vote for their

(Learning Objective 2) (AACSB: Communication; Application of

favourite package design – choosing between ‘The Original’, ‘The Real

Knowledge; Analytical Thinking)

McCoy’, ‘The Straight-Shooter’ and ‘The Wild Card’ – with the design varying

❷ Iced coffee is a convenience good. Customers purchase such items

progressively from the original. In branding and packaging, consistency

often and may have well-established preferences so they do not need to

is crucial so each of the package alternatives is the same shape and size,

expend a great deal of effort when choosing a brand. Customers often

uses the same colours (teal and brown) and retains the same Farmers

use the package design to quickly locate their favourite brand in the

Union trademark. After voting for their favourite package design on a

confusion of products on a supermarket shelf. Industrial goods also have

custom-made website, customers can follow progress of the vote on the

packaging. Do you think industrial buyers are influenced in the same

brand’s Facebook page. Changing packaging, its layout and design is not

way by a product’s packaging? Explain your answer. What might be the

something a brand manager does lightly. This is because the package is

considerations in designing packaging for industrial buyers? (Learning

often the last and best chance to attract a buyer’s attention.45

Objectives 1 and 2) (AACSB: Communication; Application of Knowledge)

7.3  Marketing analytics at work Just one more cereal Kellogg’s, maker of All-Bran, Special K and Kellogg’s Corn Flakes, has

flavour to Kellogg’s Ultimate Spiderman cereal, and gluten-free versions

more than 10 established cereal brands on the market in Australia

of its iconic Special K and Corn Flakes brands. When launching a new

as well as many new cereals – everything from Nutri-Grain Ice Break

brand, the company must consider a number of key brand strategy

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Part 3  Designing a customer-driven strategy and mix

7.3  Marketing analytics at work continued decisions as well as the likely impact of the new brand on each of its

little more expensive to make, with variable costs of $0.55 per packet

existing brands.

(compared to $0.30 for the original product). The company expects to

❶ What brand development strategy is Kellogg’s undertaking with the

sell 5 million packets of Cereal X in the first year after introduction but

following three new products: Nutri-Grain Ice Break flavour, Kellogg’s

80 per cent of those sales will come from buyers who would normally

Ultimate Spiderman cereal and Special K Gluten Free? Do you think

buy the standard product (i.e. cannibalised sales). Assuming sales of

the new brands will cannibalise the existing Kellogg’s cereal brands?

the standard brand are normally 25 million packets a year and that the

Justify your answer. (Learning Objective 4) (AACSB: Analytical Thinking;

company will incur an increase in fixed costs of $500 000 during the

Application of Knowledge)

first year to launch Cereal X, will the new product be profitable? Refer

❷ Suppose Kellogg’s were considering launching a new brand extension

to the discussion of cannibalisation in Appendix 3 (see ‘8.5 Financial

– let’s call it Cereal X. Suppose this new brand will be sold for a

analysis of marketing tactics’) for an explanation regarding how to

higher wholesale price of $1.20 per unit (compared to the standard

conduct this analysis. (Learning Objective 4) (AACSB: Analytical

brand of cereal at $1.00 per unit), but that the new brand is also a

Thinking)

7.4  Ethical reflection Champagne from Australia? Scotch Whiskey, Champagne Sparkling Wine, Parmesan Cheese, Dijon

Scotch. True Scotch must be aged in oak casks in Scotland for at least three

Mustard – what do all of these have in common? They are not brand names

years. All of these products come with a higher price tag for consumers.

but, rather, geographical indicators (GIs) of the origins of these foodstuffs.

❶ Do you think products with geographic indicators are actually superior

Europe has a long history of gastronomical delicacies that the European

to other similar ones not originating from that geographical region?

Union has been eager to protect for economic reasons. For example, not

Give some examples to support your answer. (Learning Objective 2)

just any sparkling wine can be labelled champagne because only sparkling

(AACSB: Application of Knowledge)

wine produced in the Champagne region of France can use that on the label.

❷ Is it ethical for the makers of these products to charge higher prices

The British government is launching a registry of Scottish whiskey makers to

when others can make or grow them just as well? Justify your answer.

protect its US$4 billion industry from imitators who label their whiskey as

(Learning Objective 4) (AACSB: Application of Knowledge)

References

1 Based on Bunnings Warehouse website, , accessed April 2015; see also ‘Tradies crime prevention event’, , accessed April 2016. 2 R K Krishna Kumar, ‘Effective marketing must begin with customer engagement’, Marketing News, 15 April 2009, p. 15; and Lawrence A Crosby & Brian S Lunde, ‘The brand scorecard’, Marketing Management, May/June 2008, pp. 12–13. 3 For the BOQ campaign summary, see ‘Bank of Queensland launches new “It’s possible to love a bank” rebranding campaign via BWM’, Campaign Brief, 31 May 2013; see also , accessed April 2016. 4 For the Amaysim campaign summary, see ‘Special group convinces David Hasselhoff to change his name to launch Amaysim campaign’, Campaign Brief, 14 November 2015; see also , accessed May 2016. 5 Information from , accessed June 2016. 6 Information from , , and , accessed June 2016. 7 Colgate Total advertising, ; social marketing information, , accessed June 2016. 8 Quotes and definitions from Philip Kotler, Marketing Insights from A to Z, Wiley: Hoboken, NJ, 2003, p. 148; and , accessed June 2016. 9 See Nathaniel Wice, ‘Sonos: The best wireless speakers’, Barrons, 3 January 2015, ; Tim Bradshaw, ‘Speaker maker Sonos raises $140m’, Financial Times, 3 December 2014, ; and , accessed June 2016. 10 Alok Jha, ‘Coke or Pepsi? It’s all in the head’, The Guardian, , accessed June 2016.

11 See ‘3 in 4 grocery purchase decisions being made in-store’, MarketingCharts, 15 May 2012, ; ‘FMI – Supermarket facts’, , accessed June 2016. 12 See Mary Mazzoni, ‘Amazon continues its battle against “wrap rage”’, Triple Pundit, 9 December 2013, ; and , accessed June 2016. 13 See , accessed June 2016. 14 Quotes from Leigh Stark, ‘Optus moves on: New plans, new logo, and a walking lemon named Ollie’, Gadget Guy, 26 June 2013; Katarina Matic, ‘The new face of Optus: New branding and new plans’, 29 June 2013, , accessed June 2016; Lisa, ‘Optus – Yes or no?’, Daley Blog, 25 June 2013, , accessed June 2016; and , accessed June 2016. 15 See , accessed June 2016. 16 See Bosch Australia Customer Care at , accessed June 2016. 17 See Samsung website, , accessed June 2016. 18 See Sony Australia website, , accessed June 2016. 19 See CIA, The World Factbook, and , accessed June 2015; ‘Trade in services Australia’, , accessed June 2016.

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Chapter 7  Products, services and brands: Offering customer value

20 Information from , accessed June 2016. 21 See websites , , and ; accessed June 2016. 22 See James L Heskett, W Earl Sasser, Jr & Leonard A Schlesinger, The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value, Free Press: New York, NY, 1997; and James L Heskett, W Earl Sasser & Leonard A Schlesinger, The Value Profit Chain: Treat Employees Like Customers and Customers Like Employees, Free Press: New York, NY, 2003. Also see John Marshall & Dave Mayer, ‘Activate a brand internally’, Marketing Management, Winter 2012, pp. 37–44. 23 See Kent Relocation Group, and ; accessed June 2016. 24 For information about Camp Quality, its history and philosophy, see , accessed June 2016. 25 See Australia Post, Annual Report 2015, , p. 107, accessed June 2016. 26 This story and others from , accessed June 2016. 27 See Micah Solomon, ‘5 social media customer service best practices to handle (or prevent) customer complaints’, Forbes, 28 January 2015, . 28 See ‘McAtlas shrugged’, Foreign Policy, May–June 2001, pp. 26–37; and Philip Kotler & Kevin Lane Keller, Marketing Management, 15th edn, Pearson Publishing: Upper Saddle River, NJ, 2016, p. 316. 29 See ‘For sale: Hessian, a brand without a product’, Fast Company, 12 February 2013, . 30 For more on BrandAsset Valuator, see Philip Kotler & Kevin Lane Keller, Marketing Management, 15th edn, Pearson Publishing: Upper Saddle River, NJ, 2016, chapter 11; and ‘BrandAsset valuator’, , accessed June 2016. 31 See ‘Best global brands’, , accessed June 2016. 32 See Scott Davis, Brand Asset Management, 2nd edn, Jossey-Bass: San Francisco, CA, 2002. For more on brand positioning, see Philip Kotler & Kevin Lane Keller, Marketing Management, Global Edition, 15th edn, Pearson Higher Education: Upper Saddle River, NJ, 2015, chapter 10. 33 ’Power of love: Emotionally attached consumers worth 40–60% more’, Marketing, 17 December 2012; ‘Qantas gets emotional in NZ with latest ad campaign’, B&T

Magazine, , 30 November 2015; and also ‘Pedigree launches beautiful campaign that shows close connection between dog and owner’, B&T Magazine, 27 April 2016, accessed June 2016. 34 See Aaron Ahuvia Rajeev & Richard P Bagozzi, ‘Brand love’, Journal of Marketing, March 2012, pp. 1–16; Doug Grisaffe, ‘Feeling the brand love’, Marketing News, February 2014, pp. 26–7; and , accessed June 2016. 35 See ‘Bing’, Wikipedia, , accessed June 2015. 36 ’Shop ‘til the economy drops: Are private labels a public menace?’, news.com.au, 20 February 2016, , accessed June 2016. 37 ’Supermarket and grocery stores in Australia’, IBIS World Industry Report G4111, , accessed June 2016. 38 ’Top 150 global licensors’, Global License, May 2016, 19(2), , accessed June 2016. 39 See Devin Liddell, ‘3 reasons why co-making is the future of branding’, Fast Company, 7 March 2014, ; and The Spotify Team, ‘Go behind the lyrics with Spotify and Genius’, Spotify News, 12 January 2016, , accessed June 2016. 40 See and , accessed June 2016. 41 ’100 largest global marketers’, Advertising Age, 8 December 2014, p. 26. 42 Quotes are from Stephen Cole, ‘Value of the brand’, CA Magazine, May 2005, pp. 39–40; and Lawrence A Crosby & Sheree L Johnson, ‘Experience required’, Marketing Management, July/August 2007, pp. 21–7; also see ‘The power of customer service’, Fortune, 3 December 2012, , accessed June 2016. 43 Evert Gummesson, ‘Making relationship marketing operational’, International Journal of Service Industry Management, 5(5), 1994, pp. 5, 7. 44 David L Blenkhorn & Hugh F MacKenzie, ‘Interdependence in relationship marketing’, Asia-Australia Marketing Journal, 4(1), 1996, pp. 25–30. 45 See Ben Ice, ‘Farmers Union Iced Coffee declares new packaging election’, Marketing Magazine, 7 June 2016, ; and also , and , accessed June 2016.

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Chapter

8

New products: Developing and managing innovation In Chapter 7, you learned how marketers manage and develop products and brands. In this chapter, we examine two additional product topics: developing new products and managing products through their life cycles. New products are the lifeblood of an organisation. However, new-product development is risky, and many new products fail. So, the first part of this chapter lays out a process for developing and introducing successful new products. Marketers want new products to enjoy long and successful lives. In the second part of the chapter, we show that every product passes through several life-cycle stages and that each stage poses new challenges requiring different marketing strategies and tactics. We wrap up our product discussion by looking at two additional considerations: social responsibility in product decisions, and international product and services marketing. For a visual representation of the chapter, please see the concept map on the following page.

Learning

Objectives

Learning Objective 1 Explain how companies find and develop new-product ideas. New-product development strategy  p. 232 Learning Objective 2 List and define the steps in the new-product development process, and describe the main considerations in managing this process. The new-product development process  pp. 232–39 Managing new-product development  pp. 239–41 Learning Objective 3 Describe the stages of the product life cycle and how marketing strategies change during the product life cycle. Product life-cycle strategies  pp. 241–47 Learning Objective 4 Discuss socially responsible product decisions, and international product and services marketing. Additional product and service considerations  pp. 247–50

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Chapter 8  New products: Developing and managing innovation

LO 1 Explain how companies find and develop new-product ideas. (p. 232)

NEW-PRODUCT IDEAS

ACQUISITION

NEW-PRODUCT DEVELOPMENT PROCESS Customer-centered • Team based • Systematic LO 2 List and define the steps in the new-product development process, and describe the main considerations in managing this process. (pp. 232–41)

Idea generation

Idea screening

Concept development and testing

Marketing strategy development

Commercialisation

Test marketing

Product development

Business analysis

PRODUCT LIFE CYCLE CHANGES Shaped by ethical and international market considerations LO 3 Describe the stages of the product life cycle and how marketing strategies change during the product life cycle. (pp. 241–47)

LO 4 Discuss socially responsible product decisions, and international product and services marketing. (pp. 247–50)

INTRODUCTION

GROWTH

MATURITY

DECLINE

•Innovators •Few competitors •Low sales •Negative profit

•Early adopters •Growing competition •Rapidly rising sales •Rising profit

•Middle majority •Stable competition •Peak sales •High profit

•Laggards •Declining competition •Declining sales •Declining profit

Basic product Cost–plus pricing Selective distribution Build awareness Sales promotion to entice trial

Product extensions Penetration pricing Intensive distribution Build awareness and interest Leverage high demand

Diversity brand Price to match competition Intensive distribution Stress brand differences Encourage brandswitching

Phase out Cut price Selective distribution Reduce advertising Reduces sales promotion

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New-product development strategy (p. 232) new-product development

The development of original products, product improvements, product modifications and new brands through the company’s own research and development (R&D) efforts.

A business can obtain new products in two ways. One is through acquisition – by buying a whole company, a patent or a licence to produce someone else’s product. The other is through the firm’s own new-product development efforts. By new products we mean original products, product improvements, product modifications and new brands that the business develops through its own research and development (R&D) efforts. In this chapter, we concentrate on new-product development. New products are important – to both customers and the marketers who serve them. For customers, new products bring new solutions and variety to their lives, and they are a key source of growth for companies. Yet, innovation can be very expensive and risky. New products face tough odds. For example, by one estimate, 60 per cent of all new consumer packaged products introduced by established companies fail; two-thirds of new-product concepts are never even launched.1 Why do so many new products fail? There are several reasons. Although an idea may be good, the company may overestimate the size of the market. The actual product may be poorly designed. Or it might be incorrectly positioned, launched at the wrong time, priced too high or poorly advertised. A high-level executive might push a favourite idea despite poor marketing research findings. Sometimes, the costs of product development are higher than expected, and sometimes competitors fight back more vigorously than expected. So, companies face a problem: they must develop new products, but the odds weigh heavily against success. To create successful new products, a company must understand its consumers, markets and competitors, and develop products that deliver superior value to customers.

The new-product development process (pp. 232–39) Rather than leaving new products to chance, a company must carry out strong new-product planning and set up a systematic, customer-driven new-product development process for finding and growing new products. Figure 8.1 shows the eight major steps in this process.

Idea generation idea generation

The systematic search for new-product ideas.

New-product development starts with idea generation – the systematic search for new-product ideas. A company typically generates hundreds, or even thousands, of ideas in order to find a few good ones. Major sources of new-product ideas include both internal sources, and external sources such as customers, competitors, distributors and suppliers, and others.

Idea generation

Idea screening

Concept development and testing

Marketing strategy development

Commercialisation

Test marketing

Product development

Business analysis

Figure 8.1  The main steps in the new-product development process

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Internal idea sources Using internal sources, the company can find new ideas through formal R&D. For example, Kraft Foods has a state-of-the-art innovation facility with over 100 food scientists developing new products for the Australian and Asian markets. The facility features everything from chocolate-development equipment to a test kitchen to a customer insights facility. However, a survey of 750 global CEOs reported that only 14 per cent of their innovation ideas came from traditional R&D. Instead, 41 per cent came from employees and 36 per cent from customers.2 So, companies pick the brains of employees – from executives to scientists, engineers, manufacturing staff and salespeople. Many companies have developed successful internal social networks and intrapreneurial programs that encourage employees to develop new-product ideas. For example, Google’s Innovation Time-Off program has resulted in blockbuster product ideas, ranging from Gmail and Ad Sense to Google News. A similar program at 3M has long encouraged employees to spend 15 per cent of their working time on their own projects, resulting in Post-it® Notes and many other successful Post-it® Brand products.3 Tech companies, such as Facebook and Twitter, sponsor periodic ‘hackathons’, in which employees take a day or a week away from their day-to-day work to develop new ideas. Professional social media network, LinkedIn, which has over 460 million members, holds ‘hackdays’, a Friday each month when it encourages employees to work on whatever they want that will benefit the company. LinkedIn takes the process a step further with its InCubator program, under which employees can form teams each quarter that pitch innovative new ideas to LinkedIn executives. If approved, the team gets up to 90 days away from its regular work to develop the idea into reality.4

External idea sources Companies can also obtain good new-product ideas from any of a number of external sources. For example, distributors and suppliers can contribute ideas. Distributors are close to the market and can pass along information about consumer problems and new-product possibilities. Suppliers can tell the company about new concepts, techniques and materials that can be used to develop new products. Competitors are another important source of new-product ideas. Companies watch competitors’ ads to get clues about their new products. They buy competing new products, take them apart to see how they work, analyse their sales and decide whether they should bring out a new product of their own. Other idea sources include trade magazines, shows and seminars; government agencies; advertising agencies; marketing research firms; university and commercial laboratories; and inventors. Some companies seek the help of external new-product consultancies and design firms, such as Proen Design, for new-product ideas and designs. For example, new-product development was a key part of Sabco’s marketing campaign to reconfirm its leadership position in the market. Proen Design worked with Sabco to develop the Staxx Storage System, which is used by major retailers throughout Australia.5 Perhaps the most important source of new-product ideas is customers themselves. The company can analyse customer feedback to find new products that better solve consumer problems. For example, New Zealand manufacturer, Imake Ltd, used customer insights when it developed its new product, ‘The Grainfather’, a home-brewing system. Customer feedback revealed that home-brewers like to add features and personalise their brewing system – so Imake developed upgrades and additional features so that customers could build their perfect system. Customers can even turn their micro-brewery into a distillery by adding a condenser and dome.6 Or, the company can invite customers to share suggestions and ideas. For example, The LEGO Group, maker of the classic LEGO® plastic bricks that have been fixtures in homes around the world for more than 60 years, systematically taps users for new-product ideas and input via the LEGO® Ideas website. The website invites customers to submit their ideas and to evaluate and

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vote on the ideas of others. Ideas supported by 10 000 votes head to the LEGO® Review Board for an internal review by various departments, including marketing and design. Ideas passing the review are made into official LEGO® products. Customers whose ideas reach production earn 1 per cent of total net sales of the product and receive credit as the LEGO® Ideas set creator inside every set sold. So far, LEGO® Ideas has resulted in 10 major new products, including the likes of LEGO® Minecraft, LEGO® Maze, LEGO® Wall-E and LEGO® Doctor Who.7

Crowdsourcing More broadly, many companies are now developing crowdsourcing or open-innovation new-product idea programs. Crowdsourcing throws the innovation doors wide open, inviting broad communities of people – customers, employees, independent scientists and researchers, and even the public at large – into the new-product innovation Product ideas: The LEGO® Ideas website invites customers to submit process. Tapping into a breadth of sources – both inside and vote on new-product ideas. So far, LEGO® Ideas has resulted in and outside the company – can produce unexpected and 10 major new products. powerful new ideas. LEGO and the LEGO logo are trademarks of The LEGO Group, used here by permission. © 2016 The LEGO Group, all rights reserved. Companies large and small, across all industries, are crowdsourcing product innovation ideas rather than relying only on their own R&D labs. For example, Samsung crowdsourcing Inviting broad recently launched an Open Innovation Program, which breaks down the walls surrounding Samsung’s communities of people own innovation process and opens the doors to fresh new-product and technology ideas from outside the – customers, employees, company. Through the program, Samsung creates alliances with top industry and university researchers independent scientists around the world, participates actively in industry-wide forums, works with suppliers on innovation and and researchers, and even the public at large seeks out and invests in promising start-up companies. ‘In the 21st century, no company can do all the – into the new-product research alone,’ says a Samsung executive, ‘and we see it as critically important to partner with [others] innovation process. across the world to build and strengthen a vibrant research community.’8 Rather than creating and managing their own crowdsourcing platforms, companies can use third-party crowdsourcing networks, such as InnoCentive, Kaggle and jovoto. For example, Australian start-up, Kaggle, brings together businesses with big data and a global network of over half a million data scientists (Kagglers) to solve problems. In the highly competitive telecommunications market, understanding if a service fault is just a glitch or a total outage helps ensure a positive customer experience. So, in a recent competition, Telstra invited Kagglers to help predict the severity of service faults on its network. The winner, a self-taught data scientist from Brazil, is a competition grandmaster on Kaggle with two top-ranked solutions in the last year.9 Truly innovative companies do not rely only on one source or another for new-product ideas. Instead, they develop extensive innovation networks that capture ideas and inspiration from every possible source, from employees and customers to outside innovators and multiple points beyond.

idea screening

Screening new-product ideas in order to identify good ideas and discard poor ones as soon as possible.

Idea screening The purpose of idea generation is to create a large number of ideas. The purpose of the succeeding stages is to reduce that number. The first idea-reducing stage is idea screening, which helps identify good ideas and discard poor ones as soon as possible. Product-development costs rise greatly in later stages, so the company wants to proceed only with the product ideas that will turn into profitable products.

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Many companies require their executives to write up new-product ideas in a standard format that can be reviewed by a new-product committee. The write-up describes the product or service, the proposed customer value proposition, the target market and the competition. It includes rough estimates of market size, product price, development time and costs, manufacturing costs and rate of return. The committee then evaluates the idea against a set of general criteria. One marketing expert proposes an R-W-W (‘real, win, worth it’) new-product screening framework that asks three questions: (1) Is it real? Is there a real need and desire for the product, and will customers buy it? Is there a clear product concept and will the product satisfy the market? (2) Can we win? Does the product offer a sustainable competitive advantage? Does the company have the resources to make the product a success? (3) Is it worth doing? Does the product fit the company’s overall growth strategy? Does it offer sufficient profit potential? The company should be able to answer ‘yes’ to all three R-W-W questions before developing the new-product idea further.10

Concept development and testing

An attractive idea must be developed into a product concept. It is important to distinguish between a product idea, a product concept and a product image. A product idea is an idea for a possible product that the company can see itself offering to the market. A product concept is a detailed version of the idea, stated in meaningful consumer terms. A product image is the way consumers perceive an actual or potential product.

product concept A detailed version of the new-product idea, stated in meaningful consumer terms.

Concept development Suppose a car manufacturer has developed a practical battery-powered all-electric car. Its initial prototype is a sleek, sporty convertible that sells for about $100 000.11 However, in the near future, the manufacturer plans to introduce more-affordable, mass-market versions that will compete with recently introduced hybrid-electric or all-electric cars, such as the Nissan Leaf, Holden Volt and Mitsubishi’s i-MiEV. This 100 per cent electric car will accelerate from 0 to 100 kilometres per hour in 3.0 seconds, and will travel nearly 400 kilometres on a single charge. Looking ahead, the marketer’s task is to develop this new product into alternative product concepts, determine how attractive each concept is to customers and choose the best one. It might create the following product concepts for the electric car:

concept testing

Testing new-product concepts with a group of target consumers to determine if the concepts have strong consumer appeal.

• Concept 1: An affordably priced mid-size car designed as a second family car to be used around town for running errands and visiting friends. • Concept 2: A mid-priced sporty compact appealing to young singles and couples. • Concept 3: A ‘green’ car appealing to environmentally conscious people who want practical, low-polluting transportation. • Concept 4: A high-end, mid-size, all-wheel-drive vehicle appealing to those who love the space that SUVs provide but do not like their high levels of fuel consumption.

Concept testing Concept testing calls for testing new-product concepts with groups of target consumers. The concepts may be presented to consumers symbolically or physically. Here, in words, is the electric car, concept 3: An efficient, fun-to-drive, battery-powered compact car that seats four. This 100 per cent electric wonder provides practical and reliable transportation with no pollution. It goes nearly

Concept development: Tesla’s Model S is available in Australia. The company plans to introduce a more-affordable mass-market model by 2018. Justin Pritchard/AP/AAP

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350 kilometres on a single charge and costs just a few cents per kilometre to operate. It’s a sensible, environmentally responsible alternative to today’s pollution-producing gas-guzzlers. It’s priced, fully equipped, at $40 000. Many firms routinely test new-product concepts with consumers before attempting to turn them into actual new products. For some concept tests, a word or picture description might be sufficient. However, a more concrete and physical presentation of the concept will increase the reliability of the concept test. After being exposed to the concept, consumers then may be asked to react to it by answering questions, such as those presented in Table 8.1. The answers to such questions will help the company decide which concept has the strongest appeal. For example, the last question asks about the consumer’s intention to buy. Suppose that 2 per cent of consumers say they ‘definitely’ would buy, and another 5 per cent say ‘probably’. The company could project these figures to the full population in this target group to estimate sales volume. Even then, the estimate is uncertain because people do not always carry out their stated intentions.

Table 8.1  Questions for battery-powered electric car concept test 1. Do you understand the concept of a battery-powered electric car? 2. Do you believe the claims about the car’s performance? 3. What are the main benefits of the battery-powered electric car compared with a conventional car? 4. What are the advantages of the battery-powered electric car compared with a petrol–electric hybrid car? 5. What improvements in the car’s features would you suggest? 6. For what uses would you prefer a battery-powered electric car to a conventional car? 7. What would be a reasonable price to charge for the car? 8. Who would be involved in your decision to buy such a car? Who would drive it? 9. Would you buy such a car (definitely, probably, probably not, ­definitely not)?

marketing strategy development

Designing an initial marketing strategy for a new product based on the product concept.

Marketing strategy development

Suppose the car maker finds that concept 3 for the electric car tests best. The next step is marketing strategy development – that is, designing an initial marketing strategy for introducing this car to the market. The marketing strategy statement consists of three parts. The first part describes the target market; the planned value proposition; and the sales, market share and profit goals for the first few years. Thus: The target market is younger, well-educated, moderate- to high-income individuals, couples or small families seeking practical, environmentally responsible transportation. The car will be positioned as being more fun to drive and less polluting than today’s internal combustion engine or hybrid cars. The company will aim to sell 50 000 cars in the first year, at a loss of not more than $15 million. In the second year, the company will aim for sales of 90 000 cars and a profit of $25 million. The second part of the marketing strategy statement outlines the product’s planned price, distribution and marketing budget for the first year: The battery-powered electric car will be offered in three colours – red, white and blue – and will have a full set of accessories as standard features. It will sell at a retail price of $40 000 – with 15 per cent off the list price to dealers. Dealers who sell more than 10 cars per month will get an additional discount of 5 per cent on each car sold that month. A marketing budget of $3 million will be split 40–30–30 among a national media campaign, online and social media marketing, and local event marketing. Advertising, the website and mobile sites, and various social media content will emphasise the car’s fun spirit and low emissions. During the first year, $100 000 will be spent on marketing research to establish who is buying the car and their satisfaction levels.

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The third part of the marketing strategy statement describes the planned long-run sales, profit goals and marketing mix strategy: We intend to capture a 3 per cent long-run share of the total car market and realise an after-tax return on investment of 15 per cent. To achieve this, product quality will start high and be improved over time. Price will be raised in the second and third years if competition permits. The total marketing budget will be raised each year by about 10 per cent. Marketing research will be reduced to $60 000 per year after the first year.

Business analysis Once management has decided on its product concept and marketing strategy, it can evaluate the business attractiveness of the proposal. Business analysis involves a review of the sales, costs and profit projections for a new product to determine whether they satisfy the company’s objectives. If they do, the product can move to the product-development stage. To estimate sales, the company might look at the sales history of similar products and conduct market surveys. It can then estimate minimum and maximum sales to assess the range of risk. After preparing the sales forecast, management can estimate the expected costs and profits for the product, including marketing, R&D, operations, accounting and finance costs. The company then uses the sales and costs figures to analyse the new product’s financial attractiveness.

business analysis A review of the sales, costs and profit projections for a new product to determine whether these factors satisfy the company’s objectives.

Product development For many new-product concepts, the product may have existed only as a word description, a drawing or perhaps a crude mock-up. If the product concept passes the business test, it moves into product product development. Here, R&D or engineering develops the product concept into a physical product. development A strategy for promoting The product-development step, however, now calls for a large jump in investment. It will establish whether company growth by the product idea can be turned into a workable product. offering modified or The R&D department will develop and test one or more physical versions of the product concept. new products to current R&D hopes to design a prototype that will satisfy and excite consumers, and that can be produced quickly market segments; developing the product and at budgeted costs. Developing a successful prototype can take days, weeks, months or even years, concept into a physical depending on the product and prototype methods. product to ensure that Often, products undergo rigorous tests to ensure they perform safely and effectively, or that consumers the product idea can be will find value in them. Companies can do their own product testing or outsource testing to other firms turned into a workable product. that specialise in testing. Marketers often involve actual customers in product testing. For example, ALDI signs up customers for one year to sample and rate its products throughout the year. Every three months, members of the ‘ALDI Testers Club’ receive a hamper of 10 ALDI products. Members test and rate the products and ALDI uses the feedback to shape product development and the selection of products on the store shelves. The product-testing program gives ALDI important customer insights and helps the company ‘remain nimble and responsive to the changing behaviour of customers’.12 A new product must have the required functional features and also convey the intended psychological characteristics. The all-electric car, for example, should strike consumers as being well built, comfortable and safe. Management must learn what Product testing: ALDI invites customers to join the ALDI Testers makes consumers decide that a car is well built. To some consumers, Club whose members are ‘entrusted with quality control and this means the car has ‘solid-sounding’ doors. To  others, it monitoring the supermarkets wares’. Club members provide feedback that shapes product development and the selections of means the car is able to withstand heavy impact in crash tests. products available in stores. Consumer tests are conducted in which consumers test-drive ALDI Stores Australia the car and rate its attributes.

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test marketing

The stage of newproduct development in which the product and the associated marketing program are introduced into more realistic market settings.

Test marketing

If the product passes concept and product tests, the next step is test marketing, the stage at which the product and the associated marketing program are introduced into realistic market settings. Test marketing gives the marketer experience with marketing the product before going to the great expense of full introduction. It lets the company test the product and its entire marketing program – targeting and positioning strategy, advertising, distribution, pricing, branding and packaging, and budget levels. The amount of test marketing needed varies with each new product. Test marketing costs can be high, and the process takes time that may allow market opportunities to slip by or competitors to gain advantages. When the costs of developing and introducing the product are low, or when management is already confident about the new product, the company may do little or no test marketing. In fact, test marketing by consumer-goods firms has been declining in recent years. Companies often do not test-market simple line extensions or copies of successful competitor products. However, when introducing a new product requires a significant investment, when the risks are high or when management is unsure of the product or marketing program, a company may do a lot of test marketing. For instance, Pernod Ricard, distributors of the Jameson Irish Whiskey brand, worked with brand owners Irish Distillers to test a new Jameson pre-mix range in Australia. The range sees the iconic whiskey sold pre-mixed with cola, ginger beer or apple. Australia and New Zealand are ideal global test sites because they are relatively small, Western-like markets. Test marketing allows new-product marketers to limit access to new products while they identify and fix any problems with the product.13 Although test-marketing costs can be high, they are often small when compared with the costs of making a major mistake. And many marketers are now using simulated marketing technologies to reduce the costs of test marketing and to speed up the process. Simulated test marketing uses a range of research and computer-modelling approaches to evaluate consumer reactions to new products before they go on the market. For example, Australian company Play Market Research uses virtual-reality shopping environments to help supermarkets and brand owners test different configurations of their products on supermarket shelves. These types of simulations can be used to estimate sales and to work out the most likely impact of different marketing-mix options.14

Commercialisation commercialisation Introducing a new product into the market.

Test marketing gives management the information needed to make a final decision about whether to launch the new product. If the company goes ahead with commercialisation – introducing the new product into the market – it will face high costs. The company may need to build or rent a manufacturing facility. And, in the case of a major new consumer packaged good, the company may spend hundreds of millions of dollars for advertising, sales promotion and other marketing efforts in the first year. Samantha Wills’s pathway from selling her jewellery at local markets to becoming a global jewellery tycoon was not an easy one. It took time, hard work and money to achieve global recognition. Launching the successful Australian jewellery brand in the United States required 18 months of planning and research before the first order was received. The brand finally took off when actress Eva Mendes was snapped on the ‘red carpet’ wearing the Samantha Wills signature Bohemian Bardot Ring. Today, that signature ring is made in 150 different colours and Samantha Wills jewellery is sold in 80 countries. The brand is now a global success – but it took a long time and a lot of money to get there.15 A company launching a new product must first decide on introduction timing. If the new product might damage the sales of a company’s existing products, its introduction may be delayed. On the other hand, changes in the marketing environment or competitor activity may prompt a company to launch a new product sooner. Next, the company must decide where to launch the new product – in a single location, a region, the national market or the international market. Few companies have the confidence, capital and capacity to launch new products into full national or international distribution right away. Instead, they develop a

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planned market rollout over time. Some companies, however, may quickly introduce new models into the full national market. Companies with international distribution systems may introduce new products through swift global rollouts. For example, Apple launched its iPhone 6 and iPhone 6 Plus phones in its fastest-ever global rollout, making them available in 115 countries within less than three months of initial introduction.16

Managing new-product development (pp. 239–41) The new-product development process shown earlier in Figure 8.1 highlights the important activities needed to find, develop and introduce new products. However, new-product development involves more than just going through a set of steps. Companies must take a holistic approach to managing this process. Successful new-product development requires a customer-centred, team-based and systematic effort.

Customer-centred new-product development Above all else, new-product development must be customer-centred. When looking for and developing new products, companies often rely too heavily on technical research in their R&D labs. But, like everything else in marketing, successful new-product development begins with a thorough understanding of what consumers need and value. Customer-centred new-product development focuses on finding new customer-centred new-product ways to solve customers’ problems and create more customer-satisfying experiences. One study found that the most successful new products are those that are differentiated, solve major development Focuses on finding customer problems and offer a compelling customer-value proposition. Another study showed that new ways to solve companies that directly engage their customers in the new-product innovation process had twice the return customers’ problems on assets and triple the growth in operating income compared with firms that do not. Thus, customer and create more customer-satisfying involvement has a positive effect on the new-product development process and product success.17 experiences. Intuit – maker of financial software such as QuickBooks and Quicken – is a strong proponent of customerdriven new-product development. Intuit follows a ‘Design for Delight’ (D4D) development philosophy that says products should delight customers by providing experiences that go beyond their expectations. Design for Delight starts with customer empathy – knowing customers better than they know themselves. So, each year, Intuit conducts 10 000 hours of what it calls ‘followme-homes’, in which design employees observe first-hand how customers use its products at home and at work. Based on customer observations, the next D4D step is to ‘go broad, go narrow’ – developing many customer-driven product ideas, then narrowing them down to one or a few great ideas for products that will solve customer problems. The final D4D step involves turning the great ideas into actual products and services that create customer delight, collecting customer feedback steadily throughout the development process. Thanks to customer-centred new-product development, Intuit’s revenues have grown to US$4.5 billion annually, a 45 per cent increase in just five years.18 For products ranging from consumer packaged goods to financial services, today’s innovative companies get out of the Customer-centred new-product development: Financial-software research lab and connect with customers in search of fresh maker Intuit follows a ‘Design for Delight’ development philosophy ways to meet customer needs. Customer-centred new-product that says products should delight customers by providing development begins and ends with understanding customers experiences that go beyond expectations. Reprinted with permission. © Intuit Inc. All rights reserved. and involving them in the process.

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Team-based new-product development sequential product development

A new-product development approach in which one company department works individually to complete its stage of the process before passing the new product along to the next department and stage.

team-based new-product development

An approach in which company departments work together in cross-functional teams, overlapping the steps in the productdevelopment process to both save time and increase effectiveness.

Good new-product development also requires a total-company, cross-functional effort. Some companies organise their new-product development process into the orderly sequence of steps shown in Figure 8.1, starting with idea generation and ending with commercialisation. Under this sequential product development approach, one company department works individually to complete its stage of the process before passing the new product along to the next department and stage. This orderly, step-by-step process can help bring control to complex and risky projects. But it can also be dangerously slow. In fast-changing, highly competitive markets, such slow-but-sure product development can result in product failures, lost sales and profits, and crumbling market positions. In order to get their new products to market more quickly, many companies use a team-based new-product development approach. Under this approach, company departments work closely together in cross-functional teams, overlapping the steps in the product-development process to both save time and increase effectiveness. Instead of passing the new product from department to department, the company assembles a team of people from various departments that stays with the new product from start to finish. Such teams usually include people from the marketing, finance, design, manufacturing and legal departments, and even supplier and customer companies. In the sequential process, a bottleneck at one phase can seriously slow the entire project. In the team-based approach, if one area of the product’s development hits problems, some members of the team work to resolve them while the rest of the team continues on. The team-based approach does have some limitations. For example, it sometimes creates more organisational tension and confusion than the more orderly sequential approach. However, in rapidly changing industries that are facing increasingly shorter product life cycles, the rewards of fast and flexible product development far exceed the risks. Companies that combine a customer-centred approach with team-based new-product development gain a big competitive edge by getting the right new products to market more quickly.

Systematic new-product development Finally, the new-product development process should be holistic and systematic, rather than compartmentalised and haphazard. Otherwise, few new ideas will surface, and many good ideas will sputter and die. To avoid these problems, a company can install an innovation management system to collect, review, evaluate and manage new-product ideas. The company can appoint a respected senior person to be its innovation manager. It can set up web-based idea-management software and encourage all company stakeholders – employees, suppliers, distributors and dealers – to become involved in finding and developing new products. It can assign a crossfunctional innovation management committee to evaluate proposed new-product ideas and help bring good ideas to market. It can create recognition programs to reward those who contribute the best ideas. The innovation management system approach yields two favourable outcomes. First, it helps create an innovation-oriented company culture. It shows that top management supports, encourages and rewards innovation. Second, it will yield a larger number of new-product ideas, among which will be found some especially good ones. The good new ideas will be more systematically developed, producing more­ new-product successes. No longer will good ideas wither for the lack of a sounding board or a senior product advocate. Thus, new-product success requires more than simply thinking up a few good ideas, turning them into products and finding customers for them. It requires a holistic approach for finding new ways to create valued customer experiences, from generating and screening new-product ideas to creating and rolling-out want-satisfying products to customers. More than this, successful new-product development requires a whole-company commitment. At  companies known for their new-product prowess – such as Google, Apple, IDEO, 3M, Procter & Gamble and General Electric – the entire culture encourages, supports and rewards innovation.

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Linking the concepts Take a break. Think about new products and how companies find and develop them. ● Suppose you are on a panel to nominate the ‘best new products of the year’. What products would you nominate, and why? Considering one of these new products, what can you learn about the new-product development process?

● Applying the new-product development process you have just studied in this section, develop an idea for an innovative new snack-food product and outline a brief plan to bring the product to market.

Product life-cycle strategies (pp. 241–47) After launching a new product, management wants the product to enjoy a long and successful life. Although it does not expect the product to sell forever, the company wants to earn a decent profit to cover all the effort and risk that went into launching it. Management is aware that each product will have a life cycle, although its exact shape and length is not known in advance. Figure 8.2 shows a typical product life cycle (PLC), the course that a product’s sales and profits take over its lifetime. The product life cycle has five distinct stages: 1. Product development begins when the company finds and develops a new-product idea. During product development, sales are zero and the company’s investment costs mount. 2. Introduction is a period of slow sales growth as the product is introduced in the market. Profits are non-existent in this stage because of the heavy expenses of product introduction. 3. Growth is a period of rapid market acceptance and increasing profits. 4. Maturity is a period of slowdown in sales growth because the product has achieved acceptance by most potential buyers. Profits level off or decline because of increased marketing outlays to defend the product against competition. 5. Decline is the period when sales fall off and profits drop.

product life cycle The course of a product’s sales and profits during its lifetime. It involves five distinct stages: product development, introduction, growth, maturity and decline.

Not all products follow this product life cycle. Some products are introduced and die quickly; others stay in the mature stage for a very long time. Some enter the decline stage and are then cycled back into the growth stage through strong promotion or repositioning. It seems that a well-managed brand could live forever. Such venerable brands as Coca-Cola (beverages), Gillette (shaving), ANZ (banking), Canterbury (sportswear), Arnott’s (baked goods) and David Jones (department store), for instance, are still going strong after more than 100 years. Sales and profits ($) Sales

Profits 0

Time Product development Introduction

Growth

Maturity

Decline

Losses/ investment ($)

Figure 8.2  Sales and profits over the product life cycle, from inception to decline

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Marketing in Action 8.1

Mattel: Managing the fun and games

Mattel has ruled the toy industry for generations, with classic brands such as Barbie, Hot Wheels, Fisher-Price and a host of others. Recently, however, Mattel’s sales have fallen off as its core brands have matured. Venerable Barbie, now in her mid-50s, has experienced double-digit sales dips in each of the past two years. Sagging Fisher-Price sales suggest that today’s toy buyers are less e namoured with those storied brands than previous generations were. And  Mattel’s Hot Wheels brand, while holding its own, now seems coveted more by nostalgic dads than by their children. Mattel could blame its slump on broader toy industry trends – declining birthrates, rising costs, unfavourable economic conditions and the boom in digital technologies that make many traditional toys now seem like relics from the past. The global toy industry has stagnated in recent years, with market leaders, such as Mattel and Hasbro, taking the biggest hits. Yet none of that has slowed Mattel’s hottest competitor, The LEGO Group. In the past 10 years, despite the toy industry’s doldrums, LEGO® revenues have quadrupled, up 25 per cent last year alone. LEGO® recently surged past Mattel and Hasbro to become the world’s largest toy maker. LEGO®’s success suggests that Mattel’s problems go beyond just industry ups and downs. Rather, the company appears to have a product life-cycle problem – lots of good old products but too few good new ones. In an industry facing a

Product life-cycle management: Like many other Mattel brands, Barbie is showing her age. Beyond revitalising its classic brands, Mattel must create a steady stream of exciting new brands that stay ahead of changing consumer trends and tastes. Mike Blake/Reuters

barrage of hot new playthings, Mattel has lagged in product development and failed to adapt to rapidly changing toy trends and tastes. Consider Barbie, Mattel’s biggest and oldest brand. Born in 1959, Barbie quickly became a must-have for young girls everywhere. For more than five decades, Barbie has remained Mattel’s number-one moneymaker, accounting for as much as 30 per cent of its revenues. But during the past few years, Barbie’s popularity has spiralled downward. Although still one of the world’s largest toy brands, Barbie’s current annual revenues of US$1 billion are little more than half of what they were at her peak. Barbie sales dropped a stomach-churning 16 per cent in 2014, and another 14 per cent in 2015, prompting one analyst to suggest that ‘it might be time for Mattel to roll out Retirement Barbie’. This will not happen anytime soon. But, like many other Mattel brands, Barbie is showing her age. Designers work tirelessly on new Barbie models and features. An example is Entrepreneur Barbie, the first Barbie with her own smartphone and LinkedIn profile. Still, Barbie continues to lose relevance alongside trendier toy-aisle juggernauts, such as Disney’s Frozen line of toys and play sets. Mattel has also misfired in some of its marketing attempts to modernise Barbie, and many of its other lines are now maturing and experiencing sales declines. Critics blame Mattel’s uninspired designs, conservative innovation mindset and inability to keep the brands fresh and relevant to the times. As its own core brands have aged, Mattel has injected new life into its product lines by licensing characters from popular movies, television shows and comic books. Specifically, Mattel has made a small fortune with licensed Disney Princess and Frozen dolls and toys. It recently launched a line of Star

Wars Hot Wheels cars, and it has partnered with Warner Bros. Entertainment on a number of films based on DC Comics characters. However, although profitable, such licensed products cannot compensate for Mattel’s inability to revitalise its own brands and develop new ones. For example, Mattel recently lost its Disney character rights to rival Hasbro, leaving a huge revenue hole to fill. Thus, to regain its prowess in today’s turbulent, fast-changing toy market, Mattel must develop a faster, more nimble, more customer-focused process for developing relevant new products and guiding them profitably through their product life cycles. Beyond reinvigorating its classic brands, Mattel must create a steady stream of exciting new brands that stay ahead of changing consumer trends and tastes. For Mattel, mastering the product life cycle is more than just fun and games. It is a matter of growth, prosperity and even long-run survival. Sources: Jens Hansegard, ‘Oh, snap! Lego pushes ahead of Mattel in sales’, Wall Street Journal, 5 September 2014, p. B5; John Kell, ‘Lego says 2015 was its “best year ever”, with huge sales jump’, Fortune, 1 March 2016, ; Paul Ziobro, ‘Floundering Mattel tries to make things fun again’, Wall Street Journal, 23 December 2014, p. A1; Alexandra Petri, ‘The end of (doll) history’, Washington Post, 4 May 2013, p. A13; Maria Armental, ‘Barbie’s decline hurts Mattel profit’, Market Watch, 20 April 2016, ; Shan Li, ‘Mattel’s CEO resigns as toy maker struggles’, Los Angeles Times, 27 January 2015, p. A1; John Kell, ‘Mattel’s Barbie sales down for third consecutive year’, Fortune, 30 January 2015, ; ‘Shake-up at Mattel as Barbie loses her appeal’, New York Times, 27 January 2015, p. B1; Laura Stampler, ‘Bye, bye Barbie: 2015 is the year we abandon unrealistic beauty ideals’, Time, 30 January 2015, ; and and , accessed August 2016.

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Questions

❷ In mid-2016, Niantic launched Pokémon Go and, in doing so, reached

❶ Discuss the options for Mattel in the face of intense competition and declining sales for its key brands (see Figure 8.2 for hints).

out to loyal, older Pokémon players as well as attracting a new, younger market. How could Mattel use the same strategy to rejuvenate its brands?

The product life-cycle (PLC) concept can describe a product class (petrol-powered automobiles), a product form (SUVs) or a brand (the Toyota Landcruiser). The PLC concept applies differently in each case. Product classes have the longest life cycles – the sales of many product classes stay in the mature stage for a long time. Product forms, in contrast, tend to have the standard PLC shape. Product forms such as dial telephones and VHS tapes passed through a regular history of introduction, rapid growth, maturity and decline. A specific brand’s life cycle can change quickly because of changing competitive attacks and responses. For example, although laundry soaps (product class) and powdered detergents (product form) have enjoyed fairly long life cycles, the life cycles of specific brands have tended to be much shorter. The PLC concept also can be applied to what are known as styles, fashions and fads. Their special life cycles are shown in Figure 8.3. A style is a basic and distinctive mode of expression. For example, styles appear in homes (colonial, ranch, transitional), clothing (formal, casual) and art (realist, surrealist, abstract). Once a style is invented, it may last for generations, passing in and out of vogue. A style has a cycle showing several periods of renewed interest. A fashion is a currently accepted or popular style in a given field. For example, the more formal ‘business attire’ look of corporate dress of the 1980s and 1990s gave way to the ‘business casual’ look of today. Fashions tend to grow slowly, remain popular for a while and then decline slowly. Fads are temporary periods of unusually high sales driven by consumer enthusiasm and immediate product or brand popularity.19 A fad may be part of an otherwise normal life cycle, as in the case of recent surges in the sales of poker chips and accessories. Or the fad may comprise a brand’s or product’s entire life cycle. The ‘Pet Rock’ is a classic example. Upon hearing his friends complain about how expensive it was to care for their dogs, advertising copywriter Gary Dahl joked about his pet rock. He soon wrote a spoof of a dog-training manual for it, titled The Care and Training of Your Pet Rock. Soon, Dahl was selling some 1.5 million ordinary beach pebbles at $4 a pop. Yet the fad, which broke one October, had sunk like a stone by the next February. Dahl’s advice to those who want to succeed with a fad: ‘Enjoy it while it lasts.’ Who could forget such fads as ‘Keep Calm’ posters, mugs and tea-towels or the ‘Ice Bucket Challenge’?20

Fashion

style

A basic and distinctive mode of expression.

fashion

A currently accepted or popular style in a given field.

fad

A fashion that enters quickly, is adopted with great zeal, peaks early and declines quickly.

Fad Sales

Sales

Sales

Style

Time

243

Time

Time

Figure 8.3  Styles, fashions and fads

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Marketers can apply the product life-cycle concept as a useful framework for describing how products and markets work. And when used carefully, the PLC concept can help in developing good marketing strategies for different stages of the product life cycle. But using the PLC concept for forecasting product performance or for developing marketing strategies presents some practical problems. For example, in practice, it is difficult to forecast the sales level at each PLC stage, the duration of each stage and the shape of the PLC curve. Using the PLC concept to develop marketing strategy can also be difficult because strategy is both a cause and a result of the product’s life cycle. The product’s current PLC position suggests the best marketing strategies, and the resulting marketing strategies affect product performance in later life-cycle stages. Moreover, marketers should not blindly push products through the traditional stages of the product life cycle. Instead, marketers often defy the ‘rules’ of the life cycle and position or reposition their products in unexpected ways. By doing this, they can rescue mature or declining products and return them to the growth phase of the life cycle. Or they can leapfrog obstacles to slow consumer acceptance and propel new products forward into the growth phase. The moral of the product life cycle is that companies must continually Product life cycle: Although some products have been around for decades, others, like pillows innovate or they risk extinction. No matter how successful its current product decorated with the ‘Keep Calm’ meme, might be line-up, for future success, a company must skilfully manage the life cycles of regarded as a fad. existing products. And to grow, the company must develop a steady stream of © POJCHEE/Shutterstock.com new products that bring new value to customers. Mattel is learning this lesson the hard way. It has long dominated the world toy industry with such classic brands as Barbie, Hot Wheels and Fisher-Price. In recent years, however, as its core brands have matured, Mattel’s sales have stagnated at the hands of nimbler, more innovative competitors (see Marketing in action 8.1).21 Having looked at the product-development stage of the product life cycle in the first part of the chapter, we now turn to consider strategies for each of the other life-cycle stages.

introduction stage The stage in the product life cycle when the new product is first distributed and made available for purchase.

Introduction stage

The introduction stage starts when the new product is first launched. Introduction takes time, and sales growth is apt to be slow. Well-known products such as frozen foods and HDTVs lingered for many years before they entered a stage of more rapid growth. In this stage, as compared to other stages, profits are negative or low due to the combination of low sales and high distribution and promotion expenses. Much money is needed to attract distributors and build their inventories. Promotion spending is relatively high to inform consumers of the new product and get them to try it. Because the market is not generally ready for product refinements at this stage, the company and its few competitors produce basic versions of the product. These firms focus their selling on those buyers who are the most ready to buy. A company, especially the market pioneer, must choose a launch strategy that is consistent with the intended product positioning. It should realise that the initial strategy is just the first step in a grander marketing plan for the product’s entire life cycle. If the market pioneer chooses its launch strategy to make a ‘killing’, it may be sacrificing long-run revenue for the sake of short-run gain. As the market pioneer moves through later stages of the life cycle, it must continuously formulate new pricing, promotion and other marketing strategies. It has the best chance of building and retaining market leadership if it chooses and implements the appropriate launch strategy correctly from the start.

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Growth stage

If the new product satisfies the market, it will enter a growth stage, in which sales will start climbing quickly. The early adopters will continue to buy, and later buyers will start following their lead, especially if they hear favourable word of mouth. Attracted by the opportunities for profit, new competitors will enter the market. They will introduce new product features, and the market will expand. The increase in competitors leads to an increase in the number of distribution outlets, and sales jump just to build reseller inventories. Prices remain where they are or fall only slightly. Companies keep their promotion spending at the same or a slightly higher level. Educating the market remains a goal, but now the company must also meet the competition. Profits increase during the growth stage as promotion costs are spread over a large volume and as unit manufacturing costs fall. The firm uses several strategies to sustain rapid market growth for as long as possible. It improves product quality and adds new product features and models. It enters new market segments and new distribution channels. It shifts some advertising from building product awareness to building product conviction and purchase, and it lowers prices at the right time to attract more buyers. In the growth stage, the firm faces a trade-off between high market share and high current profit. By investing in product improvement, promotion and distribution, the company can capture a dominant position. In doing so, however, it gives up maximum current profit, which it hopes to make up in the next stage.

245

growth stage

The stage in the product life cycle when a product’s sales start climbing quickly.

Maturity stage

At some point, a product’s sales growth will slow down, and the product will enter a maturity stage. maturity stage This maturity stage normally lasts longer than each of the previous stages, and it poses strong challenges The stage in the product life cycle when sales to marketing management. Most products are in the maturity stage of the life cycle, and therefore most of growth slows or levels marketing management deals with the mature product. off. The slowdown in sales growth results in many producers with many products to sell. In turn, this overcapacity leads to greater competition. Competitors begin marking down prices, increasing their advertising and sales promotions, and increasing their product-development budgets to find better versions of the product. These steps lead to a drop in profit. Some of the weaker competitors start exiting the marketplace, and the industry eventually contains only well-established competitors. Although many products in the mature stage appear to remain unchanged for long periods, most successful ones are actually evolving to meet changing consumer needs. Product managers should do more than simply oversee or defend their mature products – they should maintain an active product-management role, and consider modifying the market, product and marketing mix. In modifying the market, the company tries to increase consumption by finding new users and new market segments for its brands. For example, Lite n’ Easy is now reaching out to the elusive male market. Meal plans include larger portion sizes for male customers and marketing communication shows both men and women enjoying the convenience of Lite n’ Easy meals. And the strategy is working: the Queensland brand is the fastest-growing brand in the Australian weight-loss sector. 22 The product manager may also look for ways to increase Modifying the market: 3M encourages its customers to ‘discover the solutions and Post-it® products to unlock something amazing’. These usage among present customers. 3M encourages users to creative options encourage greater use. ‘check out creative ways to use Post-it® products’ on the 3M Solutions page on its website, and the Collaborate page

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shows Post-it® Brand products being used in logic trees, SWOT analyses and mind mapping, among a myriad of other uses. Huggies encourages customers to share experiences and ideas, to post photos of children’s rooms and birthday cakes, and offers expert advice and comfort.23 The company might also try modifying the product – changing product characteristics, such as quality, features, style or packaging, to attract new users and to inspire more usage. The company can improve the product’s styling and attractiveness. Or it might improve its quality and performance – its durability, reliability, speed or taste. Thus, makers of consumer food and household products introduce new flavours, colours, scents, ingredients or packages to enhance performance and revitalise consumer buying. For example, Red Bull released a summer edition kiwi–apple energy drink. The new flavour follows the successful summer launch of a tropical flavour that produced a 167 per cent increase in sales over the previous summer, with nearly one-third coming from new customers. Red Bull understands that ‘innovation in flavoured energy drinks is important for future category growth’.24 Finally, the company can try modifying the marketing mix – improving sales by changing one or more of the marketing mix elements. The company can offer new or improved services to buyers. It can cut prices to attract new users and competitors’ customers. It can launch a more-effective advertising campaign or use aggressive sales promotions – trade deals, cents-off, premiums and contests. In addition to pricing and promotion, the company can also move into new marketing channels to help serve new users.

Decline stage

decline stage

The stage in the product life cycle when a product’s sales decline.

The sales of most product forms and brands eventually decrease. The decline may be slow, as in the cases of postage stamps and oatmeal cereal, or rapid, as for CDs when digital music came of age with the iPod. Sales may plunge to zero, or they may drop to a low level where they continue for many years. This is the decline stage. Sales decline for many reasons, including technological advances, shifts in consumer tastes and increased competition. As sales and profits decline, some firms withdraw from the market. Those remaining may prune their product offerings. They may drop smaller market segments and marginal trade channels, or they may cut the promotion budget and reduce their prices further. Carrying a weak product can be very costly to a firm, and not just in profit terms. There are many hidden costs. A weak product may take up too much of management’s time. It often requires frequent price and inventory adjustments. It requires advertising and salesforce attention that could be otherwise deployed to make ‘healthy’ products more profitable. A product’s failing reputation can cause customer concerns about the company and its other products. The biggest cost may well lie in the future. Keeping weak products delays the search for replacements, creates a lopsided product mix, hurts current profits and weakens the company’s foothold on the future. For these reasons, companies must identify products in the decline stage by regularly reviewing sales, market share, costs and profit trends. Then, management must decide whether to maintain, harvest or drop these declining products. Management may decide to maintain its brand, repositioning or reinvigorating it in hopes of moving it back into the growth stage of the product life cycle. P&G has done this with Old Spice. Over the past decade, P&G has retargeted, repositioned, revitalised and extended this old brand, taking it from near extinction to billion-dollar-brand status.25 Management may decide to harvest the product, which means reducing various costs (plant and equipment, maintenance, R&D, advertising, salesforce) and hoping that sales hold up. If successful, harvesting will increase the company’s profits in the short run. Or management may decide to drop the product from the line. It can sell it to another firm or simply liquidate the product at salvage value. If the company plans to find a buyer, it will not want to run down the product through harvesting. Table 8.2 summarises the key characteristics of each stage of the product life cycle. The table also lists the marketing objectives and strategies for each stage.26

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Table 8.2  Summary of product life-cycle characteristics, objectives and strategies Characteristics

Introduction

Growth

Maturity

Decline

Sales

Low sales

Rapidly rising sales

Peak sales

Declining sales

Costs

High cost per customer

Average cost per customer

Low cost per customer

Low cost per customer

Profits

Negative

Rising profits

High profits

Declining profits

Customers

Innovators

Early adopters

Middle majority

Laggards

Competitors

Few

Growing number

Stable number beginning to decline

Declining number

Create product awareness and trial

Maximise market share

Maximise profit while defending market share

Reduce expenditure and ‘milk’ the brand

Product

Offer a basic product

Offer product extensions, service, warranty

Diversify brand and models

Phase out weak items

Price

Use cost-plus

Price to penetrate market

Price to match or beat competitors’

Cut price

Distribution

Build selective distribution

Build intensive distribution

Build more intensive distribution

Go selective: Phase out unprofitable outlets

Advertising

Build product awareness among early adopters and dealers

Build awareness and interest in the mass market

Stress brand differences and benefits

Reduce to level needed to retain hard-core loyals

Sales promotion

Use heavy sales promotion to entice trial

Reduce to take advantage of heavy consumer demand

Increase to encourage brand switching

Reduce to minimal level

Marketing objectives

Strategies

Sources: Chester R Wasson, Dynamic Competitive Strategy and Product Life Cycles, Austin Press: Austin, TX, 1978; John A Weber, ‘Planning corporate growth with inverted product life cycles’, Long Range Planning, October 1976, pp. 12–29; Peter Doyle, ‘The realities of the product life cycle’, Quarterly Review of Marketing, Summer 1976.

Additional product and service considerations (pp. 247–50) In this section, we wrap up our discussion of products and services with two additional considerations: social responsibility in product decisions, and issues of international product and services marketing.

Product decisions and social responsibility Product decisions have attracted much public attention. Marketers should carefully consider public policy issues and regulations regarding acquiring or dropping products, patent protection, product quality and safety, and product warranties. Regarding new products, the government may prevent companies from adding products through company acquisitions if the result threatens to lessen competition. Companies dropping products must be aware they have legal obligations, written or implied, to their suppliers, dealers and customers who have a stake in the dropped product. Companies must also obey patent laws when developing new products. A company cannot make its product illegally similar to another company’s established product. Manufacturers must comply with specific laws regarding product quality and safety. The laws and regulations protect consumers from unsafe food, pharmaceuticals and cosmetics. Various Acts provide for the inspection of sanitary conditions in the meat- and poultry-processing industries. Safety legislation has been passed to regulate fabrics, chemical substances, automobiles, toys, pharmaceuticals and poisons. Product Safety Australia provides detailed information to consumers and businesses about product safety issues across a wide range of industries.

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If consumers have been injured by a product that has a defective design, they can sue the manufacturers or dealers. Product liability lawsuits can be very costly for businesses. They may be fined, and will likely be required to inform customers of the defect, to repair or replace faulty products and to implement a strategy to prevent a recurrence of the fault. There will also likely be damage caused to the company’s reputation. Volkswagen, Audi and Skoda have recalled over 11 million cars globally since 2015 and 90 000 in Australia alone because of emission problems with the VW diesel engines. The massive global recall is estimated to cost over US$15 billion for buy-backs, compensation and repairs, and Volkswagen will also pay billions in environmental clean-up fees and to promote zero-emission vehicles in the United States. On top of this, the company still faces fines for deceptive advertising in many markets and criminal investigations.27 The risks associated with product liability litigation have resulted in huge increases in product liability insurance premiums, causing significant problems in some industries. Some companies pass these higher costs along to consumers by raising prices. Others are forced to discontinue high-risk product lines. Some companies are now appointing ‘product stewards’, whose job is to protect consumers from harm – and the company from liability – by proactively ferreting out potential product problems.

International product and services marketing International product and services marketers face special challenges. First, they must work out what products and services to introduce and in which countries. They must then decide how much to standardise or adapt their products and services for world markets. On the one hand, companies would like to standardise their offerings. Standardisation helps a company to develop a consistent worldwide image. It also lowers the product design, manufacturing and marketing costs of offering a large variety of products. On the other hand, markets and consumers around the world differ widely. Companies must usually respond to these differences by adapting their product offerings. For example, Nestlé’s popular chocolate confectionary, Kit Kat, has been adapted to markets all over the world. In 1996, Nestlé launched its first Kit Kat flavour variant, Kit Kat Orange, in the United Kingdom, and now sells many different varieties of Kit Kat in Japan, with Asian-inspired flavours such as green tea and wasabi. In New Zealand, Kit Kat is available in a family-sized block of 12 bars and, in France, it comes as a wrapped, single bar. A luxury-gift version, Kit Kat Rubies, is available in Malaysia and comes in a box with 20 small bars of luxury chocolate, truffle cream and hazelnuts. To coincide with Chinese New Year, Nestlé Australia released 88 limited-edition, gold-leaf-coated bars flavoured with oolong tea, lychee and rose petals. These variants keep the brand exciting and interesting for consumers all over the world.28 Packaging also presents new challenges for international marketers. Packaging issues can be subtle. For example, names, labels and colours may not translate easily from one country to another. A firm using yellow flowers in its logo might fare well in New Zealand but meet with disaster in Mexico, where a yellow flower symbolises death or disrespect. Similarly, although Nature’s Gift might be an appealing name for gourmet mushrooms in Australia, it would be deadly in Germany, where gift means poison. There is a strong argument for companies to rebrand when entering some international markets. For example, when entering China, Nike renamed its brand ‘Nai Ke’, characters that mean ‘Endurance Conquer’. Coca-Cola is also represented as ‘Ke Kou Ke Le’ or ‘Can be tasty, Can be happy’. In both cases, the new brand names both sound similar to the core brand name and have positive associations for the brand – not an easy combination to get right. Most strategies focus on matching either the sound of the brand name or its associations.29 Some more examples are shown in Figure 8.4. Packaging may also need to be tailored to meet the physical characteristics of consumers in various parts of the world. For instance, soft drinks are sold in smaller cans in Japan to better fit the smaller average hand-size of the Japanese population. Thus, although product and package standardisation can produce benefits, companies must usually adapt their offerings to the unique needs of specific international markets.

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Chapter 8  New products: Developing and managing innovation

Figure 8.4  Branding approaches for international brands in China Source: Adapted from ‘Lost in translation: Few multinationals rename well for Chinese market’, Marketing Magazine, 17 August 2012.

Service marketers also face special challenges when going global. Some service industries have a long history of international operations. For example, the commercial banking industry was one of the first to grow internationally. Banks had to provide global services in order to meet the foreign exchange and credit needs of their home country clients wanting to sell overseas. In recent years, many banks have become truly global. Germany’s Deutsche Bank, for example, serves millions of customers through its 2790 branches in over 70 countries. For its clients around the world who wish to grow globally, Deutsche Bank can raise money not only in Frankfurt but also in Zurich, London, Paris, Mumbai, Auckland and Melbourne.30

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Professional and business services industries, such as accounting, management consulting and advertising, have also globalised. The international growth of these firms followed the globalisation of the client companies they serve. For example, as more clients employ worldwide marketing and advertising strategies, advertising agencies have responded by globalising their own operations. McCann Worldgroup, a large US-based advertising and marketing services agency, operates in more than 120 countries. It serves international clients, such as Coca-Cola, Microsoft, MasterCard, Johnson & Johnson and Unilever, in markets ranging from the United States and Canada to Korea and Kazakhstan. Moreover, McCann Worldgroup is one company in the Interpublic Group of Companies, an immense, worldwide network of advertising and marketing services companies.31 Retailers are among the latest service businesses to go global. As their home markets become saturated, US retailers, such as Walmart, Office Depot and Saks Fifth Avenue, are expanding into faster-growing markets in other countries. For example, Walmart currently operates over 10 000 retail outlets in 27 countries. Other retailers are making similar moves. Asian shoppers can now buy European products in French-owned Carrefour stores. Carrefour, the world’s fourth-largest retailer – behind Walmart, Costco and the United Kingdom’s Tesco – now operates more than 10 000 stores in 34 countries. It is the leading retailer in Europe, Brazil and Argentina, and the largest foreign retailer in China.32 The trend towards growth of global service companies will continue, especially in banking, airlines, telecommunications and professional services. Today, service firms are no longer simply following their manufacturing customers. Instead, they are taking the lead in international expansion.

Linking the concepts Let us take a moment to reflect on the journey of products through their life cycle and how international markets offer opportunities to extend a product’s life. ● Fresh fruit and vegetables do not really seem like a product class that has a life cycle. Thinking about your local supermarket, what new products (if any) in fresh produce have you seen recently?

● Arnott’s Tim Tam biscuits are an Australian favourite treat, but this is a mature market. One option for Arnott’s is to take the brand internationally to grow sales. Develop a strategy to launch the Tim Tam brand in China, and outline a brief plan to bring the brand to market.

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Student Learning Centre

251

Learning Objective 3. Describe the stages of the product life cycle and how marketing strategies change during the product life cycle. (pp. 241–47) Each product has a life cycle marked by a changing set of problems and opportunities. The product life cycle (PLC) has five distinct stages. The cycle begins with the product-development stage in which the company finds and develops

Reviewing the learning objectives A company’s current products face limited lifespans and must be replaced by newer products. But new products can fail – the risks of innovation are as great as the rewards. The key to successful innovation lies in a customer focus, total-company effort, strong planning and a systematic new-product development process.

Learning Objective 1. Explain how companies find and develop new-product ideas. (p. 232) Companies find and develop new-product ideas from a variety of sources. Many new-product ideas stem from internal sources. Companies conduct formal research and development, pick the brains of their employees and brainstorm at executive meetings. Other ideas come from external sources. Companies track competitors’ offerings and obtain ideas from distributors and suppliers who are close to the market and can pass along information about consumer problems and new-product possibilities. Perhaps the most important source of new-product ideas is customers themselves. Companies observe customers, invite them to submit their ideas and suggestions, or even involve customers in the new-product development process. Many companies are now developing crowdsourcing or open-innovation new-product idea programs, which invite broad communities of people – customers, employees, independent scientists and researchers, and even the general public – into the new-product innovation process. Truly innovative companies do not rely only on one source for new-product ideas.

a new-product idea. The introduction stage is marked by slow growth and low profits as the product is distributed to the market. If successful, the product enters a growth stage, which offers rapid sales growth and increasing profits. Next comes a maturity stage in which sales growth slows down and profits stabilise. Finally, the product enters a decline stage in which sales and profits dwindle. The company’s task during this stage is to recognise the decline and to decide whether it should maintain, harvest or drop the product. The different stages of the PLC require different marketing strategies and tactics. In the introduction stage, the company must choose a launch strategy consistent with its intended product positioning. Much money is needed to attract distributors and build their inventories, and to inform consumers of the new product and achieve trial. In the growth stage, companies continue to educate potential consumers and distributors. In addition, the company works to stay ahead of the competition and to sustain rapid market growth by improving product quality, adding new product features and models, entering new market segments and distribution channels, shifting advertising focus from building product awareness to building product conviction and purchase, and lowering prices at the right time to attract new buyers. In the maturity stage, companies continue to invest in maturing products and consider modifying the market, the product and the marketing mix. When modifying the market, the company attempts to increase the consumption of the current product. When modifying the product, the company changes some of the product’s characteristics – such as quality, features or style – to attract new users or inspire more usage. When modifying the marketing mix, the company works to

Learning Objective 2. List and define the steps in the new-product development process, and describe the main considerations in managing this process. (pp. 232–41)

improve sales by changing one or more of the marketing mix elements. Once the

The new-product development process consists of eight sequential stages.

and trying to maintain sales; or drop the product, selling it to another firm or

The process starts with idea generation. Next comes idea screening, which reduces the number of ideas based on the company’s own criteria. Ideas that pass the screening stage continue through product concept development, in which a detailed version of the new-product idea is stated in meaningful consumer terms. In the next stage, concept testing, new-product concepts are tested with a group of target consumers to determine whether the concepts have strong consumer appeal. Strong concepts proceed to marketing strategy development, in which an initial marketing strategy for the new product is developed from the product concept. In the business-analysis stage, a review of the sales, costs and profit projections for a new product is conducted to determine whether the new product is likely to satisfy the company’s objectives. With positive results here, the ideas become more concrete through product development and test marketing and, finally, are launched during commercialisation. New-product development involves more than just going through a set of

company recognises that a product has entered the decline stage, management must decide whether to maintain the brand without change, hoping that competitors will drop out of the market; harvest the product, reducing costs liquidating it at salvage value.

Learning Objective 4. Discuss socially responsible product decisions, and international product and services marketing. (pp. 247–50) Marketers must consider two additional product issues. The first is social responsibility. This includes public policy issues and regulations involving acquiring or dropping products, patent protection, product quality and safety, and product warranties. The second involves the special challenges facing international product and services marketers. International marketers must decide how much to standardise or adapt their offerings for world markets.

Discussion questions

steps. Companies must take a systematic, holistic approach to managing this

❶ Crowdsourcing seems great but what about confidentiality? Crowdsourcing

process. Successful new-product development requires a customer-centred,

innovation is risky business; ideas can fall into competitors’ hands and,

team-based, systematic effort.

even with non-disclosure agreements, businesses must sometimes keep key

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Part 3  Designing a customer-driven strategy and mix

information confidential. This reduces the effectiveness of crowdsourcing. However, there is a great deal of evidence confirming the effectiveness

Critical thinking exercises

of crowdsourcing for innovation. When would crowdsourcing be a bad

❶ It appears that the sky is the limit regarding ideas for smartphone/tablet

idea? Explain when the benefits of crowdsourcing outweigh its problems.

apps. In a small group, create an idea for a new app. Develop a marketing-

(Learning Objective 1) (AACSB: Communication; Reflective Thinking)

strategy statement and describe how you would conduct a business analysis

❷ Innovation – ahead of its time? Innovation involves new ideas, concepts and products whose benefits are not initially apparent to customers –

for the new app. (Learning Objective 2) (AACSB: Teamwork; Communication; Analytical Thinking; Application of Knowledge)

the first computer and the first microwave oven are examples. And if the

❷ Choose an example of a company that launched a new consumer product

product does not provide value, consumers will not buy it. Is it the case,

within the past five years. Develop a presentation showing how the company

then, that customers do not know what they want when it comes to new

implemented the 4Ps in launching the product and report on the product’s

products because they do not understand what is possible? Does this mean

success since the launch. (Learning Objective 3) (AACSB: Communication;

that consumers cannot provide any input to new-product development?

Application of Knowledge)

How do we reconcile this apparent contradiction? What should companies

❸ Visit the Accelerating Commercialisation Australia website () to learn about

Thinking)

this government program. Review the funding and resources available to

❸ The product life cycle is a good conceptual tool but is not useful in practice.

support businesses. How would these programs make a difference to a

Studies show that most marketers have heard of the product life-cycle

company producing a new product during the introduction phase of the

concept but do not use it. Why do you think this is the case? Many times,

product life cycle? (Learning Objective 3) (AACSB: Communication; Use of

products seem to skip stages and the classic life-cycle pattern does not

IT; Application of Knowledge)

apply. Does this mean that the product life cycle has no practical application? Could the product life cycle be misrepresentative, or is it a good guideline for a marketing strategy? Justify your answer. (Learning Objective 3) (AACSB: Reflective Thinking) ❹ Decline or possible decline stage? When marketers discuss the notion of a product life cycle, they often speak as if the decline stage is inevitable. Is such a perspective a self-fulfilling prophecy? Would it make more sense to

Navigating the key terms Learning Objective 1

product development  (p. 237)

new-product development 

sequential product development 

(p. 232)

call it the ‘possible decline stage’? Justify your answer. (Learning Objective 3)

Learning Objective 2

(AACSB: Reflective Thinking)

business analysis  (p. 237)

❺ Is it really ‘new and improved’? Does it matter? A washing-powder

commercialisation  (p. 238)

(p. 240) team-based new-product development  (p. 240) test marketing  (p. 238)

Learning Objective 3

manufacturer finds through research that, by adding ‘blue beads of

concept testing  (p. 235)

brightness’ to its hitherto white washing powder, it is likely to sell more

crowdsourcing  (p. 234)

decline stage  (p. 246)

of its product. If the blue beads contain an active ingredient that, in fact,

customer-centred new-product

fad  (p. 243)

bleaches whites whiter, then a genuine product improvement has been

development  (p. 239)

made and consumers benefit. Would it matter if the blue beads were not a

idea generation  (p. 232)

growth stage  (p. 245)

bleach but just a coloured washing powder, and consumers still perceived

idea screening  (p. 234)

introduction stage  (p. 244)

their whites to be whiter? After all, isn’t it the case that what is new is

marketing strategy development 

really a matter of what consumers perceive to be new? Justify your answer. (Learning Objective 4) (AACSB: Reflective Thinking)

(p. 236) product concept  (p. 235)

fashion  (p. 243)

maturity stage  (p. 245) product life cycle  (p. 241) style  (p. 243)

Mini cases 8.1 Innovation IHearYou Over four million Australians have a hearing impairment. For some, a hearing

Enter Blamey and Saunders, Australian audiologists and inventors. They

aid is a welcome support – but finding a suitable aid is not straightforward.

wanted to redesign not just the hearing aid but the entire fitting process.

The best-quality hearing aids perform well in a wide range of situations.

First, they developed a new ‘bionic’ hearing aid that could be bought online

But good-quality hearing aids are expensive! It is not unusual for a hearing

for just $1500. Next, they developed an online hearing test that anyone can

aid and fitting to cost more than $10 000. So it is not surprising that many

take – for fee! Then, working with Planet Innovation, Blamey and Saunders

people with a hearing impairment go without support or leave the hearing

developed Incus, a device that allows the user to program their hearing

aid in a drawer because it just does not work for them.

aid using a smartphone. The IHearYou system allows people to take control

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of their hearing, completely changing the way customers access hearing

❷ Discuss the factors Blamey, Saunders and Planet Innovation should

solutions.33

consider when conducting business analysis for a product such as

❶ What stage of the product life cycle is each of the three products in

the IHearYou hearing system. How will business analysis add value

the IHearYou system currently in? (Learning Objective 3) (AACSB:

for customers? (Learning Objective 2) (AACSB: Communication;

Communication; Application of Knowledge)

Application of Knowledge)

8.2  New-product development Telemedicine With the majority of health-care costs being spent for the treatment of

❶ Research the telemedicine industry and describe two companies offering

chronic diseases and the reason for most emergency-room visits being­

services. What are the pros and cons of offering medical services this

non-emergencies, the time is ripe for telemedicine. Patients are tapping their

way, and what (if any) governmental or industry guidance is in place

phones, tablets and keyboards instead of making an office visit or trip to the

for this industry? (Learning Objective 1) (AACSB: Communications;

emergency room. Technology makes it possible for doctors to consult with

Reflective Thinking)

patients through Skype or FaceTime on smartphones, access medical tests via

❷ In what stage of the product life cycle is telemedicine? What role has

electronic medical records and send a prescription to a patient’s local pharmacy

mobile technology played in the evolution of this industry? Explain your

– all from kilometres away. The telemedicine industry is still in its infancy, but

answer. (Learning Objective 3) (AACSB: Communication; Reflective

it is predicted to increase to a multi-million dollar industry in just a few years.

Thinking)

8.3  Marketing analytics at work Dental house calls With the population ageing and patients who often dread sitting in a sterile

determine the amount of sales necessary to break even on this increase

dental office, dentists are finding an opportunity in dental house calls. Mobile

in fixed costs to offer this additional service. (Learning Objective 2)

Dental Services has taken its clinic on the road in Sydney and Melbourne,

(AACSB: Communication; Analytical Thinking)

performing everything from routine exams and cleanings to root canals. Clients

❷ What other factors must a dentist consider before offering this service

are elderly residents of care facilities who cannot get out to the dentist’s office.

in addition to his or her in-office service? (Learning Objectives 2 and 3)

Re-creating a dental office in a vehicle requires additional equipment, such as

(AACSB: Communication; Reflective Thinking)

a portable X-ray machine, sterile water tanks, a dental drill, lights and a laptop.

❸ Estimate total market demand for this new service, using Australian

A portable X-ray machine alone costs $8000. Refer to Appendix 3 ‘Marketing

Bureau of Statistics (ABS) data to estimate the number of elderly in

Analytics Spotlights’ to answer the following questions.34

residential care. Assume that each person will have at least one dental

❶ What types of fixed costs are associated with this service? Assuming

visit per year for a routine examination and clean, at an average price

that adding a mobile service will increase the business’s fixed costs by

of $180. (Learning Objective 2) (AACSB: Communication; Use of IT,

$20 000 and that there is a desired contribution margin of 40 per cent,

Analytical Thinking)

8.4 Ethical reflection Brainstimulator For years, electrical current has been used to treat brain disorders, such as

The buyer should beware, however, because these devices have been neither

depression, Parkinson’s disease and epilepsy. Traditional electrical-treatment

reviewed nor approved for this use in Australia.35

methods are invasive and require sending large electrical currents through,

❶ Discuss the ethical issues surrounding this type of product. What research

or implanting devices in, patients’ brains to achieve positive results. Recent

can you find to support the claims and safety of these new products?

studies have shown, however, that sending non-invasive low-dose electrical

(Learning Objective 4) (AACSB: Communication; Ethical Reasoning)

current powered by a 9-volt battery through the brains of adults and

❷ The Therapeutic Goods Administration (TGA), which is part of the

children helps them with learning mathematics and languages. For a few

Department of Health, regulates the use of these types of devices

hundred dollars, you can purchase your own transcranial direct-current

and other products, such as herbal supplements, that are marketed as

stimulation (tDCS) device to get better grades in school. The Brain Stimulator

cognitive enhancers. What approach does the TGA take in regulating

tDCS Basic Kit allows users to select between four different current levels

these types of goods? (Learning Objective 4) (AACSB: Communication;

and provides a headband or cap to hold the electrodes next to your skull.

Reflective Thinking)

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References

1 David Meer, Edward C Landry & Samrat Sharma, ‘Creating what consumers want’, Forbes, 26 January 2015, , accessed June 2016. 2 ‘Kraft Foods opens Australia’s largest R&D facility’, Food & Drink, 13 February 2013, , accessed June 2016; and survey data from John Peppers & Martha Rogers, ‘The buzz on customer-driven innovation’, Sales & Marketing Management, June 2007, p. 13. 3 For these and other examples, see Dan Schawbel, ‘Why companies want you to become an intrapreneur’, Forbes, 9 September 2013, ; and Kaomi Goetz, ‘How 3M gave everyone days off and created an innovation dynamo’, , accessed June 2016. 4 Kevin Scott, ‘The LinkedIn [in]cubator’, 7 December 2012, , accessed June 2016; and for LinkedIn membership, see , accessed December 2016. 5 Example from , accessed July 2016. 6 Example from and ; see also , accessed July 2016. 7 See Jonathan Ringen, ‘How Lego became the Apple of toys’, Fast Company, 8 January 2015, ; and , accessed July 2016. 8 ‘Samsung is fueling its future with open innovation’, InnoCentive, 23 October 2013, ; see also , accessed July 2016. 9 See Kaggle Team, ‘Telstra network disruption, winner’s interview: 1st place, Mario Filho’, No Free Hunch, 23 March 2016, ; see also and , accessed July 2016. 10 See George S Day, ‘Is it real? Can we win? Is it worth doing?’, Harvard Business Review, December 2007, pp. 110–20. 11 This example is based on Tesla Motors and information obtained from , accessed July 2016; and Daniel Cooper, ‘Tesla’s long-delayed Model X SUV is testing in California’, engadget, 13 January 2015, . Also see Ryan Bradley, ‘Full charge ahead’, Fortune, 4 February 2013, pp. 10–13; Leah Hunter, ‘How Tesla protects the romance of driving while disrupting the industry’, Co.Design, 7 November 2013, ; Campbell Simpson, ‘Tesla Model S officially on sale in Australia, here’s the price’, Gizmodo, 29 May 2014, ; ‘EV revolution: 100+ years of the electric car’, Motoring, 9 July 2016, accessed July 2016; and ‘Electric car’, Wikipedia, , accessed July 2016. 12 Quotations from ‘Shoppers get free groceries as members of the ALDI Testers Club’, news.com.au, 27 October 2015, , accessed July 2016; see also and , accessed July 2016. 13 ‘Jameson Irish Whiskey pushes recently launched pre-mix range in a new campaign via TBWA’, Campaign Brief, 20 December 2013, , accessed July 2016. 14 See and for examples of different types of new product research, accessed July 2016; see also Chris Thomas, ‘Speed and freedom – the future is now for FMCG testing’, Marketing, 19 January 2016, , accessed July 2016. 15 Bhakthi Puvanenthiran, ‘Samantha Wills: Jewellery designer took 12 years to become an overnight success’, Sydney Morning Herald, 20 June 2016, , accessed July 2016; Eloise Keating, ‘From 3am market starts and $80,000 in credit card debt: How Samantha Wills created a multimillion-dollar jewellery empire’, 23 June 2016, , accessed July 2016; Kate Racovolis, ‘How this millennial made her first million’, Forbes, 27 June 2016, , accessed July 2016. 16 ‘iPhone 6 & iPhone 6 Plus arrive in 36 more countries and territories this month’, Apple press information, 13 October 2014, , accessed July 2016. 17 See Robert G Cooper, ‘Formula for success’, Marketing Management, March–April 2006, pp. 19–23; Christoph Fuchs & Martin Schreier, ‘Customer empowerment in new product development’, Product Innovation Management, January 2011, pp. 17–32; and Robert Safien, ‘The lessons of innovation’, Fast Company, March 2012, p. 18. 18 See Chris O’Brien, ‘How Intuit became a pioneer of “delight”’, Los Angeles Times, 10 May 2013; Brad Smith, ‘Intuit’s CEO on building a design-driven company’, Harvard Business Review, January–February 2015, pp. 35–8; and and , accessed July 2016. 19 This definition is based on one found in Bryan Lilly & Tammy R Nelson, ‘Fads: Segmenting the fad-buyer market’, Journal of Consumer Marketing, 20(3), 2003, pp. 252–65. 20 See Katya Kazakina & Robert Johnson, ‘A fad’s father seeks a sequel’, New York Times, 30 May 2004, ; John Schwartz, ‘The joy of silly’, New York Times, 20 January 2008, p. 5. For examples of fads see also , accessed August 2016; , accessed August 2016; James Surowiecki, ‘What happened to the ice bucket challenge?’, The New Yorker, 25 July 2016, , accessed August 2016. 21 Shan Li, ‘Mattel’s CEO resigns as toy maker struggles’, Los Angeles Times, 27 January 2015, p. A1; John Kell, ‘Mattel’s Barbie sales down for third consecutive year’, Fortune, 30 January 2015, ; ‘Shake-up at Mattel as Barbie loses her appeal’, New York Times, 27 January 2015, p. B1. 22 Catie Low, ‘Weight Watchers Australia hopes for Oprah boost’, Sydney Morning Herald, 31 January 2016, , accessed August 2016. 23 3M, , accessed August 2016; Huggies, , accessed August 2016. 24 For quotes, see ‘Red Bull releases kiwi–apple energy drink’, Australian Food News, 13 August 2016, , accessed August 2016. 25 Simon Pitman, ‘The Old Spice brand portfolio gets a make-over’, Cosmetics Design, 7 January 2016, , accessed August 2016. 26 For a more comprehensive discussion of marketing strategies over the course of the PLC, see Philip Kotler & Kevin Lane Keller, Marketing Management, 15th edn, Pearson Education: Upper Saddle River, NJ, 2016, pp. 358ff. 27 Joshua Dowling, ‘VW recalls 90,000 cars for dodgy diesels’, Cars Guide, 7 October 2015, , accessed August 2016; David McCowen, ‘Volkswagen to offer buyback compensation to US drivers’, Drive, 21 April 2016, , accessed August 2016; ‘Volkswagen emissions probe expands a labour chief warns jobs may be cut across US, Europe’, ABC News, 2 March 2016, , accessed August 2016; Chris Isidore & David Goldman, ‘Volkswagen agrees to record $14.7 billion settlement over emissions cheating’, @CNNMoney, 28 June 2016, , accessed August 2016. 28 Information about Kit Kat from Nestlé, , accessed August 2016; ‘Kit Kat Australia launches golden Chinese New Year flavour celebration from its own retail outlet’, Australian Food News, 13 August 2016, , accessed August 2016; ‘Kit Kat’, Wikipedia, , accessed August 2016.

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Chapter 8  New products: Developing and managing innovation

29 Quotations from ‘Lost in translation: Few multinationals rename well for Chinese market’, Marketing Magazine, 17 August 2012. 30 Information from , accessed August 2016. 31 Information from , and , accessed August 2016. 32 See ‘Global powers of retailing 2015’, ; ‘Walmart corporate international’, , accessed August 2016; and information from and , accessed August 2016. 33 For information, see and , accessed August 2016; as well as ‘From the bionic ear to the “audiologist in your pocket”’, Science in Public, 8 April 2015, , accessed August 2016; and ‘50 most innovative companies 2015’, AFR Weekend, 3 March 2016, , accessed August 2016. 34 See , accessed August 2016. 35 Ursula Malone, ‘Concerns over DIY brain stimulation kits that promise to improve school results’, ABC News, 5 April 2015, , accessed August 2016; and Amy Corderoy, ‘Change my brain: Could these stimulation techniques treat depression and make us smarter?’, Sydney Morning Herald, 30 May 2015, , accessed August 2016; see also , accessed August 2016.

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Chapter

9

Pricing: Capturing customer value Companies today face a fierce and fast-changing pricing environment. Value-seeking customers have put increased pricing pressure on many companies. Thanks to the weak global economy, the pricing power of internet vendors such as Amazon – the world’s largest online merchant – and value-driven retailers such as ALDI, Costco, Coles Supermarkets and Woolworths, consumers seem to have become bargain-hunters more than ever before. In response, it appears that almost every company is looking for ways to slash prices. Yet, cutting prices is often not the best answer. Reducing prices unnecessarily can lead to lost profits and damaging price wars. It can cheapen a brand by signalling to customers that the price is more important than the customer value a brand delivers. Instead, no matter what the state of the economy, companies should sell value, not price. In some cases, that means selling lesser products at rock-bottom prices. But in most cases, it means persuading 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. After all, most of us will happily pay for products that deliver value.1 For a visual representation of the chapter, please see the concept map on the following page.

Learning

Objectives

Learning Objective 1 Identify the three main pricing strategies, and discuss the importance of understanding customer-value perceptions, company costs and competitor strategies when setting prices. What is a price?  p. 258 Major pricing strategies  pp. 258–64 Learning Objective 2 Identify and define the other important external and internal factors affecting a firm’s pricing decisions. Other internal and external considerations affecting price decisions  pp. 264–68 Learning Objective 3 Describe the main strategies for pricing new products. New-product pricing strategies  pp. 268–69 Learning Objective 4 Explain how companies determine a set of prices that maximises the profits from the total product mix. Product-mix pricing strategies  pp. 270–71 Learning Objective 5 Discuss how companies adjust their prices to take into account different types of customers and situations. Price-adjustment strategies  pp. 271–79 Learning Objective 6 Discuss the key issues related to initiating and responding to price changes. Price changes  pp. 279–82 Public policy and pricing  pp. 282–84

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Chapter 9  Pricing: Capturing customer value

Value-based pricing LO 1

to t price targe ustomer t e S tch c alue ma ceived v per

Ass nee ess cu ds s perc and tome ept valu ion e s

r

Determin that ca e costs n incurre be d

perception of com er’s pet m o itio st u n C

d D

t to duc lue pro d va gn sire ice esi er de get pr v r eli at ta

Identify the three main pricing strategies, and discuss the importance of understanding customer-value perceptions, company costs and competitor strategies when setting prices. (pp. 258–64)

Price ceiling

Product costs

LO 2 Identify and define the other important external and internal factors affecting a firm’s pricing decisions. (pp. 264–68)

Price floor

Customer perceptions of value

Competition-based pricing

f

sm e

nt of com p

g

ic Pr

e

ix t-m uc od Pr

p

ng

C o st- b a

g s e d p rici n

Ne w-p rod uct p ricing Mar ket-s kimm ing prici Mar ng ket-p enetr ation p ricing

LO 3 Describe the main strategies for pricing new products. (pp. 268–69)

teg

in e D ete r m c osts t produc

S et base price d on c o st ric i

ra s st e tit o r ’

ch an ge s

so

ses

y

r uye e b al u vinc ’s v C o n ro d u c t p e

As

D oo e s i g dp na ro d uct

Competition-based pricing

nts tme s u j d Price a nces llowa g a / s t n • Discou ted pricin g ing n • Segme cal pricin al pric c i i g lo ph ricing • Psycho eogra ng • G ational p i c i r p l n na • Promotio ricing • Inter p • Dynamic

LO 4

LO 5

LO 6

Explain how companies determine a set of prices that maximises the profits from the total product mix (pp. 270–71)

Discuss how companies adjust their prices to take into account different types of customers and situations. (pp. 271–79)

Discuss the key issues related to initiating and responding to price changes. (pp. 279–84)

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What is a price? (p. 258) price

The amount of money charged for a product or service, or the sum of the values consumers exchange for the benefits of having or using the product or service.

In the narrowest sense, price is the amount of money charged for a product or service. More broadly, 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 main factor affecting buyer choice. In recent decades, non-price factors have gained increasing importance. Nevertheless, 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 numberone problem facing many marketing executives, and many companies do not handle pricing well. Some managers view pricing as a big headache, preferring instead to focus on 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 increase in profitability. More importantly, as part of a company’s overall value proposition, price plays a key role in creating customer value and building customer relationships. So, instead of shying away from pricing, smart marketers are embracing it as an important competitive asset.2

Major pricing strategies (pp. 258–64) 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 9.1 summarises the main considerations in setting price. Customer 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. If the company prices the product below its costs, company profits will suffer. In setting its price between these two extremes, the company must consider a number of other internal and external factors, including competitors’ strategies and prices, the company’s overall marketing strategy and mix, and the nature of the market and demand. The figure suggests three main pricing strategies: (1) customer value-based pricing, (2) cost-based pricing and (3) competition-based pricing. We discuss each of these below.

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

Price floor No profits below this price

Figure 9.1  Considerations in setting price

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Customer value-based pricing In the end, the customer will decide whether a product’s price is right. Pricing decisions, like other marketing mix decisions, must start with customer value. 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 that value. Customer value-based pricing uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Value-based pricing means that the marketer cannot design a product and marketing program and then set the price. Price is considered along with the other marketing mix variables before the marketing program is set. Figure 9.2 compares value-based pricing with cost-based pricing. Although costs are an important consideration in setting prices, cost-based pricing is often product-driven. 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 markups 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 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, and price is set to match consumers’ perceived value. It is important to remember that ‘good value’ is not the same as ‘low price’. For example, some owners consider a luxurious Patek Philippe watch a real bargain, even at eye-popping prices ranging from US$20 000 to US$500 000.3 A company using value-based pricing must determine what value buyers assign to different competitive offers. However, companies often find it difficult to measure the value customers will attach to its product. For example, calculating the cost of ingredients in a meal at a top-end restaurant is relatively easy. But assigning a value to other satisfactions, such as taste, environment, relaxation, conversation and status, is very difficult. These values are subjective – they 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

customer valuebased pricing

Setting the price based on buyers’ perceptions of value, rather than on the seller’s cost.

VALUE-BASED PRICING Assess customer needs and value perceptions

Set target price to match customerperceived value

Determine costs that can be incurred

Design product to deliver desired value at target price

Determine product costs

Set price based on cost

Convince buyers of product’s value

COST-BASED PRICING Design a good product

Figure 9.2  Value-based pricing versus cost-based pricing

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product and for each benefit added to the offer. Or a company might conduct experiments to test the perceived value of different product offers. According to an old Russian proverb, there are two fools in every market – one who asks too much and one who asks too little. 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 the products 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

good-value pricing Offering just the right combination of quality and good service that customers want at a fair price.

value-added pricing

Rather than cutting prices to match competitors’ prices, marketers adopting this strategy attach valueadded features and services to differentiate their offerings, and this supports higher prices.

Recent economic events have caused a fundamental shift in consumer attitudes towards price and quality. In response, many companies have changed their pricing approaches to bring them into line with changing economic conditions and consumer price perceptions. More and more, marketers have adopted good-value pricing strategies – offering just the right combination of quality and good service at a fair price. In many cases, good-value pricing has involved introducing less-expensive versions of established, brand name products. To meet the tougher economic times and more frugal consumer spending habits, fast-food restaurants, such as Hungry Jack’s and McDonald’s, offer value meals and dollar menu items. Mercedes-Benz offers its A-Class, entry-level models, such as the A180 with a starting price at just over $40 000. From its sleek lines to its 90kW turbo inline-4 engine, A-Class gives customers ‘The best or nothing’ at a realistic price.4 In other cases, good-value pricing has involved redesigning existing brands to offer more quality for a given price or the same quality for less. Some companies even succeed by offering less value but at rockbottom prices. For example, passengers flying Ireland’s low-cost airline, Ryanair, Europe’s most profitable airline, will not get much in the way of free amenities – even having to pay for toilet use – but they will like the airline’s unbelievably low prices. Ryanair and other ultra low-cost airlines appear to have found a radical pricing solution in these tough air-travel times: Make flying free! Ryanair entered the low-cost air travel market in 1991 with promises that more than half of its passengers would pay nothing for their tickets. Remarkably, even during the global recession of 2008, the airline continued to offer virtually free fares to many of its customers. What is its secret? Ryanair’s frugal cost structure makes even the most cost-conscious competitor look like a reckless spender. In addition, however, the airline charges for virtually everything except the seat itself, from baggage check-in to seat-back advertising space. In fact, over one-fifth of its revenue comes from these ancillary sales. Despite Ryanair’s sometimes pushy efforts to extract more revenue from each traveller, customers are not complaining. Most of the additional purchases are discretionary, and those outrageously low prices just cannot be beaten. Recession-weary businesses are opting for low costs over luxury and Ryanair responded to this new market by offering reserved seats, flexible tickets and corporate booking agents – at a fee of course.5 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. Retailers such as Costco, Coles and Woolworths practise EDLP. The global king of EDLP is Walmart, which practically defined the concept and from whom Australian and New Zealand retailers adopted the practice. In contrast, high–low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items. Department stores often practise high–low pricing by having frequent sales days, early-bird savings and bonus earnings for store credit-card holders.6

Value-added pricing Value-based pricing does not mean simply charging what customers want to pay or setting low prices to meet the competition. Instead, many companies adopt value-added pricing strategies. Rather than cutting prices to match competitors’ prices, companies attach value-added features and services to differentiate their offers and thus support higher prices. Consider this example:

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The monsoon season in Mumbai, India, is three months of near-nonstop rain. For over 150 years, most Mumbaikars protected themselves with a Stag umbrella from venerable Ebrahim Currim & Sons. Like Ford’s Model T, the basic Stag was sturdy, affordable, and of any colour, as long as it was black. By the end of the 20th century, however, the Stag was threatened by cheaper imports from China. Stag responded by dropping prices and scrimping on quality. It was a bad move; for the first time since the 1940s, the brand began losing money. Finally, however, Stag came to its senses. It abandoned the price war and started innovating. It launched designer umbrellas in funky designs and cool colours. Teenagers and Value-added pricing: Stag umbrellas offer value beyond protection young adults lapped them up. It also launched umbrellas from rain, with a model to suit different moods, clothing and with a built-in high-power flashlight for those who walk personalities. Raghu Rai/Magnum Photos/Trunk Archive unlit roads at night, and models with pre-recorded tunes for music lovers and impressionist art for art lovers. There is even a Stag’s Bodyguard model, armed with glare lights, emergency blinkers, and an alarm. Customers willingly pay up to a 100 per cent premium for the new products. Under the new value-added strategy, the Stag brand has now returned to profitability. Come the monsoon in June, the grand old black Stags still reappear on the streets of Mumbai – but now priced 15 per cent higher than the imports.7 The Stag example illustrates once again that customers are motivated not by price, but by what they get for what they pay.

Cost-based pricing Whereas customer-value perceptions set the price ceiling, costs set the floor for the price 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 the company’s effort and risk. A company’s costs may be an important element in its pricing strategy. Some companies, such as Ryanair, Tigerair, Woolworths and Dell, 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. However, other companies – such as Apple, BMW and Steinway – intentionally pay higher costs so that they can add value and claim higher prices and margins. For example, it costs more to make a ‘handcrafted’ Steinway piano than it does to make a Yamaha production model. But the higher costs result in higher quality, justifying an average $80 000+ price tag. To those who buy a Steinway, price is nothing; the Steinway experience is everything. The key is to manage the spread between costs and prices – how much the company makes for the customer value it delivers.

Types of costs A company’s costs take two forms: fixed and variable. Fixed costs (also known as overhead) are costs that do not vary with production or sales level. For example, a company must pay each month’s bills for rent, heat, interest and executive salaries, whatever the company’s output. Variable costs vary directly with the level of production. Each personal computer produced by Hewlett-Packard involves a cost of computer chips, wires, plastic, packaging and other inputs. These costs tend to be the same for each unit produced. They are called ‘variable’ because their total varies with the number of units produced. Total costs are the sum of the fixed costs and variable costs for any given level of production. Management wants to charge a price that will at least cover the total production costs at a given level of production.

cost-based pricing Setting prices based on the costs for producing, distributing and selling the product, plus a fair rate of return for the company’s effort and risk.

fixed costs (overhead)

Costs that do not vary with production or sales level.

variable costs

Costs that vary directly with the level of production.

total costs

The sum of the fixed costs and variable costs for any given level of production.

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The company must manage its costs carefully. If it costs the company more than it does its competitors to produce and sell a similar product, the company will need to charge a higher price or make less profit, putting it at a competitive disadvantage.

Cost-plus pricing cost-plus pricing (markup pricing) Adding a standard markup to the cost of the product.

The simplest pricing method is cost-plus pricing (or markup pricing) – adding a standard markup to the cost of the product. For example, an electronics retailer might pay a manufacturer $20 for a 64Gb flash drive and mark it up to sell at $30, a 50 per cent markup on cost. The retailer’s gross profit is $10, meaning a 33.33 per cent gross profit margin. If the store’s operating costs amount to $8 per flash drive sold, the retailer’s net (of costs) profit will be $2. The manufacturer that made the flash drive probably used cost-plus pricing, too. If the manufacturer’s standard cost of producing the flash drive was $16, it might have added a 25 per cent markup, setting the price to the retailers at $20. Similarly, construction companies submit job bids by estimating the total project cost and adding a standard markup for profit. Lawyers, accountants, architects and other professionals typically price by adding a standard markup to their costs. Some sellers tell their customers they will charge cost plus a specified markup; for example, aerospace companies price this way to the government. Does using standard markups to set prices make sense? Generally, no. Any pricing method that ignores consumer demand and competitor prices is not likely to lead to the best price. Still, markup 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.

Breakeven pricing breakeven pricing (target-return pricing)

Setting the price to break even on the costs of making and marketing a product, or to make the desired profit.

Another cost-oriented pricing approach is breakeven pricing, or a variation called target-return pricing. The firm tries to determine the price at which it will break even or make the target return it is seeking. Target-return pricing uses the concept of a breakeven chart, which shows the total cost and total revenue expected at different sales-volume levels. Figure 9.3 shows a breakeven chart for the flash-drive manufacturer discussed previously. Fixed costs are $6 million regardless of sales volume, and variable costs are $5 per unit. Variable costs are added to fixed costs to form total costs, which rise

Total revenue 12

Target return ($2 million) Total cost

Dollars (millions)

10 8 6

Fixed cost

4 2 0

200

400 600 Sales volume in units (thousands)

800

Figure 9.3  Breakeven chart for determining target-return price and breakeven volume

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with volume. The slope of the total revenue curve reflects the price. Here, the price is $15 (e.g. the company’s revenue is $12 million on 800 000 units, or $15 per unit). At the $15 price, the manufacturer must sell at least 600 000 units to break even (breakeven volume = fixed costs ÷ (price − variable costs) = $6 000 000 ÷ ($15 − $5) = 600 000). That is, at this level, total revenues will equal total costs of $9 million, producing no profit. If the flash-drive manufacturer wants a target return of $2 million, it must sell at least 800 000 units to obtain the $12 million of total revenue needed to cover the total cost of $10 million plus the $2 million of target profits. In contrast, if the company charges a higher price, say $20, it will not need to sell as many units to break even or to achieve its target profit. In fact, the higher the price, the lower the manufacturer’s breakeven point will be. The main problem with this analysis, however, is that it fails to consider customer value and the relationship between price and demand. As the price increases, demand decreases, and the market may not buy even the lower volume needed to break even at the higher price. For example, suppose the flash-drive manufacturer calculates that, given its current fixed and variable costs, it must charge a price of $30 for the product in order to earn its desired target profit. But marketing research shows that few consumers will pay more than $25. In this case, the company must trim its costs in order to lower the breakeven point so that it can charge the lower price consumers expect. Thus, although breakeven analysis and target-return pricing can help the company to determine minimum prices needed to cover expected costs and profits, they do not take the price–demand relationship into account. When using this method, the company must also consider the impact of price on sales volume needed to realise target profits and the likelihood that the needed volume will be achieved at each possible price.

Competition-based pricing

Competition-based pricing involves setting prices based on competitors’ strategies, costs, prices

competition-

and market offerings. Consumers will base their judgments of a product’s value on the prices that based pricing Setting prices based on competitors charge for similar products. competitors’ strategies, In assessing competitors’ pricing strategies, the company should ask several questions. First, how does the costs, prices and market company’s market offering compare with competitors’ offerings in terms of customer value? If consumers offerings. perceive that the company’s product or service provides greater value, the company can charge a higher price. If consumers perceive less value relative to competing products, the company must either charge a lower price or change customer perceptions to justify 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 from the market. If the market is dominated by larger, lower-price competitors, a company may decide to target unserved market niches by offering value-added products and services at higher prices. Importantly, the goal is not to match or beat competitors’ prices. Rather, the goal is to set prices according to the relative value created versus competitors. If a company creates greater value for customers, higher prices are justified. For example, Caterpillar makes highCompetition-based pricing: The Athlete’s Foot utilises training and its advanced shoe-selection system rather than adopting competition-based quality, heavy-duty construction and mining equipment. pricing. It dominates its industry despite charging higher prices The Athlete’s Foot than competitors such as Komatsu. When a commercial

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customer once asked a Caterpillar dealer why it should pay $500 000 for a big Caterpillar bulldozer when it could get an ‘equivalent’ Komatsu bulldozer for $420 000, the Caterpillar dealer famously provided an analysis similar to the following: $420 000   $50 000   $40 000   $40 000   $20 000 $570 000 −$70 000 $500 000

the Caterpillar’s price if equivalent to the competitor’s bulldozer the value added by Caterpillar’s superior reliability and durability the value added by Caterpillar’s lower lifetime-operating costs the value added by Caterpillar’s superior service the value added by Caterpillar’s longer parts warranty the total value-added price for Caterpillar’s bulldozer discount final price

Thus, although the customer pays an $80 000 price premium for the Caterpillar bulldozer, it is actually getting $150 000 in added value over the product’s lifetime. The customer chose the Caterpillar bulldozer. What principle should guide decisions about what price to charge relative to those of competitors? The answer is simple in concept but often difficult in practice: no matter what price you charge – high, low or in-between – be certain to give customers superior value for that price.

Linking the concepts The concept of customer value is critical to good pricing and to successful marketing in general. Let’s pause for a minute to ensure you appreciate what value really means. ● An earlier example states that – although the average Steinway piano costs $80 000 – to those who own one, a Steinway is a great value. Does this fit your idea of value? Explain your answer.

● Pick two competing brands from a familiar product category (watches, perfume, consumer electronics, restaurants) – one low-priced and the other high-priced. Which offers the greater value? ● Does ‘value’ mean the same thing as ‘low price’? How do these concepts differ?

Other internal and external considerations affecting price decisions (pp. 264–68) Customer perceptions of value set the upper limit for prices, and costs set the lower limit. Within these limits, customers will compare the prices and value of the company’s offer to those of competitors. However, beyond customer value perceptions, costs and competitor strategies, the company must consider several additional internal and external factors. Internal factors affecting pricing include the company’s overall marketing strategy, objectives and marketing mix, as well as other organisational considerations. External factors include the nature of the market, aspects of demand and other environmental factors.

Overall marketing strategy, objectives and mix Price is only one element of the company’s broader marketing strategy. Thus, before setting price, the company must decide on its overall marketing strategy for the product or service. If the company has selected its target market and positioning carefully, then its marketing mix strategy, including price, will be fairly straightforward. Pricing may play an important role in helping to accomplish 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 them 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

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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 coordinated with product design, distribution and promotion decisions to form a consistent and effective integrated marketing program. Decisions made for other marketing mix variables may affect pricing decisions. For example, 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. 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. 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, target costing starts with an ideal selling price based on customer-value considerations and then targets costs that will ensure the price is met. Other companies de-emphasise price and use other marketing mix tools to create non-price positions. Often, the best strategy is not to charge the lowest price, but rather to differentiate the marketing offer to make it worth a higher price. For example, Bang & Olufsen (B&O) – known for its cutting-edge consumer electronics – builds more value into its products and charges high prices. A B&O 55-inch ultra high definition (UHDTV) Avant 4K television will cost you about $12 000. A complete B&O sound system? Well, you do not really want to know. But target customers recognise Bang & Olufsen’s very high quality and are willing to pay more to get it. Some marketers even position their products on high prices, featuring them as part of their product’s allure. For example, Grand Marnier offers a $300+ bottle of Cuvée du Cent Cinquantenaire (150th Anniversary Hand Painted Limited Edition) that is marketed with the tagline, ‘Hard to find, impossible to pronounce, and prohibitively expensive’.8 Thus, marketers must consider the total marketing strategy and mix when setting prices. But again, even when featuring price, marketers need to remember that customers rarely buy on price alone. Instead, they seek products that give them the best value in terms of benefits received for the prices paid.

target costing

265

Starts with an ideal selling price based on customer-value considerations and then targets costs that will ensure the price is met.

Organisational considerations Management must decide who within the organisation should set prices. Companies handle pricing in a variety of ways. In small companies, prices are often set by top management rather than by the marketing or sales department. In large companies, pricing is typically handled by divisional or productline managers. In industrial markets, salespeople may be allowed to negotiate with customers within certain price ranges. Even so, top management sets the pricing objectives and policies, and it often approves the prices proposed by lower-level management or salespeople. In industries in which pricing is a key factor (airlines, aerospace, steel, railroads, oil companies), companies often have pricing departments to set the best prices or to help others in setting them. These departments report to the marketing department or to top management. Others who have an influence on pricing include sales managers, production managers, finance managers and accountants.

The market and demand As noted earlier, good pricing starts with an understanding of how customers’ perceptions of value affect the prices they are willing to pay. Both consumer and industrial buyers balance the price of a product or service against the benefits of owning it. Thus, before setting prices, the marketer must understand the relationship between price and demand for the company’s product. 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.

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Pricing in different types of markets 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. 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. Thus, Hyundai differentiates its various models from dozens of other car brands through strong branding and advertising. Because there are many competitors in such markets, each firm is less affected by competitors’ pricing strategies than in oligopolistic markets.9 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 a steel company slashes its price by 10 per cent, buyers will quickly switch to this supplier. The other steelmakers must respond by lowering their prices or increasing their services. In a pure monopoly, the market consists of one seller. The seller may be a government monopoly (as Australia Post was when it began service in the early 1800s), a private regulated monopoly (a power company) or a private non-regulated monopoly (De Beers and diamonds). 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.

Analysing the price–demand relationship demand curve

Price

A curve that shows the number of units the market will buy in a given time period at different prices.

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 9.4.

P2 P1

Q2 Q1 Quantity demanded per period

Figure 9.4  Demand curve

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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. Thus, the company would sell less if it raised its price from P1 to P2. In short, consumers with limited budgets probably will buy less of something if its price is too high. Understanding a brand’s price–demand curve is crucial to good pricing decisions. 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. If demand hardly changes with a small change in price, we say demand is inelastic. If demand changes greatly, we say the demand is elastic. 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 and the instant price comparisons afforded by the internet and other technologies have increased consumer price sensitivity, turning products ranging from telephones and computers to new automobiles into commodities in some consumers’ eyes.

price elasticity

A measure of the sensitivity of demand to changes in price.

The economy Economic conditions can have a strong impact on the firm’s pricing strategies. Economic factors, such as boom or recession, inflation and interest rates, affect pricing decisions because they affect consumer spending, consumer perceptions of the product’s price and value, and the company’s costs of producing and selling a product. In the aftermath of the Global Financial Crisis and other crises that have affected foreign exchange rates, consumers have rethought the price–value equation. Many consumers have tightened their belts and become more value conscious. As a result, many marketers have increased their emphasis on value-for-themoney pricing strategies. The most obvious response to the new economic realities is to cut prices and offer deep discounts. And thousands of companies have done just that. Lower prices make products more affordable and help spur short-term sales. However, such price cuts can have undesirable long-term consequences. Lower prices mean lower margins. Deep discounts may cheapen a brand in consumers’ eyes. And once a company cuts prices, it is difficult to raise them again even when the economy recovers. Rather than cutting prices, many companies are instead shifting their marketing focus to more affordable items in their product mixes. For example, in response to falling premium brand sales, Bang & Olufsen offer a range of affordable products that work with iPhones and iPads. Other companies are holding prices but redefining the ‘value’ in their value propositions. Some luxury marketers are even thumbing their noses at the fluctuating economic conditions by flaunting their high prices. For example, readers of The Australian Financial Review’s weekend Life & Leisure liftout section see all manner of high-priced products, ranging from a Louis Vuitton necklace in metal and Swarovski crystal, to a Karl Lagerfeld clutch for Chanel. And who could live without a Girard-Perregaux new-release 1966 Skeleton watch! The point is that, even in tough economic times, consumers do not buy based on price alone. They balance the price they pay against the value they receive. For example, according to a recent survey, despite

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selling its shoes for as much as $250 a pair, Nike commands the highest consumer loyalty of any brand in the footwear segment. Customers perceive the value of Nike’s products and the Nike ownership experience to be well worth the price. Thus, no matter what price they charge – low or high – companies need to offer great value for the money.

Other external factors When setting prices, beyond the market and the economy, the company must consider a number of other factors in its external environment. It must know what impact its prices will have on other parties in its environment. How will resellers react to various prices? The company should set The economy: For loyal Nike customers the ownership experience prices that give resellers a fair profit, encourage their support is well worth the price, despite the economy. and help them to sell the product effectively. The government Mark Peterson/Corbis is another important external influence on pricing decisions. Finally, social concerns may need to be taken into account. In setting prices, a company’s short-term sales, market share and profit goals may need to be tempered by broader societal considerations. We examine public policy issues in pricing later in the chapter. We have now seen that pricing decisions are subject to a complex array of customer, company, competitive and environmental 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. The company adjusts its prices to reflect changes in costs and demand, and to account for variations in buyers and situations. As the competitive environment changes, the company considers when to initiate price changes and when to respond to them. In the sections that follow, we examine additional pricing approaches used in special pricing situations or to adjust prices to meet changing situations. We look in turn at new-product pricing for products in the introductory stage of the product life cycle, product-mix pricing for related products in the product mix, price-adjustment strategies that account for customer differences and changing situations, and strategies for initiating and responding to price changes.

Linking the concepts We have already seen that the concept of customer value is critical to good pricing and to successful marketing in general. Consider the following questions in your quest to ensure you understand the place of pricing in marketing planning and execution: ● Can you explain why marketers might need to consider the total marketing strategy and marketing mix elements when setting prices?

● Can you identify how many types of markets economists usually recognise, and can you provide examples of each type? ● Can you explain the difference between inelastic demand and elastic demand?

New-product pricing strategies (pp. 268–69) 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. They can choose between two broad strategies: (1) market-skimming pricing and (2) market-penetration pricing.

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Market-skimming pricing Many companies that invent new products set high initial prices to ‘skim’ revenues layer by layer from the market. Apple frequently uses this strategy, called market-skimming pricing (or price skimming). When Apple first introduced the iPhone, it charged an initial price of as much as $599 per phone. The phones were purchased only by customers who really wanted the sleek new smartphone and could afford to pay a high price for it. Six months later, Apple dropped the prices to attract new buyers. Within a year, it dropped prices again on the 3G model but held its prices on the newer 3GS model ($719 for the 8Gb). In this way, Apple skimmed the maximum amount of revenue from the various segments of the market on the plain 3G model. But with the introduction of the iPhone 4 in August 2010, Apple was offering its models at the retail prices of $859 (16Gb) and $999 (32Gb), once again seeking to skim the market with the newer models. It used this same skimming strategy again in September 2012, when it launched the iPhone 5 at $799 (16Gb) for the basic model and $200 more for the 64Gb model. At the same time, Apple reduced the prices of the still popular iPhone 4 to $499 (8Gb), and the 4S to $679 (16Gb). These differences in price ensure there is an Apple smartphone that suits most customers’ preferences. Market-skimming pricing 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 the advantage of charging more. Finally, competitors should not be able to enter the market easily and undercut the high price.

market-skimming pricing (price skimming) Setting a high price for a new product to skim maximum revenue from the segments willing to pay the high price; the company makes fewer but more profitable sales.

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 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, Samsung has used penetration pricing to quickly build demand for its mobile devices in fast-growing emerging markets: In Kenya, Nigeria, and other African countries, Samsung recently unveiled an affordable yet full-function Samsung Galaxy Pocket Neo model that sells for only about $113 with no contract. The Samsung Pocket is designed and priced to encourage millions of first-time African buyers to trade up to smartphones from their more basic handsets. Samsung also offers a line of Pocket models in India, selling for as little as $87. Through penetration pricing, the world’s largest smartphone maker hopes to make quick and deep inroads into India’s exploding mobile device market, which consists of mostly first-time users and accounts for nearly onequarter of all smartphones sold globally each year. Low prices are also required in emerging markets to compete with super-cheap phones from competitors, such as Chinese phone maker Xiaomi. Samsung’s penetration pricing has set off price wars with Apple, which has responded in emerging markets with heavy discounts and more affordable models of its own. Apple iPhones have typically sold for more than $300 in India, limiting Apple’s market share to only about 2 per cent there.10

marketpenetration pricing

Setting a low price for a new product in order to attract a large number of buyers and a large market share.

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 keep out the competition, and the company adopting penetration pricing must maintain its low-price position – otherwise, the price advantage may be only temporary.

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Product-mix pricing strategies (pp. 270–71) The strategy for setting a product’s price often has to be changed when the product is part of a product mix. In this case, the firm looks 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 9.1: (1) product-line pricing, (2) optional-product pricing, (3) captive-product pricing, (4) by-product pricing and (5) product-bundle pricing.

Table 9.1  Product-mix pricing Pricing situation

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 or to make money on them and the main products

Product-bundle pricing

Pricing bundles of products sold together

Product-line pricing Companies usually develop product lines rather than single products. For example, Kenwood offers some 15 different mixers in an array of designer shapes and sizes, at prices that range from $249 for a retro Patissier mixer to nearly $2000 for a mixer that cooks. In product-line pricing, management must decide on the price steps to set between the various products in a line. The price steps should take into account cost differences between the products in the line. More importantly, they should account for differences in customer perceptions of the value of different features. For example, Kenwood offers a range of kitchen machines in various colours and with various features at a wide range of prices. Many buyers happily pay more to obtain additional features and premier attachments. Kenwood’s task is to establish perceived value differences that support the price differences.11

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 buyer may choose to order a GPS navigation system and Bluetooth wireless communication – or, in the case of an Audi A5, a range of features, including 18-, 19- or 20-inch wheels. Refrigerators come with optional ice makers. And when you order a new PC, you can select from a bewildering array of storage devices, docking systems, software options, service plans and carrying cases. Pricing these options can be complicated. Car companies must decide which items to include in the base price and which to offer as options. European car dealers usually adopt a normal pricing strategy of advertising a stripped-down model at a base price to pull people into showrooms and then devote most of the showroom space to showing option-loaded cars and demonstrators at higher prices.

Captive-product pricing Product line pricing: Kenwood’s Titanium Major KMM025 is a premium kitchen machine in Kenwood’s mixer range. De’Longhi Australia Pty Ltd

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, video games and printer cartridges.

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Producers of the main products (razors, video-game consoles, printers, single-cup coffee-brewing systems and tablet computers) often price the main products low and set high markups on the supplies. For example, when Sony first introduced its PlayStation3 (PS3) video-game console, priced at $499 and $599, respectively, for the regular and premium versions, it lost as much as $306 per unit sold. Sony hoped to recoup the losses through sales of more lucrative PS3 and now PS4 games, such as Gran Turismo, from its Sony Computer Entertainment division – Polyphony Digital. Similarly, Amazon makes little or no profit on its Kindle readers and tablets. It hopes to more than make up for thin margins through sales of digital books, music, movies, subscription services and other content for the devices. ‘We want to make money when people use our devices, not when they buy our devices,’ declares Amazon CEO Jeff Bezos.12 However, companies that use captive-product pricing must be careful. Finding the right balance between the main product and captive-product prices can be tricky. For example, despite industry-leading PS3 video-game sales, it was not until four years after launch that Sony first made a profit on its PS3 console.13 What is more, consumers trapped into buying expensive captive products may come to resent the brand that ensnared them. In the case of services, captive-product pricing is called two-part pricing. The price of the service is broken into a fixed fee plus a variable usage rate. Thus, at some amusement parks, you pay a daily ticket or season-pass charge plus additional fees for food and other in-park features. Cinemas charge admission and then generate additional revenues from concessions. And mobile phone companies charge a flat rate for a basic calling plan, then charge for minutes, or data in the case of 4G data plans, over what the plan allows. The service firm must decide how much to charge for the basic service and how much to charge for the variable usage. The fixed amount should be low enough to induce usage of the service; profit can be made on the variable fees.

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 – turning trash into cash. For example, old tyres are cryogenically frozen, then chipped into pieces that are used as fillers. Sawdust and resin are used to make park benches, while sawdust and cement are used to make lighter-weight structural pieces. The by-products of white meat and red meat abattoirs are used to manufacture stockfeed and wet and dry pet foods, such as Mars PetCare’s many brands, which include Dine, My Dog, Pedigree, Schmackos and Whiskas, thus off-setting the manufacturing costs of chicken and red meat products that we humans consume.

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 ‘meal deal’ price. And Telstra, Optus and other telecommunications companies bundle various combinations of cable-TV service, landline and mobile telephone services, and broadband internet connections at a low combined price. 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.14

Price-adjustment strategies (pp. 271–79) Companies usually adjust their basic prices to account for various customer differences and changing situations. Here, we examine the seven price-adjustment strategies summarised in Table 9.2: (1) discount and allowance pricing, (2) segmented pricing, (3) psychological pricing, (4) promotional pricing, (5) geographical pricing, (6) dynamic pricing and (7) international pricing.

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Table 9.2  Price adjustments Strategy

Description

Discount and allowance pricing

Reducing prices to reward customer responses such as volume purchases, paying early 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

Discount and allowance pricing

discount

A straight reduction in price on purchases during a stated period of time or when purchasing larger quantities.

allowance

Promotional monies paid by suppliers to retailers in return for an agreement to feature the suppliers’ products in some way.

segmented pricing

A company sells a product or service at two or more prices, even though the difference in price is not based on differences in costs.

Most companies adjust their basic price to reward customers for certain responses, such as early payment of bills, volume purchases and off-season buying. These price adjustments – called discounts and allowances – can take many forms. The many forms of discounts include a cash discount, a price reduction to buyers who pay their bills promptly. A typical example is ‘2/10, net 30’, which means that although payment is due within 30 days, the buyer can deduct 2 per cent if the bill is paid within 10 days. A quantity discount is a price reduction to buyers who buy large volumes. Such discounts provide an incentive to the customer to buy more at a time, or more from one given seller rather than from many different sources. Often, this type of discount takes the form of a rebate paid retrospectively at the end of a trading period when various quantity levels are reached. Another type of rebate might be termed a ‘marketing rebate’, which can become the cost of doing business with a retailer and used by the retailer to increase earnings.15 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. 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. Trade-in allowances are most common in the automobile industry but are also given for other durable goods. Promotional allowances are payments or price reductions to reward dealers for participating in advertising and sales support programs.

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 price 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. For instance, a retailer’s house-brand product may come from the same factory as a manufacturer’s brand, yet the house brand is sold at a lower price. Using location-based pricing, a company charges different prices for different locations, even though the cost of offering each location is the same. For instance, theatres vary their seat prices because of audience preferences for certain vantage points, and universities charge higher tuition fees for fee-paying and

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international students. Finally, using time-based pricing, a firm varies its price by the season, the month, the day and even the hour. Movie cinemas charge matinee pricing during the daytime. Resorts give weekend and seasonal discounts. For segmented pricing to be an effective strategy, certain conditions must exist. The market must be segmentable, and segments must show different degrees of demand. The costs of segmenting and reaching the market cannot exceed the extra revenue obtained from the price difference. Of course, the segmented pricing must also be legal. Most importantly, segmented prices should reflect real differences in customers’ perceived value. Consumers in higher price tiers must feel they are getting their extra money’s worth for the higher prices paid. By the same token, companies must be careful not to treat customers in lower price tiers as second-class citizens. Otherwise, in the long run, the practice will lead to customer resentment and ill will. For example, in recent years, the airlines have incurred the wrath of frustrated customers at both ends of the aircraft. Passengers paying full fare for business- or first-class seats often feel they are being gouged. At the same time, passengers in lower-priced coach seats feel they are being ignored or treated poorly.

Psychological pricing Price says something about the product. For example, many consumers use price to judge quality. A $100 bottle of perfume may contain only $3 worth of scent, but some people are willing to pay the $100 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 place less reliance on price to judge quality. But when they cannot judge quality because they lack the information or skill, price becomes an important quality signal. For example, who is the better lawyer – one who charges $200 per hour or one who charges $1000 per hour? You would have to do a lot of digging into the respective lawyers’ credentials to answer this question objectively and, even then, you might not be able to judge accurately. Most of us would simply assume the higher-priced lawyer is better. 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, such as when a grocery retailer shelves its house brand of oat flakes and raisins cereal, priced at $3.49, next to Uncle Tobys Bran Plus, priced at $5.59. For most purchases, consumers do not have all the skill or information they need to work out whether they are paying a good price. They do not 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 (see Marketing in action 9.1). Interestingly, such pricing cues are often provided by sellers. Even small differences in price can signal product differences. Consider a smartphone-capable digital radio priced at $200 compared to one priced at $199.99. The actual price difference is only 1 cent, but the psychological difference can be much greater. For example, some consumers will see the $199.99 as a price in the $100 range, rather than in the $200 range. The $199.99 will more likely be seen as a bargain price, whereas the $200 price suggests more quality. 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.16

psychological pricing

Sellers consider the psychology of prices and not simply the economics.

reference prices

Prices that buyers carry in their minds and refer to when looking at a given product.

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Marketing in Action 9.1

Pricing cues are customer clues

It is Saturday morning and you stop by your local supermarket to pick up a few

this pricing cue is remarkable.’ Normally, you would expect that demand for

items for tonight’s barbecue. Navigating the aisles, you are bombarded with price

an item would fall as the price goes up. Yet, in one study involving women’s

signs, all suggesting that you just cannot beat this store’s deals. A 5-kilogram bag

clothing, raising the price of a dress from $34 to $39 increased demand by a

of house-brand charcoal briquettes for the Weber goes for only $3.99 with your

third. By comparison, raising the price from $34 to $44 yielded no difference

frequent-shopper card ($4.39 without the card), cans of Heinz baked beans are

in demand.

four for $1 (four for $2.16 without the card). An aisle display hard-sells big bags

But are prices ending in 9 accurate as pricing cues? ‘The answer varies,’

of Kettle potato chips at an ‘everyday low price’ of just $3.99. And a sign atop a

the researchers report. ‘Some retailers do reserve prices that end in 9 for

huge mound of Coke 12-packs advertises two for $9.

their discounted items. For instance, more than one store uses 00-cent

These sure look like good prices, but are they? If you are like most shoppers,

endings on regularly priced merchandise and 99-cent endings on discounted

you do not really know. Researchers have noted that, ‘For most of the items

items. Comparisons of prices at major department stores reveal that this is

they buy, consumers don’t have an accurate sense of what the price should be.’

common, particularly for apparel. But at some stores, prices that end in 9 are

In fact, customers often do not even know what prices they are actually paying.

a miscue – they are used on all products regardless of whether the items

In one study, supermarket shoppers were asked the price of an item just as they

are discounted.’

were putting it into their shopping trolley. Fewer than half of the shoppers gave the right answer. To be absolutely sure you are paying the best price, you would have to compare the marked price with past prices, prices of competing brands and prices in other stores. For most purchases, consumers just do not bother. Instead, they rely on a most unlikely source. ‘Remarkably … they rely on the retailer to tell them if they are getting a good price,’ say the researchers. ‘In subtle and notso-subtle ways, retailers send signals [or pricing cues] to customers, telling them whether a given price is relatively high or low.’ In their article, the researchers outline the following common retailer pricing cues: • Sale signs. The most straightforward retail-pricing cue is a sale sign. It might take any of several familiar forms: ‘Sale!’, ‘Reduced!’, ‘New low price!’, ‘Price after rebate!’ or ‘Now 2 for only …!’ Such signs can be very effective in signalling low prices to consumers and increasing sales for the retailer. The researchers’ studies into retail stores and mail-order catalogues reveal that using the word ‘sale’ beside a price (even without actually varying the price) can increase demand by more than 50 per cent. Sale signs can be effective, but overuse or misuse can damage both the seller’s credibility and its sales. This is one reason why David Jones has only half-yearly sales. Unfortunately, some retailers do not always use such signs truthfully. Still, consumers trust sale signs. Why? ‘Because they are accurate most of the time,’ say the researchers. ‘And, besides, customers are not that easily fooled.’ They quickly become suspicious when sale signs are used improperly. • Prices ending in ‘9’. Just like a sale sign, a 9 at the end of a price often signals a bargain. You see such prices everywhere. For example, browse the websites of discount stores. It is almost impossible to find even one price that does not end in 9. (Really, try it!) ‘In fact, this pricing tactic is so common,’ say the researchers, ‘you’d think customers would ignore it. Think again. Response to

Pricing cues, such as sale signs and prices ending in 9, can be effective in signalling low prices to consumers and thus stimulating higher sales for retailers. Vstock LLC/Thinkstock

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• Signpost pricing (or loss-leader pricing). Unlike sale signs and prices that end

of price-matching policies by introducing “branded variants” – slightly

in 9, signpost pricing is used on frequently purchased products about which

different versions of products with different model numbers for different

consumers tend to have accurate price knowledge. For example, you probably

retailers.’

know a good price on a 12-pack of Coke when you see one. New parents

Used properly, pricing cues can help consumers. Careful buyers really can

usually know how much they expect to pay for disposable nappies. Research

take advantage of signals such as sale signs, 9-endings, loss leaders and price

suggests that customers use the prices of such signpost items to gauge a

guarantees to locate good deals. Used improperly, however, these pricing cues

store’s overall prices. If a store has a good price on Coke or Huggies or Omo

can mislead consumers, tarnishing a brand and damaging customer relationships.

washing powder, they reason, it probably also has good prices on other items.

The researchers conclude: ‘Customers need price information, just as they

Retailers have long known the importance of signpost pricing, often called

need products. They look to retailers to provide both. Retailers must manage

‘loss-leader pricing’. They offer selected signpost items at or below cost to

pricing cues in the same way that they manage quality … No retailer …

pull customers into the store, hoping to make money on the shopper’s other

interested in [building profitable long-term relationships with customers] would

purchases. For instance, a retailer such as JB Hi-Fi might sell recently released

purposely offer a defective product. Similarly, no retailer who [values customers]

DVDs at several dollars below wholesale price. Customers get a really good

would deceive them with inaccurate pricing cues. By reliably signalling which

deal. And although JB Hi-Fi loses money on every DVD sold, the low DVD

prices are low, companies can retain customers’ trust – and [build more solid

prices increase store traffic and purchases of higher-margin complementary

relationships].’

products, such as Blu-Ray DVD players. • Price-matching guarantees. Another widely used retail-pricing cue is price matching, whereby stores promise to meet or beat any competitor’s price. A retailer, for example, advertises, ‘We’ll meet or beat any local competitor’s price, guaranteed! If you find a better price within 30 days on something you bought, we will refund the difference plus 10 per cent.’ Many consumerelectronics retailers even offer a self-enforced price-matching policy. Imagine the goodwill created if a retailer found a competitor with a lower advertised price and mailed a cheque for the difference to any of its frequent-buyer customers who had paid a higher price in the previous 30 days.

Sources: Quotes and other information from Eric Anderson & Duncan Simester, ‘Mind your pricing cues’, Harvard Business Review, September 2003, pp. 96–103. See also Joydeep Srivastava & Nicholas Lurie, ‘Price-matching guarantees as signals of low store prices: Survey and experimental evidence’, Journal of Retailing, 80(2), 2004, pp. 117–28; Bruce McWillams & Elten Gerstner, ‘Offering low price guarantees to improve customer retention’, Journal of Retailing, June 2006, pp. 105–13; Manoj Thomas & Vicki Morvitz, ‘Penny wise and pound foolish: The double digit effect in price cognition’, Journal of Consumer Research, June 2005, pp. 54–64; Heyong Min Kim & Luke Kachersky, ‘Dimensions of price salience: A conceptual framework for perceptions of multi-dimensional prices’, Journal of Product and Brand Management, 15(2), 2006, pp. 139–47; Robert M Schindler, ‘The 99 price ending as a signal of a low-price appeal’, Journal of Retailing, 82(1), 2006, pp. 71–7.

Questions

Evidence suggests customers perceive that stores offering price-matching

❶ Reference prices are those that are carried in customers’ minds and which

guarantees have overall lower prices than competing stores, especially in

they refer to when they look at a given product. Why might these be used

markets where they perceive price comparisons to be relatively easy. But are

when buying some products and not others?

such perceptions accurate? ‘The evidence is mixed,’ say the researchers.

❷ Why might a higher price signal higher quality to many buyers?

‘Consumers can usually be confident that they’ll pay the lowest price on

❸ Why might prices ending in 9 signify lower or sale prices? Can you identify

eligible items. However, some manufacturers make it hard to take advantage

and elaborate on a recent experience of this pricing strategy?

Promotional pricing

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, large-screen televisions and other consumer electronics are promotionally priced before major sporting events, and in November and December to attract Christmas shoppers 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. Rebates have been popular with car makers and producers of mobile phones and small appliances, but they are also used with consumer packaged goods. Some manufacturers offer low-interest financing, longer warranties or free maintenance to reduce the consumer’s ‘price’. This is a favourite practice of the motor vehicle industry. 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.

promotional pricing

A company temporarily prices its product below list price, and sometimes even below cost, to create buying excitement and urgency.

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Or, constantly reduced prices can erode a brand’s value in the eyes of customers. Marketers sometimes become addicted to promotional pricing, especially in difficult economic times. They use price promotions as a quick fix instead of sweating through the difficult process of developing effective longer-term strategies for building their brands. But companies must be careful to balance short-term sales incentives against long-term brand building. One analyst advises: When times are tough, there’s a tendency to panic. One of the first and most prevalent tactics that many companies try is an aggressive price cut. Price trumps all. At least, that’s how it feels these days. 20% off. 30% off. 50% off. Buy one, get one free. Whatever it is you’re selling, you’re offering it at a discount just to get customers in the door. But aggressive pricing strategies can be risky business. Companies should be very wary of risking their brands’ perceived quality by resorting to deep and frequent price cuts. Some discounting is unavoidable in a tough economy and consumers have come to expect it. But marketers have to find ways to shore up their brand identity and brand equity during times of discount mayhem.17 The point is that promotional pricing can be an effective means of generating sales for some companies in certain circumstances; however, it can be damaging for other companies or if used too regularly.

Geographical pricing A company also must decide how to price its products for customers located in different parts of the country or world. Should the company risk losing the business of more-distant customers by charging them higher prices to cover the higher shipping costs? Or should it charge all customers the same prices regardless of location? Here, we look at five geographical pricing strategies for the following hypothetical situation: The Peerless Paper Company is located in Melbourne, Victoria, and sells paper products to customers all over Australia and New Zealand. The cost of freight is high and affects the companies from whom customers buy their paper. Peerless wants to establish a geographical pricing policy. It is trying to determine how to price a $10 000 order to three specific customers: Customer A (Melbourne), Customer B (Sydney, NSW), and Customer C (Wellington, New Zealand). One option is for Peerless to ask each customer to pay the shipping cost from the Melbourne factory to the customer’s location. All three customers would pay the same factory price of $10 000, with Customer A paying, say, $100 for shipping; Customer B, $150; and Customer C, $350. Called FOB-origin pricing, this practice means 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. Because each customer picks up its own cost, supporters of FOB pricing believe this is the fairest way to assess freight charges. The disadvantage, however, is that Peerless will be a high-cost firm to distant customers. Uniform-delivered pricing is the opposite of FOB pricing. Here, the company charges the same price plus freight to all customers, regardless of their location. The freight charge is set at the average freight cost. Suppose this is $150. Uniform-delivered pricing therefore results in a higher charge to the Melbourne customer (who pays $150 freight instead of $100) and a lower charge to the New Zealand customer (who pays $150 instead of $350). Although the Melbourne customer may prefer to buy paper from another local paper company that uses FOB-origin pricing, Peerless has a better chance of winning over the New Zealand customer. Other advantages of uniform-delivered pricing are that it is fairly easy to administer and it lets the firm 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. For example, Peerless might set up a South/Eastern Zone and charge $100 freight to all customers in this zone, a North/Eastern Zone in which it charges $150, and a South/Western Zone in

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which it charges $350. In this way, the customers within a given price zone receive no price advantage from the company. For example, customers in Adelaide and New Zealand pay the same total price to Peerless. The complaint, however, is that the Adelaide customer is paying part of the New Zealand customer’s freight cost. 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. For example, Peerless might set Sydney as the basing point and charge all customers $10 000 plus the freight from Sydney to their locations. This means that a Melbourne customer pays the freight cost from Sydney to Melbourne, even though the goods may be shipped from Melbourne. If all sellers used the same basing-point city, delivered prices would be the same for all customers and price competition would be eliminated. Industries such as sugar, cement, steel and automobiles used basingpoint pricing for years, but this method has become less popular today. Some companies set up multiple basing points to create more flexibility; they quote freight charges from the basing-point city nearest to the customer. 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 and online 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 19th century. Today, most prices are set this way. However, some companies are now reversing the fixed-pricing trend. They are using dynamic pricing – adjusting dynamic pricing Prices are adjusted prices continually to meet the characteristics and needs of individual customers and situations. continually to meet the For example, think about how the internet has affected pricing. From the mostly fixed-pricing characteristics and needs practices of the past century, the internet seems now to be taking us back – into a new age of fluid pricing. of individual customers The flexibility of the internet allows online sellers to instantly and constantly adjust prices on a wide range and situations. of goods based on demand dynamics (sometimes called real-time pricing). In other cases, customers control pricing by bidding on auction sites, such as eBay, or negotiating on some sites. Still other companies customise their offers based on the characteristics and behaviours of specific customers. 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, such as CableChick.com.au, can adjust prices almost instantaneously according to changes in demand or costs – changing prices for specific items on a day-by-day or even hour-by-hour basis. Many direct marketers monitor inventories, costs and demand at any given moment and adjust prices instantly. For example, Dell Computer uses dynamic pricing to achieve real-time balancing of supply and demand for computer Dynamic pricing: Sites such as AppliancesOnline offer instant price comparisons for hundreds of brands, making it easier than ever components. By raising prices on components in short supply before for customers to negotiate the best prices when shopping. and dropping prices for oversupplied items, Dell actually AppliancesOnline reshapes demand on the go to meet supply conditions.

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Consumers also benefit from the web and dynamic pricing. A wealth of price comparison sites – such as Yahoo! Shopping, ShopBot and GetPrice – offer instant product and price comparisons from thousands of vendors. Most such comparison sites let shoppers browse by category or search for specific products and brands, and report back links to sellers offering the best prices, along with customer reviews. In addition to simply finding the best product and the vendor with the best price for that product, customers armed with price information can often negotiate lower prices. GetPrice even has an app that enables customers to use its service when shopping in-store. In addition, consumers can negotiate prices at online auction sites and exchanges. Suddenly, the centuries-old art of haggling is back in vogue. Want to sell that antique pickle jar that has been collecting dust for generations? Post it on eBay, the world’s biggest online flea-market, or on its sibling site, Gumtree. Want to name your own price for a hotel room or rental car? Visit a reverse auction site. Want to get a cheap overnight stay on a business trip or a weekend away from home? Then visit Wotif.com. Dynamic pricing can also be controversial. Most customers would find it galling to learn that the person in the next seat on that flight from Adelaide to Alice Springs paid 10 per cent less just because he or she happened to call at the right time or buy online. 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. An embarrassed Amazon.com halted the experiments. Dynamic pricing makes sense in many contexts – it adjusts prices according to market forces, and it often works to the benefit of the customer. But marketers need to be careful not to use dynamic pricing to take advantage of certain customer groups, thereby damaging important customer relationships.

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, whether in Oceania, the United States, Europe or a third-world country. 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 also may 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. As we have already discussed, Samsung might introduce a new product 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. Overseas travellers are often surprised to find that goods that are relatively expensive at home may carry outrageously lower price tags in other countries. A pair of Skechers sneakers selling for $129 in Australia might go for just half that price in the United States. A McDonald’s Big Mac selling for a modest $4.20 in the United States might cost $7.85 in Norway or $5.65 in Brazil; and an Oral-B electric-toothbrush head that sells for $2.49 in New York may cost $10 in China. Conversely, a Gucci handbag that sells for only $140 in Milan, Italy, might fetch $350 in Australia or New Zealand. 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, exchange-rate fluctuations and physical distribution. Import tariffs and taxes can also add to costs. For example, China imposes duties as high as 25 per cent on imported Western luxury products, such as watches, designer dresses, shoes and leather

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Chapter 9  Pricing: Capturing customer value

handbags. It also levies consumption taxes of 30 per cent for cosmetics and 20 per cent on high-end watches. As a result, Western luxury goods bought in mainland China carry prices as much as 50 per cent higher than in Europe.18 Price has become a key element in the international marketing strategies of companies attempting to enter less-affluent emerging markets. Typically, entering such markets has meant targeting the exploding middle classes in developing countries, such as China, India, Russia and Brazil, whose economies have been growing rapidly. More recently, however, as the weakened global economy has slowed growth in both domestic and emerging markets, many companies are shifting their sights to include a new target – the so-called ‘bottom of the pyramid’, the vast untapped market consisting of the world’s poorest consumers. Not long ago, the preferred way for many brands to market their products in developing markets – whether consumer products or cars, computers and smartphones – was to paste new labels on existing models and sell them at higher prices to the privileged few who could afford them. However, such a pricing approach put many products out of the reach of the tens of millions of poor consumers in emerging markets. As a result, many companies developed smaller, more basic and affordable product versions for these markets. For example, Unilever – the maker of such brands as Dove, Sunsilk, Lipton and Vaseline – shrank its packaging and set low prices that even the world’s poorest consumers could afford. It developed single-use packages of its shampoo, laundry detergent, face cream and other products that it could sell profitably for just pennies a pack. As a result, today, more than half of Unilever’s revenues come from emerging economies.19 Although this strategy has been successful for Unilever, most companies are learning that selling profitably to the ‘bottom of the pyramid’ requires more than just repackaging or stripping down existing products and selling them at low prices. Just like more well-to-do consumers, low-income buyers want products that are both functional and aspirational. Thus, companies today are innovating to create products that not only sell at very low prices but also give bottom-of-the-pyramid consumers more for their money, not less.

Price changes (pp. 279–82) 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 or a weakened economy. In such cases, the firm may aggressively cut prices to boost sales and share. But as the airline, fast-food, automobile 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. A company may also cut prices in a drive to dominate the market through lower costs. Either the company starts with lower costs than its competitors, or it cuts prices in the hope of gaining market share that will further cut costs through larger volume. Specsavers, the largest optical retailer in the United Kingdom, used a low-cost, low-price strategy to become a leader in the market for professional eye care, glasses and contact lens, and aggressively pursued this strategy when entering Australia and New Zealand. Costco used this strategy to become the world’s largest warehouse retailer. Similarly, Chinese low-price phone maker Xiaomi has now become China’s smartphone market leader, and the low-cost producer is making rapid inroads into India and other emerging markets.

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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 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 overdemand: when a company cannot supply all that its customers need, it may raise its prices, ration products to customers, or both. Consider today’s worldwide oil and gas industry. When raising prices, the company must avoid being perceived as a price gouger. For example, when petrol prices rise Initiating price increases: When petrol prices rise rapidly, angry rapidly, angry customers often accuse the major oil companies of consumers often accuse major oil companies of price gouging. enriching themselves at the expense of consumers. Customers Emma Gaulton have long memories, and they will eventually turn away from companies or even whole industries that they perceive as charging excessive prices. In the extreme, claims of price gouging may even bring about increased government regulation. 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 salesforce should help business customers find ways to economise. Wherever possible, the company should consider ways to meet higher costs or demand without raising prices. For example, it can consider more cost-effective ways to produce or distribute its products. It can shrink the product or substitute less-expensive ingredients instead of raising the price. Or it can ‘unbundle’ its market offering, removing features, packaging or services, and separately pricing elements that were formerly part of the offer. For example, to keep fares down, many airlines now charge separately for oncecomplimentary services, such as for checking more than one piece of luggage, for food served on flights and even for using in-flight toilets.

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 the watch is even more exclusive or better made. On the other hand, you might think 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 you are getting a better deal on an exclusive product. More likely, however, you would 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

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company is trying to grab a larger market share, or that it is doing poorly and trying to boost its sales. Or it might think the company wants the whole industry to cut prices to increase total demand. The company must assess each competitor’s likely reaction. If all competitors behave alike, this amounts to analysing only a typical competitor. In contrast, if the competitors do not behave alike – perhaps because of differences in size, market shares or policies – then separate analyses are necessary. However, if some competitors will match the price change, there is good reason to expect that the rest will also match it.

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 issues, the company must also consider its own situation and strategy and possible customer reactions to price changes. Figure 9.5 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. However, waiting too long to act might let the competitor get stronger and more confident as its sales increase. 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. Cutting the price will reduce the company’s profits in the short run. Some companies might also reduce their product quality, services

Has competitor cut price?

No

Hold current price; continue to monitor competitor’s price

Yes Will lower price negatively affect our market share and profits?

No

Yes

Can/should effective action be taken?

No

Yes

Reduce price

Raise perceived value

Improve quality and increase price

Launch low-price ‘fighter brand’

Figure 9.5  Assessing and responding to competitor price changes

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and marketing communications to retain profit margins, but this will ultimately hurt long-run market share. The company should try to maintain its quality as it cuts prices. 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. The higher quality creates greater customer value, which justifies the higher price. In turn, the higher price preserves the company’s higher margins. Finally, the company might launch a low-price ‘fighter 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. To counter store brands and other lowprice entrants in a tighter economy, P&G turned a number of its brands into fighter brands.20 However, companies must use caution when introducing fighter brands, as such brands can tarnish the image of the main brand. In addition, although they may attract budget buyers away from lower-priced rivals, they can also take business away from the firm’s higher-margin brands.

Linking the concepts We pause again to consider further the pricing issues we discussed in this section. Making price changes and responding to competitors’ price changes occurs frequently in business.

The critical issue is to comprehend the factors that need to be taken into account in such situations. ● Detail these factors involved in making price changes.

Public policy and pricing (pp. 282–84) Price competition is a core element of our free-market economy. In setting prices, companies usually are not free to charge whatever prices they wish. Many federal and state laws govern the rules of fair play in pricing. In addition, companies must consider broader societal pricing concerns. The most important piece of legislation affecting pricing is the Competition and Consumer Act 2010 (Cth), which prohibits price fixing, resale price maintenance and particular forms of price discrimination, as well as predatory pricing by monopolistically positioned competitors, and deceptive pricing. The Australian Competition and Consumer Commission (ACCC) plays a major role in investigating possible breaches of the Act.21 Figure 9.6 shows the main public policy issues in pricing. These include potentially damaging pricing practices within a given level of the channel (price fixing and predatory pricing) and across levels of the channel (retail price maintenance, discriminatory pricing and deceptive pricing).22

Pricing within channel levels Federal legislation on price fixing states that sellers must set prices without talking to competitors. Otherwise, price collusion is suspected. Price fixing is illegal per se – that is, the government does not accept any excuses for price fixing. Companies found guilty of such practices can receive heavy fines. Price fixing is also prohibited in many international markets. For example, Apple was recently fined US$670 000 on pricefixing charges for its iPhones in Taiwan.23 Sellers are also prohibited from using predatory pricing – selling below cost with the intention of punishing a competitor or gaining higher long-run profits by putting competitors out of business. This prohibition protects small sellers from larger ones who might sell items below cost temporarily or in a

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Producer A

Price fixing Predatory pricing

Retailer 1 Retail price maintenance Discriminatory pricing

Producer B

Price fixing Predatory pricing

Deceptive pricing

Consumers

Retailer 2 Deceptive pricing

Figure 9.6  Public policy issues in pricing

specific locale in order to drive small sellers out of business. The biggest problem is determining just what constitutes predatory-pricing behaviour. Selling below cost to unload excess inventory is not considered predatory; selling below cost to drive out competitors is. Thus, the same action may or may not be predatory depending on intent, and intent can be very difficult to determine or prove.

Pricing across channel levels The Competition and Consumer Act 2010 seeks to prevent unfair price discrimination by ensuring that sellers offer the same price terms to customers at a given level of trade. For example, every retailer is entitled to the same price terms from the same manufacturer, whether the retailer is a national chain or your local bicycle shop. However, price discrimination is allowed if the seller can prove that its costs are different when selling to different retailers – for example, that it costs less per unit to sell a large volume of bicycles to a national chain than it does to sell a few bicycles to the local dealer. The seller can also discriminate in its pricing if it manufactures different qualities of the same product for different retailers. The seller has to prove that these differences are proportional. Price differentials may also be used to ‘match competition’ in ‘good faith’, provided the price discrimination is temporary, localised and defensive, rather than offensive. Laws also prohibit retail (or resale) price maintenance – a manufacturer cannot require dealers to charge a specified retail price for its product. Although the seller can propose a manufacturer’s suggested retail price to dealers, it cannot refuse to sell to a dealer who takes independent pricing action, nor can it punish the dealer by shipping late or denying advertising allowances. Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers. This might involve bogus reference or comparison prices, such as when a retailer sets artificially high ‘regular’ prices, then announces ‘sale’ prices close to its previous everyday prices. Comparison-pricing claims are legal if they are truthful. However, sellers are advised not to advertise a price reduction unless it is a savings from the usual retail price; not to advertise ‘factory’ or ‘wholesale’ prices unless such prices are what they are claimed to be; and not to advertise comparable value prices on imperfect goods. Other deceptive pricing issues include scanner fraud and price confusion. The widespread use of scannerbased computer checkouts has led to increasing complaints of retailers overcharging their customers.

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Most of these overcharges result from poor management – from a failure to enter current or sale prices into the system. Other cases, however, involve intentional overcharges. Price confusion results when firms employ pricing methods that make it difficult for consumers to understand just what price they are really paying. For example, consumers are sometimes misled regarding the real price of a home mortgage or car finance agreement. In other cases, important pricing details may be buried in the ‘fine print’. However, reputable sellers go beyond what is required by law. Treating customers fairly and making certain they fully understand prices and pricing terms is an important part of building strong and lasting customer relationships.

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Student Learning Centre

285

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 customer retention and building

Reviewing the learning objectives

profitable customer relationships, preventing competition, supporting resellers

Before you put pricing behind you, let us further review the important concepts.

and gaining their support, or avoiding government intervention. Price decisions

Price can be defined as the sum of all the values that customers give up in order

must be coordinated with product design, distribution and promotion decisions

to gain the benefits of having or using a product or service. Pricing decisions

to form a consistent and effective marketing program. Finally, in order to

are subject to an incredibly complex array of company, environmental and

coordinate pricing goals and decisions, management must decide who within the

competitive forces.

organisation is responsible for setting price.

Learning Objective 1. Identify the three main pricing strategies, and discuss the importance of understanding customer-value perceptions, company costs and competitor strategies when setting prices. (pp. 258–64)

Other external pricing considerations include the nature of the market and demand, and environmental factors such as the economy, reseller needs and government actions. The seller’s pricing freedom varies with different types of markets. Ultimately, the customer decides whether the company has set the right price. The customer weighs the price against the perceived values of using the product – if the price exceeds the sum of the values,

A price is the sum of all the values that customers give up in order to gain

consumers will not buy. So, the company must understand concepts such

the benefits of having or using a product or service. The three main pricing

as demand curves (the price–demand relationship) and price elasticity

strategies include customer value-based pricing, cost-based pricing and

(consumer sensitivity to prices).

competition-based pricing. Good pricing begins with a complete understanding

Economic conditions can also have a major impact on pricing decisions.

of the value that a product or service creates for customers and setting a price

The recent recession caused consumers to rethink the price–value equation.

that captures that value. The price the company charges will fall somewhere

Marketers have responded by increasing their emphasis on value-for-the-money

between one that is too high to produce any demand and one that is too low

pricing strategies. Even in tough economic times, however, consumers do not buy

to produce a profit.

based on prices alone. Thus, no matter what price they charge – low or high –

Customer 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

companies need to offer superior value for the money.

the floor for prices. If the company prices the product below its costs, its profits

Learning Objective 3. Describe the main strategies for pricing new products. (pp. 268–69)

will suffer. Between these two extremes, consumers will base their judgments

Pricing is a dynamic process. Companies design a pricing structure that covers all

of a product’s value on the prices that competitors charge for similar products.

their products. They change this structure over time and adjust it to account for

Thus, in setting prices, companies need to consider all three factors – customers’

different customers and situations. Pricing strategies usually change as a product

perceived value, costs and competitors’ pricing strategies.

passes through its life cycle. In pricing innovative new products, the company

will not buy the product. At the other extreme, company and product costs set

Costs are an important consideration in setting prices. However, cost-based

can use market-skimming pricing by initially setting high prices to ‘skim’ the

pricing is often product-driven. The company designs what it considers to be a

maximum amount of revenue from various segments of the market. Or it can use

good product and sets a price that covers costs plus a target profit. If the price

market-penetrating pricing by setting a low initial price to penetrate the market

turns out to be too high, the company must settle for lower markups or lower

deeply and win a large market share.

sales, both resulting in disappointing profits. Value-based pricing reverses this

drive decisions about product design and what costs can be incurred. As a result,

Learning Objective 4. Explain how companies determine a set of prices that maximises the profits from the total product mix. (pp. 270–71)

price is set to match customers’ perceived value.

When the product is part of a product mix, the firm searches for a set of prices

process. The company assesses customer needs and value perceptions and then sets a target price to match targeted value. The targeted value and price then

Learning Objective 2. Identify and define the other important external and internal factors affecting a firm’s pricing decisions. (pp. 264–68)

that will maximise the profits from the total mix. In product-line pricing, the company decides on price steps for the entire set of products it offers. In addition, the company must set prices for optional products (optional or accessory products included with the main product), captive products (products that are required for

Other internal factors that influence pricing decisions include the company’s

use of the main product), by-products (waste or residual products produced when

overall marketing strategy, objectives and marketing mix, as well as

making the main product) and product bundles (combinations of products at a

organisational considerations. Price is only one element of the company’s

reduced price).

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Learning Objective 5. Discuss how companies adjust their prices to take into account different types of customers and situations. (pp. 271–79) Companies apply a variety of price-adjustment strategies to account for differences in consumer segments and situations. One such strategy 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 freightabsorption pricing. Finally, international pricing means the company adjusts its price to meet different conditions and expectations in different world markets.

Learning Objective 6. Discuss the key issues related to initiating and responding to price changes and public policy. (pp. 279–84)

price-based – but what of the situation when companies introduce innovative new products? Some companies seem to be able to command a much higher price. How do they do it? (Learning Objective 3) (AACSB: Reflective Thinking) ❹ Some things go together – an airline seat and space for your suitcase; an e-book reader and e-books – so how do companies price each part of their product offering? Deciding on the prices for each product can be tricky. Why not include the whole lot in a single price? What should be considered when setting the price for each part of the product or service mix? (Learning Objective 4) (AACSB: Reflective Thinking) ❺ A retailer may display a product for an odd price, such as $4.99. Certainly, $4.99 is perceived to be under $5, even though we know that no change is given when $5 is paid. Why are such odd prices employed by retailers? (Learning Objective 5) (AACSB: Reflective Thinking) ❻ How can a retailer be sure they do not break the law if they check out the competition when they set their prices? Sometimes, companies set their prices based on their competitors’ strategies and offerings – are they risking action from the ACCC for a breach of the Competition and Consumer Act 2010 (Cth)? What is the difference between competitor pricing and price fixing? (Learning Objectives 1 and 6) (AACSB: Reflective Thinking)

Critical thinking exercises ❶ In a small group, discuss your perceptions of value and how much you are

When a firm considers initiating a price change, it must consider customers’ and

willing to pay for the following products: cars, frozen dinners, jeans and

competitors’ reactions. There are different implications to initiating price cuts and

athletic shoes. Are there differences of opinion among members of your

initiating price increases. Buyer reactions to price changes are influenced by the

group? Explain why those differences exist. Discuss some examples of

meaning customers see in the price change. Competitors’ reactions flow from a

brands of these products that are positioned to deliver different value to

set reaction policy or a fresh analysis of each situation.

consumers. (Learning Objective 1) (AACSB: Communication; Teamwork;

There are also many factors to consider in responding to a competitor’s price

Application of Knowledge)

changes. The company that faces a price change initiated by a competitor must try

❷ Source estimates of price elasticity for a variety of consumer goods and

to understand the competitor’s intent as well as the likely duration and impact of

services. Explain what price elasticities of 0.5 and 2.4 mean. Note: These are

the change. If a swift reaction is desirable, the firm should pre-plan its reactions to

absolute values, as price elasticity is usually negative. (Learning Objective 2)

different possible price actions by competitors. When facing a competitor’s price

(AACSB: Analytical Thinking; Communication)

change, the company might do nothing, reduce its own price, raise perceived

❸ In a small group, determine the costs associated with offering an online

quality, improve quality and raise price, or launch a fighting brand. In setting

MBA degree in addition to a traditional MBA degree at a university. Which

prices, companies usually are not free to charge whatever prices they wish.

costs are fixed and which are variable? Determine the fees (i.e. price) to charge for each subject in this degree program. Which pricing method is your

Discussion questions ❶ Price should be what you can get in the market! If value-based pricing considers the customer’s viewpoint, should not the price be set at the highest

group using to determine the price? (Learning Objectives 1, 2, 3, 4 and 5) (AACSB: Communication; Teamwork; Analytical Thinking)

level a customer will pay? Surely this means the customer is getting value and

Navigating the key terms

the company is maximising profit? Or are there other factors to consider?

Learning Objective 1

good-value pricing  (p. 260)

Explain your answer. (Learning Objective 1) (AACSB: Reflective Thinking)

breakeven pricing (target-return

price  (p. 258)

❷ Pricing is done by the finance people, and marketing’s role is to help them

pricing)  (p. 262)

total costs  (p. 261)

get the numbers – or is it the reverse? In many companies, finance and

competition-based pricing  (p. 263)

value-added pricing  (p. 260)

marketing people work together to set prices for products and services.

cost-based pricing  (p. 261)

variable costs  (p. 261)

But what is the role of each? Who should have the final say on pricing?

cost-plus pricing (markup pricing) 

(Learning Objective 2) (AACSB: Reflective Thinking) ❸ In mature markets, competitors drive prices; to compete effectively, a company must match its competitors’ prices. As products reach maturity in their life cycle, they become like commodities and competition is typically

(p. 262) customer value-based pricing  (p. 259) fixed costs (overhead)  (p. 261)

Learning Objective 2 demand curve  (p. 266) price elasticity  (p. 267) target costing  (p. 265)

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Learning Objective 3

by-product pricing  (p. 270)

Learning Objective 5

promotional pricing  (p. 275)

market-penetration pricing  (p. 269)

captive-product pricing  (p. 270)

allowance  (p. 272)

psychological pricing  (p. 273)

market-skimming pricing (price

optional-product pricing  (p. 270)

discount  (p. 272)

reference prices  (p. 273)

product-bundle pricing  (p. 270)

dynamic pricing  (p. 277)

segmented pricing  (p. 272)

skimming)  (p. 269)

Learning Objective 4

product-line pricing  (p. 270)

(see Table 9.1 for abridged definitions)

Mini cases 9.1  Online price tracking Most consumers know that prices fluctuate throughout the year, but did

to inform them of the prices. All of this is free. Camel makes its money

you know they fluctuate even hourly? If you take regular trips on Australia’s

from an unlikely partner – Amazon – which funnels price data directly

domestic airlines, then you will know they hold regular sales days. One way

to Camel. Camel is a member of Amazon’s Affiliate program, rebating

to find out about these fluctuating prices is to sign up with the airlines

8.5 per cent of sales for each customer Camel refers. It would seem

for email notification. Another is to sign up with Tripadviser.com.au or

that Amazon would want customers to buy when prices are higher, not

Ozbargain.com.au for travel deals and coupons.

lower. But the online behemoth sees this as a way to keep the bargain

If you often buy items on Amazon, then you know that prices for

hunters happy while realising more profitability from less-price-sensitive

various products change regularly. Perhaps it is simply seasonal changes,

customers. This is an improvement over Amazon’s earlier pricing tactics,

but if you cannot keep up with the price changes, there is an app that can.

which charged different customers different prices based on their buying

Camelcamelcamel is a tool that tracks Amazon’s prices for consumers and

behaviour.

sends alerts when a price hits the sweet spot. At the time of writing, this app

❶ Go to . Track the prices of two flights that

only benefitted residents of Canada, China, Germany, Italy, Japan, Spain, the

interest you. Did the prices of any of the flights come close to your

United Kingdom and the United States. Of course, you may buy from within

desired price? Write a report on the usefulness of this type of app for

Australia and have your goods delivered to a Shipito.com warehouse for

consumers. (AACSB: Communication; Use of IT)

on-forwarding to your Australian or New Zealand address. The Amazon price-tracking app allows users to import entire Amazon wishlists and to set desired price levels at which emails or tweets are sent

❷ Camel is not the only tracking or online price-tracking application. Find and describe an example of another online price-tracking tool for consumers. (AACSB: Communication; Use of IT)

9.2  Rebates under the microscope At various points in the book, we have referred to the demise of Dick Smith

Please research this matter and answer the following questions.

Holdings (DSH) before the rise of the online version, bought by retail mogul

❶ Explain the difference between promotional rebates and what we have

Ruslan Kogan and which he runs along with his other business interests.24

termed ‘marketing rebates’? (Learning Objective 5) (AACSB: Reflective

Financial analysts have commented on the allegations that the former directors and managers of DSH inflated earnings and hid the truth about retail sales levels between the time DSH was floated on the stock exchange

Thinking) ❷ How might a retailer use rebates to inflate earnings? (Learning Objective 5) (AACSB: Analytical Thinking; Reflective Thinking)

and its demise in early 2016.25 In the present chapter, we refer to two types of rebates when discussing allowances. Both these types of rebates are common in the retailing of fastmoving consumer goods (FMCG).

9.3  Marketing analytics at work Weighted average and breakeven analysis In this marketing analytics at work exercise, you are asked to use weighted

situation facing the marketer of a new suite of office productivity software

averages in breakeven analysis. In doing so, please consider the pricing

– Transformer Software Corporation (TSC).

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Part 3  Designing a customer-driven strategy and mix

9.3  Marketing analytics at work continued Three software components form a bundled suite (OfficeTransformer) in

❶ What is the formula (equation) for calculating breakeven point (BEP)?

the first instance, and they will also be sold as individual products from the

❷ How would you calculate the weighted average sales unit and variable

end of the first year: (1) word processor, (2) spreadsheet/cashbook account,

cost unit to use in breakeven analysis given that we must use single

and (3) internet browser, flat file database and email client. The brand

sales, variable costs and fixed costs units in the breakeven formula?

names, competitor’s unit direct sell price, projected sales, unit retail selling

The BEP formula is explained in the present chapter, and in Appendix 3,

prices and variable costs are shown in Table 9.3.

Spotlight 8.

The company’s projected fixed costs for the first 12 months include integrated marketing communication ($10 million), depreciation on plant

❸ Given the projected unit sales volume for year 1, will the company, TSC, achieve breakeven based on the unit selling prices shown?

and equipment ($1.5 million), interest on loans ($0.5 million), equipment

Note: When you arrive at a single breakeven number of sales units, this

lease payments ($1.5 million), and other (including salaries) ($86 million).

needs to be converted back into the units for the various individual products.

In addition, the company expects an annual 40 per cent return on the

OfficeTransformer _______

$500 million invested in the business as a result of an initial public offering (IPO).

WordTransformer _______

Please answer the following questions to illustrate the particular

AccountsTransformer _______

measures we are examining in this mini case.

InfoTransformer _______

Table 9.3  Product pricing and costs Product/brand

Competitor unit direct sell price

Projected sales units, year 1

Sales ratios

Unit variable costs

OfficeTransformer

$859

200 000

1

$245

WordTransformer

$559

600 000

3

$50

AccountsTransformer

$659

400 000

2

$120

InfoTransformer

$239

200 000

1

$75

9.4  Ethical reflection Psychology of mobile payments As the meteoric adoption of Nintendo’s Pokémon Go has shown,

will lose their monsters if they do not purchase more space. All the while,

consumers love to play games on their mobile devices. While this is a

mathematicians and statisticians work behind the scenes to track game

global phenomenon, Japanese consumers seem to be the most passionate

play and make it easier or more challenging to keep players engaged

players. Mobile game publishers in Japan have mastered the art of getting

and spending. One expert called Puzzle & Dragons ‘truly diabolical’ in

as much revenue as possible from players – some earning more than

convincing players to pay and play more. These and other game producers’

$4 million per day. The makers of Puzzle & Dragons have seemingly

tactics have propelled Japan’s game revenue alone to exceed revenue

cracked the revenue code by using the psychology of mobile payments

from all apps in the United States.

to squeeze more revenue by encouraging players to play longer.

❶ Is it ethical for game producers to use game-playing data to encourage

One Puzzle & Dragons secret was to issue its own virtual currency, called

consumers to spend more? Explain why, or why not. (AACSB:

magic stones, so that consumers do not feel they are spending real money

Communication; Ethical Reasoning)

for chances to enhance play. Then the game offers a little reward at the

❷ Is this similar to the ‘freemium’ model used by many game producers?

end with a reminder of what is lost if the player does not take the offer.

Explain the ‘freemium’ model and discuss examples of games that

Limited-time sales offer players monsters to use in battle for just a few

use this model. (AACSB: Communication; Reflective Thinking; Ethical

magic stones and, if players run out of space, the game reminds them they

Reasoning)

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References

1 Dhruv Grewal, Anne L Roggeveen, Larry D Compeau & Michael Levy, ‘Retail value-based pricing strategies: New times, new technologies, new consumers’, Journal of Retailing, 88(1), March 2012, pp. 1–6. 2 For more on the importance of sound pricing strategy, see Thomas T Nagle, John Hogan & Joseph Zale, The Strategy and Tactics of Pricing: A Guide to Growing More Profitably, 5th edn, Prentice Hall: Upper Saddle River, NJ, 2011, chapter 1. 3 See Megan Willett, ‘How Swiss watchmaker Patek Philippe handcrafts its famous $500,000 watches’, Business Insider, 12 July 2013, ; Stacy Perman, ‘Patek Philippe crafts its future’, Fortune, 16 June 2014, pp. 37–44; and , accessed October 2015. 4 See Mercedes-Benz Australia, , accessed July 2016. 5 See Gulliver Business Travel, ‘Ryanair’s business class’, The Economist, 28 February 2013; Nick Webb, ‘One-in-four suits “slumming it” as Ryanair chases business’, The Sunday Independent, 3 February 2013; Kevin Done, ‘Runway success – Ryanair’, Financial Times, 20 March 2009; Matthew Maier, ‘A radical fix for airlines: Make flying free’, Business 2.0, April 2006, pp. 32–4; Kerry Capell, ‘Fasten your seatbelt, Ryanair’, BusinessWeek, 18 February 2008, p. 16; and , accessed March 2013. 6 See V Shankar & R N Bolton, ‘An empirical analysis of determinants of retailer pricing strategy’, Marketing Science, 23(1), pp. 28–49. 7 Example adapted from Anupam Mukerji, ‘Monsoon marketing’, Fast Company, April 2007, p. 22; also see ‘Ask a shopkeeper: Ebrahim Currim & Sons’, Mumbai Boss, 30 June 2011. 8 See Vintage Direct, ‘Grand Marnier Cuvee Speciale du Cent Cinquantenaire Liqueur (700ml)’, , accessed July 2016; and Julie Bosman, ‘A toast to a liqueur (if you can say it)’, 13 October 2005, , accessed July 2016. 9 See Wheels magazine’s Car of the Year finalists in 2016 for an example of monopolistic competition among car brands in Australia, , accessed July 2016. 10 ‘Lower cost Samsung GALAXY unveiled in Kenya’, BiztechAfrica, 23 May 2014, ; Bruce Einhorn & Bhuma Shrivastava, ‘Samsung’s China problems come to India’, Bloomberg Businessweek, 23 October 2014, pp. 44–5; and ‘Samsung Galaxy Pocket Neo’, , accessed October 2015. 11 See Kenwood, , accessed July 2016. 12 Karis Hustad, ‘Kindle fire HDX keeps Amazon’s low price, adds extra features’, Christian Science Monitor, 26 September 2013, . 13 See James Trew, ‘Playstation and image sensors help Sony turn a profit’, Engadget, 29 October 2015, , accessed July 2016. 14 See Thomas Nagle, John Hogan & Joseph Zale, The Strategy and Tactics of Pricing: A Guide to Growing More Profitably, 5th edn, Prentice Hall: Upper Saddle River, NJ, 2011, pp. 51–5; Bram Foubert & Els Gijsbrechts, ‘Shopper response to bundle promotions

289

for packaged goods’, Journal of Marketing Research, November 2007, pp. 647–62; Roger M Heeler, Adam Nguyen & Cheryl Buff, ‘Bundles = discount? Revisiting complex theories of bundle effects’, Journal of Product & Brand Management, 16(7), 2007, pp. 492–500; and Timothy J Gilbride, Joseph P Guiltinan & Joe Urbany, ‘Framing effects in mixed price bundling’, Marketing Letters, June 2008, pp. 125–40. 15 See Sue Mitchell, ‘Dick Smith “inflated’ profit”’, Australian Financial Review, 12 July 2016, pp.1, 8; Sue Mitchell, ‘Dick Smith trouble began under private equity owners’ and ‘Anchorage started Dick Smith rebate’, Australian Financial Review, 13 July 2016, pp. 1, 13, 16. Also see Mini case 2.3 ‘Marketing analytics at work’ in Chapter 2 for more on the demise of Dick Smith Electronics. 16 See Anthony Allred, E K Valentin & Goutam Chakraborty, ‘Pricing risky services: Preference and quality considerations’, Journal of Product and Brand Management, 19(1), 2010, p. 54; Kenneth C Manning & David E Sprott, ‘Price endings, left-digit effects, and choice’, Journal of Consumer Research, August 2009, pp. 328–36; Travis Nichols, ‘A penny saved: Psychological pricing’, Gumroad, 18 October 2013, ; and Bouree Lam, ‘The psychological difference between $12.00 and $11.67’, The Atlantic, 30 January 2015, . 17 Adapted from information found in Elizabeth A Sullivan, ‘Stay on course’, Marketing News, 15 February 2009, p. 1113. 18 Liza Lin, ‘Shhh … luxury goods are discounted in China’, Bloomberg Businessweek, 21 August 2014, pp. 28–9. 19 Matthew Boyle, ‘Unilever: Taking on the world, one stall at a time’, Bloomberg Businessweek, 7 January 2013, pp. 18–20; and Martinne Geller, ‘Unilever sticks with emerging markets as sales rebound’, Reuters, 21 January 2014, . 20 See Mark Ritson, ‘Should you launch a fighter brand?’, Harvard Business Review, October 2009. 21 See , accessed November 2016. 22 For discussions of these issues, see Dhruv Grewel & Larry D Compeau, ‘Pricing and public policy: A research agenda and overview of special issue’, Journal of Public Policy and Marketing, Spring 1999, pp. 3–10; and Michael V Marn, Eric V Roegner & Craig C Zawada, The Price Advantage, John Wiley & Sons: Hoboken, NJ, 2004, appendix 2. 23 See Tim Worstall, ‘Apple fined $670,000 in Taiwan for price fixing’, Forbes, 25 December 2013, ; and Lina Chan, ‘The age of Amazon is upon us’, Salon, 16 January 2015, . 24 See Mini case 2.3 ‘Marketing analytics at work’ in Chapter 2 for more on the demise of Dick Smith Electronics. 25 Dominic Powell, ‘Dick Smith management accused of disguising rebates as profit: How supplier rebates work’, 12 July 2016, , accessed July 2016.

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Chapter

10

Placement: Customer value fulfilment In this chapter, we examine the changing supply chain for member organisations: manufacturers, service providers, intermediaries such as wholesalers and retailers, and, of course, consumers. After discussing the nature and benefits of supply chain management, we work our way through these logistics networks with an explanation of decision areas before examining the nature of marketing channels and the distribution of goods and services. We then examine two main aspects of supply chains in more detail – retailing and wholesaling. We start by looking at the nature of retailing and its importance, the main types of store and non-store retailers, the decisions retailers make and the future of retailing. We then discuss the same topics for wholesalers. While we discuss direct fulfilment – or non-store retailing, as it is often termed – in more detail when considering direct and digital marketing (see Chapter 13), we introduce the topic of digital retailing in this chapter. For a visual representation of the chapter, please see the concept map on the following page.

Learning

Objectives

Learning Objective 1 Describe the nature of supply chain management and how marketing channels add value. Supply chains and the value delivery network  pp. 292–300 Learning Objective 2 Describe the nature of marketing channels and how they organise to create value. The nature of marketing channels and value creation  pp. 300–4 Channel behaviour and organisation  pp. 304–11 Channel design and management decisions  pp. 311–13 Learning Objective 3 Discuss retailing, retailers’ marketing decisions and the different ways of classifying stores, and describe retailing trends and developments. Retailing  pp. 314–27 Learning Objective 4 Compare and contrast the different types of wholesalers and their marketing decisions, and discuss wholesaling trends. Wholesaling  pp. 327–32

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LO 1

Manufacturer

Describe the nature of supply chain management and how marketing channels add value. (pp. 292–300)

Manufacturer

Manufacturer

LO 2 Describe the nature of marketing channels and how they organise to create value. (pp. 300–13)

LO 3 Discuss retailing, retailers’ marketing decisions and the different ways of classifying stores, and describe retailing trends and developments. (pp. 314–27)

FUNCTIONS: information, promotion, contact, matching, negotiation, physical distribution, financing, risk taking

Wholesaler

Agents and brokers

Retailer

Retailer

Customer

Customer

Customer

RETAILERS Speciality stores

Department stores

Supermarkets

Convenience stores

Discount stores

Mass merchants

Off-price retailers

Superstores

WHOLESALERS LO 4 Compare and contrast the different types of wholesalers and their marketing decisions, and discuss wholesaling trends. (pp. 327–32)

Merchant wholesalers

Full service

Limited service

Brokers and agents

Sales branch and offices

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Supply chains and the value delivery network (pp. 292–300) supply chain

A system of efficiently and effectively producing, making and getting products to endusers.

supply chain management

Managing upstream and downstream value-added flows of materials, final goods and related information among suppliers, the marketing organisation, resellers and final consumers.

marketing logistics (physical distribution)

The tasks involved in planning, implementing and controlling the physical flow of materials and final goods from points of origin to points of consumption in order to meet the needs of customers at a profit.

value delivery network

The network made up of the marketing organisation, suppliers, distributors and, ultimately, customers who partner with each other to improve the performance of the entire system.

One difficulty in understanding the management system of making and distributing products is that the following terms may be used interchangeably by different commentators: logistics, marketing logistics, integrated logistics management, supply chain management, materials management and physical distribution. We use the term supply chain when describing the system of efficiently and effectively producing, making and getting products to end-users. We also use the term supply chain management to encompass the management of upstream and downstream value-added flows of materials, final goods and related information among suppliers, the company, resellers and final consumers. The terms supply chain and supply chain management are used, rather than the term logistics, since the latter is but a subset of supply chain management and the two terms are not seen to be synonymous.1 Additionally, we need to take into account the fact that service organisations such as banks, government departments and motor vehicle rental companies – to name but three types of marketing organisations – also move their offerings to customers as efficiently as possible. For some, the term supply chain may still be too limiting, as it suggests 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. Rather, it makes more sense to use the term demand chain, since this term suggests a sense-and-respond view of the market. If we look at placement this way, planning starts by identifying 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. At the outbound logistics section of the supply chain (see Figure 10.1), between the producer and the customer, we find the marketing channels, which are the direct responsibility of marketing management. These are part of the firm’s marketing logistics system – also called physical distribution, for it involves planning, implementing and controlling the physical flow of goods, services and related information from points of origin to points of consumption in order to meet customer requirements at a profit. In short, it involves getting the right product to the right customer in the right place at the right time. Regardless of the terms used for any part of the supply chain, we find that most large companies today are engaged in building and managing a complex, continuously evolving value delivery network. A value delivery network is made up of the marketing organisation, suppliers, distributors and, ultimately, customers who ‘partner’ with each other to improve the performance of the entire system. In the case of many services, for example, the supplier and customer co-produce the offering, such as when you, the reader, learn at university. Information systems play a critical role in managing supply chains. Major gains in logistical efficiency have resulted from information technology, such as point-of-sale terminals, uniform product codes,

Suppliers

Inbound logistics

Marketing organisation

Outbound logistics

Resellers

Customers

Reverse logistics

Figure 10.1  Supply chain management

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satellite tracking of transport (monitoring position and managing speed and fuel consumption), radiofrequency identification (RFID) tags, electronic data interchange (EDI), electronic funds transfer (EFT) and now the internet.2 These developments have made it possible for companies to make or require such promises as, ‘The product will be at dock 25 at 10 am tomorrow’, and to control this promise through information. Supply chain decisions – including those related to marketing channels, the finished-goods delivery end – are among the most important facing management today. Decisions such as whether or not to sole-source, operations decisions such as where to locate a plant and the type of process to use, and scheduling decisions such as whether to supply from inventory or from production, are among many of the most critical decisions a firm can make. Such business design decisions are critical because they affect every other decision. Supply chain management involves several activities. The first is sales forecasting, on the basis of which the company schedules production, inventory levels and distribution. The production plans indicate the materials the purchasing department must order. These materials arrive through inbound transportation, enter the receiving area and are stored in raw material inventory. Raw materials are converted into finished goods. The finished-goods inventory is the link between the customers’ orders and the company’s manufacturing activity. Customers’ orders draw down the finished-goods inventory level and manufacturing activity builds it up. Finished goods flow off the assembly line and pass through packaging, in-plant warehousing, shipping-room processing, outbound transportation, field warehousing, and customer delivery and servicing. This flow is demonstrated in Figure 10.2. Management is continually concerned about the total cost of logistics, which can amount to 30–40 per cent of a product’s cost. Companies spend large amounts, up to 10 per cent of the country’s GDP, to wrap, bundle, load, unload, sort, reload and transport goods. The grocery industry is one that is constantly revamping its logistics in an endeavour to lower costs. Products may spend anything up to 100 days getting from factories to supermarkets, as they move through a labyrinth of wholesalers, distributors, brokers and other consolidators. With expensive inefficiencies like these, it is no wonder that

Agents and brokers Distributor

Supplier

Retailer Raw materials

Assembly Final Batch, line packing continuous process Manufacturer

EDI link

JIT system

Inventory

End-user QRT EDI link EFTPOS & POS scan data

Figure 10.2  Supply chain for a typical grocery product

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services marketing logistics

Coordinating nonmaterial activities needed to provide a service in a cost-effective way and with the quality expected.

experts have called logistics ‘the last frontier for cost economies’. Lower logistics costs permit lower prices and yield higher profit margins, and may produce both. Though the cost of coordination can be high, a well-planned supply chain management program can be a potent tool in competitive marketing. Companies can attract additional customers by offering better service, faster cycle time or lower prices through logistics improvements. This is the thinking behind crossdocking, where branded fast-moving consumer goods (FMCGs) move quickly through the network from suppliers to transporters, bypassing central retailer warehouses and arriving at stores days or weeks earlier than before. What happens if a company’s logistics networks are not set up properly? Companies lose customers when they fail to supply goods on time. Until recently, Woolworths Limited’s supermarkets achieved superior performance to Coles Supermarkets for many years because of continual improvement of the company’s supply chain. While both companies have sought to gain from logistics improvements, it is Woolworths’ Project Refresh that initially showed major gains in the cost of doing retail business.3 The direct linking of the manufacturer and retailer, initiated between Procter & Gamble and Walmart in the United States, has been extended to many other manufacturers and retailers around the world, including Lever-Rexona and Coles Supermarkets in Australia, and is a direct outcome of technological change and a willingness to see advantage in supply chain management. In Figure 10.2, we see the supply chain for a typical grocery product. In this supply chain, goods flow from the supplier to the end-user. However, other flows are involved: information, such as orders and delivery advice; and communication, such as advertising, title to the goods and payments. Supply chains can be likened to a pipeline delivering water to the household dwelling, for the intent is, as far as possible, to supply on demand rather than to carry inventories of finished goods. Services marketing logistics addresses the issue of coordinating the non-material activities necessary to provide a service in a cost-efficient way with the level of quality expected. This is represented in the case of a legal service in Figure 10.3 and, in the case of an experiential product, in Figure 10.4.

Business Government

Courts

Legal casework and service conversion Households LEGAL FIRM

DIGITAL NETWORKS

FLOWS: Information • Materials • Title • Payment/Credit

Figure 10.3  Supply chain for a legal service

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• Actors/players • Sponsors • Ticketing • Managers, etc. THEATRE

SPORT

STUDIO

Households

S Y N D I C ATO R

DIGITAL NETWORKS FTA-TV/Subscriber/Web FLOWS: Information • Materials • Payment/Credit

Figure 10.4  Supply chain for an experiential product

Figures 10.2 to 10.4 also illustrate that a number of marketing channels can be used to ensure that products reach their final destination and thus satisfy demand and customer service requirements. The reference to QRT (quick retail technology) in Figure 10.2 involves the use of telesales and EDI to speed the movement of products through the network in response to orders taken by suppliers from individual stores. In Figure 10.4 we see that, once a video production has been produced, it may be distributed via freeto-air TV (FTA-TV), subscriber-TV, such as Foxtel, or streamed over the web by one of the many services, such as Netflix and Stan, now available. Such streaming services have grown rapidly – by some 46 per cent between June 2015 and June 2016 – and some of the 2.6 million customers streaming video on demand (SVOD) subscribe to multiple services.4 It is noticeable that, unlike the flows involved in the case of goods, no title is passed to the customer in the case of experiential products. Finally, more than almost any other marketing function, supply chains affect the environment and a firm’s environmental sustainability efforts. Transportation, warehousing, packaging and other logistics functions are typically the biggest supply chain contributors to the company’s environmental footprint. At the same time, they also provide one of the most fertile areas for cost savings. So, developing a green supply chain is not only environmentally responsible; it can also be profitable. ‘Your CO2 footprint of transportation and your cost of fuel are permanently linked,’ says one supply chain manager. ‘The good news is if you can reduce logistics costs you can write an environmental story about it.’5 Nike is one company that measures environmental impact across the supply chain, using the Higg Index to work with suppliers and distributors to reduce its supply chain’s environmental footprint. For instance, during just the past three years, the more-than 900 contract factories that make Nike footwear worldwide have reduced their carbon emissions by 6 per cent, despite production increases of 20 per cent. That is equivalent to an emissions savings equal to more than 1 billion kilometres of car travel.6

Supply chain goals When making marketing logistics decisions that aim to provide a targeted level of customer service at the least cost, there arises the notion of a trade-off in the five logistics variables involved when meeting

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Product

Process

Promotion

People

Price

Physical evidence

PLACEMENT (CUSTOMER SERVICE)

Inventory carrying costs

Transportation costs

Conversion lot quantity costs

Warehousing throughput costs

Order-processing and information costs

Figure 10.5  Supply chain trade-offs and interaction with the extended marketing mix elements in providing customer service Source: Adapted from D M Lambert, The Development of Inventory Costing Methodology: A Case Study of Costs Associated with Holding Inventory, National Council of Physical Distribution Management, 1976, p. 7.

supply chain trade-offs

The trade-offs in costs areas involved when deciding on the service level the organisation will offer customers.

customers’ service requirements. The trade-off is illustrated in Figure 10.5. Customer service in this context might mean that the customer requires all major brands of a range to be delivered into their distribution centre within 24 hours of order placement, and minor brands to be delivered with greater time tolerances. It should be noted that there is a considerable difference in perspective in the supply chain involved in providing goods compared with that used to provide a service. For example, the experience of a night at a live Go Violets concert cannot be stored. Thus, it is meaningless to talk of inventory. Or is it? The experience at an entertainment centre also requires supporting products, such as food and beverages, which must be stored so they will be available to meet the needs of the concert patrons. These items are a vital part of the overall service encounter or experiential aspect of consuming such a product. Supply chain trade-offs occur because management seeks an optimal result in terms of achieving a customer service level acceptable to the customer at a cost that gives an optimal profit and cashflow result to the company. In achieving these outcomes, several decisions are involved. Supply chains typically add value through the following decisions: • cycle-time reductions (e.g. changing the manufacturing or service-delivery process)

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• conversion operations location (e.g. placing the manufacturing plant close to the source of raw materials or the television studio close to qualified technicians) • purchasing decisions to make or buy or vertically integrate or network with suppliers • manufacturing and operations process decisions (e.g. product scheduling to produce larger lot sizes and thereby reduce costs, or making many ‘soapies’ simultaneously) • order processing and costs (e.g. using telecommunications technology to run a single telesales operation in a regional location where labour is flexible and costs are lower, or to operate an online operation’s pick-and-pack warehouse from a location adjacent to transport infrastructure) • warehouse and distribution centre numbers and costs (e.g. improving customer service by placing warehouses in each capital city and using cross-docking to speed the delivery cycle) • inventory levels and costs (e.g. reducing inventory levels and costs by introducing cross-docking and radio tags to track inventory) • transport type and costs (e.g. using rail transport instead of road transport to reduce freight costs, or directly beaming television shows and commercials via microwave links to television stations or movies to cinema complexes via satellite) • restructuring the marketing channels used to place products within easy reach of buyers and ­ end-users. Some companies state their supply chain objective as providing maximum customer service at the least cost. Unfortunately, no supply chain can both maximise customer service and minimise distribution costs. Maximum customer service implies rapid delivery, large inventories, flexible product assortments, liberal returns policies and other services – all of which raise distribution costs. In contrast, minimum distribution costs imply slower delivery, smaller inventories and larger shipping lots – which represent a lower level of overall customer service. The goal of any supply chain should be to provide a targeted level of customer service at the least cost. A company must first research the importance of various distribution services to customers and then set desired service levels for each segment. The objective is to maximise profits, not sales. Therefore, the company must weigh the benefits of providing higher levels of service against the costs to do so. Some companies offer less service than do their competitors and charge a lower price. Other companies offer more service and charge higher prices to cover higher costs.

Major supply chain functions Given a set of supply chain objectives, the company is ready to design a system that will minimise the cost of attaining these objectives. The main supply chain functions focusing on the customer end include warehousing, inventory management, transportation and logistics information management.

Warehousing Production and consumption cycles rarely match. So, most companies must store their goods while they wait to be sold. For example, lawn-mower manufacturers operate their factories all year long and store up products for the heavy spring and summer buying seasons. The storage function overcomes differences in needed quantities and timing, ensuring that products are available when customers are ready to buy them. A company must decide on how many and what types of warehouses it needs and where they will be located. The company might use either storage warehouses or distribution centres. Storage warehouses store goods for moderate to long periods. In contrast, distribution centres are designed to move goods, rather than just store them. They are large and highly automated warehouses designed to receive goods from various plants and suppliers, take orders, fill them efficiently and deliver goods to customers as quickly as possible. In FMCG retailing, for example, Coles Supermarkets, Woolworths and wholesaler Metcash operate a network of large distribution centres in capital cities and major centres, which aggregate

distribution centre

Large and highly automated warehouse designed to receive goods from various plants and suppliers, take orders, fill them efficiently and deliver goods to the stores of the retail owner of the centre as quickly as possible.

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orders for many of the products stocked at store level and distribute them to individual stores. We find a similar situation in the distribution of pharmaceutical and health-care products by wholesalers Australian Pharmaceutical Industries (API), Sigma and Symbion. The distribution of online products is no different – as Amazon illustrates. Amazon operates more than 50 distribution centres, called fulfilment centres, which fill online orders and handle returns. These  centres are huge and highly automated. For example, the Amazon fulfilment centre in Tracy, California, covers more than 110 000 square metres (equivalent to 27 football fields). At the centre, 4000  employees control an inventory of 21 million items and ship up to 700 000 packages a day to Amazon customers in Northern California and parts of the Pacific Northwest. During a recent Cyber Monday, Amazon’s fulfilment-centre network filled customer orders at a rate of 426 items per second globally. Moreover, like many such centres, Amazon uses an army of army of squat, ottoman-size, day-glo orange robots to assist the human operators it employs.7 Like almost everything else these days, warehousing has seen dramatic changes in technology in recent years. Outdated materials-handling methods are steadily being replaced by newer, computer-controlled systems requiring few employees. As Amazon illustrates, some larger centres use computers and scanners to read orders and to direct lift trucks, electric hoists or robots to gather goods, move them to loading docks and issue invoices.

Inventory management Inventory management also affects customer satisfaction. Here, managers must maintain the delicate balance between carrying too little inventory and carrying too much. With too little stock, the firm risks not having products when customers want to buy. To remedy this, the firm may need costly emergency shipments or production. Carrying too much inventory results in higher-than-necessary inventory-carrying costs and stock obsolescence. Thus, in managing inventory, firms must balance the costs of carrying larger inventories against resulting sales and profits. Many companies have greatly reduced their inventories and related costs through just-in-time ( JIT ) logistics networks. With such systems, producers and retailers carry only small inventories of parts or merchandise, often only enough for a few days of operations. New stock arrives exactly when needed, rather than being stored in inventory until being used. JIT systems require accurate forecasting along with fast, frequent and flexible delivery, so that new supplies will be available when needed. However, these systems result in substantial savings in inventory-carrying and handling costs. Marketers are always looking for new ways to make inventory management more efficient. In the not-too-distant future, handling inventory might even become fully automated by using RFID or ‘smart tag’ technology, by which small transmitter chips are embedded in or placed on products and packaging on everything from flowers and razors to tyres. ‘Smart’ products could make the entire supply chain – which accounts for nearly 75 per cent of a product’s cost – intelligent Sea carrier transportation: As a major trading nation with large customers such as China and Japan, Australia is dependent on sea and automated. transport to and from the rest of the world. Companies using RFID would know, at any time, exactly Aleksey Stemmer/Fotolia where a product is located physically within the supply chain.

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‘Smart shelves’ would not only tell them when it is time to reorder, but would also place the order automatically with their suppliers. Such exciting new information technology applications will revolutionise distribution as we know it. Many large and resourceful marketing companies, such as Coles, Woolworths, Metcash, Unilever, Procter & Gamble, Kraft, IBM, HP and others, are investing heavily to make the full use of RFID technology a reality.8

Transportation The choice of transportation carriers affects the pricing of products, delivery performance and condition of the goods when they arrive – all of which will affect customer satisfaction. In shipping goods to its warehouses, dealers and customers, the company can choose among five main transportation modes: truck, rail, water, pipeline and air, along with an alternative mode for digital products – the internet. Trucks (articulated vehicles) have the third-highest share of transportation and account for some 30 per cent of total cargo tonne-kilometres travelled in Australia.9 They are efficient for short hauls of high-value merchandise. Trucking firms have evolved in recent years to become full-service providers of global transportation services. For example, large trucking firms now offer everything from satellite tracking, web-based shipment management and logistics planning software, to cross-border shipping operations. Railroads account for the major share of freight movement within Australia, with some 40 per cent of total cargo tonne-kilometres moved. They are one of the most cost-effective modes for shipping large amounts of bulk products – coal, sand, minerals, and farm and forest products – over long distances. In recent years, railroads have increased their customer services by designing new equipment to handle special categories of goods; providing flatcars for carrying truck trailers by rail (piggyback); and providing in-transit services, such as the diversion of shipped goods to other destinations en route and the processing of goods en route. Sea carriers, which account for about one-third of cargo tonne-kilometres, transport large amounts of goods by ships. Although the cost of water transportation is very low for shipping bulky, low-value, nonperishable products, such as sand, coal, grain, oil and metallic ores, water transportation is the slowest mode and may be affected by the weather. Pipelines, which account for about 1 per cent of cargo tonne-kilometres, are a specialised means of shipping petroleum, natural gas and chemicals from sources to markets. Most pipelines are used by their owners to ship their own products. Although air carriers transport less than 1 per cent of cargo tonne-kilometres of the nation’s goods, they are an important transportation mode. Airfreight rates are much higher than rail or truck rates, but airfreight is ideal when speed is needed or distant markets have to be reached. Among the most frequently airfreighted products are perishables (fresh fish and crustaceans, cut flowers) and high-value, low-bulk items (technical instruments, jewellery). Companies find that airfreight also reduces inventory levels, packaging costs and the number of warehouses needed. The internet carries digital products from producer to customer via satellite, cable or copper wire. Software firms, the media, entertainment companies and education all make use of the internet to transport digital products. Although these firms primarily use traditional transportation to distribute DVDs, newspapers and more, the internet holds the potential for lower product distribution costs. Whereas planes, trucks and trains move freight and packages, digital technology moves information bits. Shippers also use multimodal transportation – combining two or more modes of transportation. Total cargo tonne-kilometres moved via multiple modes is 14 per cent. Piggyback describes the use of rail and trucks; fishyback, the use of water and trucks; trainship, water and rail; and airtruck, air and trucks.

multimodal transportation Combining two or more modes of transportation.

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Combining modes provides advantages that no single mode can deliver. Each combination offers advantages to the shipper. For  example, not only is piggyback cheaper than trucking alone, but it also provides flexibility and convenience. In choosing a transportation mode for a product, shippers must balance many considerations: speed, dependability, availability, cost and others. Thus, if a shipper needs speed, then air and truck are the prime choices. If the goal is low cost, then water or rail are likely to be chosen.

Supply chain information management Companies manage their supply chains through information. Channel partners often link up to share information and to make Multimodal transportation: Aurizon’s nationwide transportation of bulk and containerised freight involves truck trailers on rail better joint logistics decisions. From a logistics perspective, flows cars or enabling a fast changeover from road wheels to rail of information, such as customer transactions, billing, shipment bogies on these trailers. and inventory levels, and even customer data, are closely linked © Prasit Rodphan/Shutterstock to channel performance. Companies need simple, accessible, fast and accurate processes for capturing, processing and sharing channel information. Information can be shared and managed in many ways, but most sharing takes place through traditional or internet-based electronic data interchange, the digital exchange of data between organisations, which primarily is transmitted via the internet.10 Coles Supermarkets, for example, requires EDI links with its many suppliers. In some cases, suppliers might actually be asked to generate orders and arrange deliveries for their customers. Large retailers, such as Kmart, work closely with major suppliers to set up vendor-managed inventory (VMI) systems or continuous inventory replenishment systems. Using VMI, the customer shares realtime data on sales and current inventory levels with the supplier. The supplier then takes full responsibility for managing inventories and deliveries. Some retailers even go so far as to shift inventory and delivery costs to the supplier. Such systems require close cooperation between the buyer and seller.

Linking the concepts Let’s stop here for a moment and apply the distribution channel concepts we have discussed so far. ● Can you identify and elaborate on the supply chain tradeoffs? Is the aim to reduce costs, or is there something more that marketing organisations aim to fulfil by optimising these functions?

marketing channel (distribution channel) A set of interdependent organisations involved in the process of making a product or service available to users.

● If you were managing Nestlé’s Uncle Tobys operations located in the Victorian town of Wahgunyah, which transport modes might you consider? (See Google Maps reference.11) For an overview of Uncle Tobys’ products, see .

The nature of marketing channels and value creation (pp. 300–4) Marketing channels are a major part of any supply chain and involve the interaction of intermediaries used to bring finished goods and services to the marketplace, within easy reach of buyers and end-users. A marketing channel (or distribution channel) is a network of interdependent organisations – intermediaries – involved in the process of making goods and services available for use or consumption by the consumer or business user.

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How marketing channels add value Why do producers give some of the selling and distribution jobs to channel partners? Doing so means giving up some control over how, and to whom, a producer’s or supplier’s products are sold. However, suppliers also gain certain advantages by using intermediaries. These advantages are described in this section. Many suppliers lack the financial resources to carry out direct marketing, or customers want personal interaction before buying large-ticket items. For  example, car makers Ford and General Motors sell their cars through a number of independent franchises and company-owned dealers. Locally and globally, the big car makers would be unwise to bypass their dealers. No matter how much car makers turn to online methods, they will still need their dealers. Direct and online marketing would require many suppliers to set up company-managed networks of intermediaries for their producers if they wished to achieve the mass distribution economies their current marketing channels offer. For example, the pie maker, Patties (Four’N Twenty brand), would find it impractical to set up small retail pie shops around the country, or to sell its meat pies door-to-door or by mail order via post or the web in Australia and New Zealand. In order to be viable, the company would have to sell pies along Marketing channels: Value is added by marketing with many other small products, and would end up in the milk bar and food channel members for companies such as Patties, store business. The company finds it advantageous to work through a network of which must get the 50 000 Four’N Twenty meat third-party distributors and retailers. pies an hour it produces to market. Even producers that can afford to set up their own channels can often earn a Four’N Twenty is a trademark of Patties Foods Pty Ltd greater return by increasing their investment in their main business. For example, if a company earns a 20 per cent rate of return on manufacturing and foresees only a 10 per cent return on retailing, it may be unwise to undertake its own retailing. The use of intermediaries largely reflects their greater efficiency in making goods available to target markets. Through their contacts, experience, specialisation and scale of operation, intermediaries usually offer a producer or supplier more than it can achieve on its own. Figure 10.6 shows one way that using intermediaries can provide economies and add value. Part A (on the left-hand side of the figure) shows three producers, each using a direct marketing approach to 1 M

2

C

M

C

M

C

M

1

4

C

3 4 5 6

M

7 M

8 9

A. Number of contacts MxC=3x3=9 M = Manufacturer

2

D

3

5

6

C

C

B. Number of contacts M+C=3+3=6 C = Customer

D = Distributor

Figure 10.6  How a distributor reduces the number of channel transactions

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reach three customers. This system requires nine different contacts. Part B shows the three producers working through one distributor, who contacts the three customers. This system requires only six contacts. In this way, intermediaries reduce the amount of work that must be done by suppliers to sell and distribute the product, and by customers to search for and buy such products. From an economic point of view, the role of marketing intermediaries is to transform the assortment of products made by producers into the assortments wanted by consumers. Producers make and supply narrow assortments of products in large quantities. However, as we observe from the popularity of shopping malls, supermarkets, banks and direct factory outlets (DFOs), consumers want broad assortments of products in small quantities, within easy reach by transport or accessible by telephone or the internet. By using marketing channels, customers interact with intermediaries who buy and break down into smaller quantities the large assortments they bring together from the suppliers of many brands and product ranges. Thus, intermediaries play an important role in coordinating supply and demand. Members of the marketing channel add value when they move goods from producers and suppliers to consumers. This overcomes the main time, placement and possession gaps that arise when separate suppliers are unable to coordinate supply and demand. Marketing channel members perform many key functions: • information – gathering and distributing marketing research and intelligence information about actors and forces in the marketing environment needed for planning and aiding exchange • promotion – developing and spreading persuasive communications about an offer • contact – finding and communicating with prospective buyers • matching – shaping and fitting the offer to the buyer’s needs, including such activities as manufacturing, grading, assembling and packaging • negotiation – reaching an agreement on price and other terms of the offer so that ownership or possession can be transferred • physical distribution – transporting and storing goods • financing – acquiring and using funds to cover the costs of the channel work • risk taking – assuming the risks of carrying out the channel work. The question is not whether these functions need to be performed – they must be – but, rather, who is to perform them. All the functions have three things in common: (1) they use up scarce resources; (2) they can often be performed better through specialisation; and (3) they can be transferred to other channel members. To the extent that the producer performs these functions, its costs go up and so, too, do its prices. At the same time, when some functions are shifted to intermediaries, the producer’s costs and prices are lower, but the intermediaries must add a charge to cover the cost of their work and their own profits. In dividing the work of the channel network as a whole, the various functions should be assigned to the channel members who add the most value for the cost involved.

Number of channel levels channel level

A layer of intermediaries who perform some work in bringing the product and its ownership closer to the final buyer.

direct marketing channel A direct marketing channel has no intermediary levels.

Marketing channels may be described by the number of channel levels involved. Each layer of intermediaries that performs some work in bringing the product and its ownership closer to the final buyer is a channel level. Because the manufacturer, or supplier, and the final consumer each perform some work, they are part of every channel. We use the number of intermediary levels to indicate the length of a channel. Figure 10.7 shows several distribution channels of different lengths. Channel 1, called a direct marketing channel, has no intermediary levels. It consists of a manufacturer selling directly to consumers. For example, Avon sells its products door-to-door and online, Vodafone sells its services from retail stores and online, Foxtel and Optus Television sell their subscriber-TV services through telesales, and private health insurance companies sell their resources through their own outlets or person-to-person. Channel 2 contains one intermediary level. In consumer markets, this level is typically a retailer, as in the case where large retailers, such as Big W and Kmart, sell televisions, cameras, tyres, furniture, appliances and many other products that they buy directly from manufacturers. Channel 3 contains two intermediary

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Producer

Producer

Producer

Producer

Producer

Manufacturer’s representatives or sales branch

Wholesaler

Retailer

Retailer

Consumer

Consumer

Consumer

Channel 1

Channel 2

Channel 3

A. Customer marketing channels

Producer

Business distributor

Business distributor

Business customer

Business customer

Business customer

Channel 1

Channel 2

Channel 3

B. Business marketing channels

Figure 10.7  Consumer and industrial marketing channels

levels. In consumer markets, these levels are typically a wholesaler and a retailer. This channel is often used by small manufacturers of food, pharmaceutical, hardware and other products. Distribution channels with more levels are still evident but are becoming less common as time goes on. For the producer, a greater number of levels means less control. And the more levels, the greater the channel’s complexity and the more costs involved. In Japan, for example, retail products often flow through many levels, making it difficult for suppliers from Australia and New Zealand to understand the complex relationships and influence the market. Figure 10.7 shows some common businessto-business marketing channels. The industrial goods producer can use its own salesforce to sell directly to industrial customers. It can also sell to industrial distributors who, in turn, sell to industrial customers. It can sell through a manufacturer’s representatives or its own sales branches to industrial customers, or use either to sell through industrial distributors. Thus, zero-, one- and two-level distribution channels are common in industrial goods markets. As we saw earlier in Figures 10.2 to 10.4, the institutions in the channel are connected by several types of flows. These include the product flow of goods and services, the flow of ownership (in the case of goods, but not in the case of services), Direct marketing channels: Vodafone sells its services from retail stores and also payment flow, information flow and promotion flow. online. These flows can make channels very complex, Takatoshi Kurikawa/Alamy Stock Photo even those with only one or a few levels.

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Channels in the service sector The concept of marketing channels is not limited to the distribution of goods. Producers of services and experiences also face the problem of making their output available to target populations. Governments market ideas when they develop ‘educational distribution systems’ and ‘health delivery systems’. They must determine agencies and locations for reaching a widely spread population. Hospitals must be located in a geographic space to provide people with complete medical care, and schools must be built close to the children who need to learn there. Fire stations must be located so as to give rapid access to potential fires. Voting booths must be placed so that people can cast their ballots without expending unreasonable amounts of time, effort or money to reach a polling station, even in countries such as Australia where voting is compulsory. In cities, playgrounds are created and located for children. In many overpopulated countries, to ensure contraceptive and family-planning information reaches the people, birth-control clinics must be assigned or widely distributed consumer goods used as a vehicle for distributing such information or aids. Marketing channels are also used in ‘person’ marketing. Before the advent of television in Australia and New Zealand in 1956, professional comedians could only reach audiences through theatres, special events, nightclubs, radio, movies and carnivals. By the late 1950s, television had become a strong channel and vaudeville began to disappear. More recently, comedians’ channels have grown to include subscriberTV (e.g. the Comedy Channel), television shows, the web, promotional events, product endorsements, videotapes and DVDs. As elections the world over show, politicians seek cost-effective channels, such as the mass media, and social networking internet sites such as Facebook, YouTube and Twitter, but still resort to visiting shopping malls and rallies to distribute their messages to voters.

Channel behaviour and organisation (pp. 304–11) Marketing channels are more than simple collections of firms tied together by various flows – networks, if you will. They are complex behavioural networks in which people and companies interact to accomplish individual, company and channel goals. Some channel networks consist only of informal interactions among loosely organised firms; others consist of formal interactions guided by strong organisational structures. And channel networks do not stand still: new types of intermediaries surface and whole new channel networks evolve. Here, we look at channel behaviour, and at how members organise to do the work of the channel.

Channel behaviour

channel conflict

Disagreements among marketing channel members on goals, roles and rewards – that is, on who should do what and for what rewards.

A marketing channel consists of firms that have partnered for their common good. Each channel member depends on the others. Ideally, because the success of individual channel members depends on overall channel success, all channel firms should work together smoothly. They should understand and accept their roles, coordinate their goals and activities, and cooperate to attain overall channel goals. By cooperating, they can more effectively sense, serve and satisfy the target market. In some cases, individual channel members may not take such a broad view. They may be more concerned with their own short-run goals and their dealings with those firms closest to them in the channel. Cooperating to achieve overall channel goals sometimes means giving up individual company goals. Although channel members are dependent on one another, they sometimes act alone in trying to meet their own short-run best interests. They may disagree on the roles each should play, on who should do what and for what rewards. Such disagreements over goals and roles generate channel conflict. Horizontal conflict is conflict between firms at the same level of the channel. Such conflict might be due, for example, to rivalry between insurance agents encroaching on each other’s territories or customers. Franchisees of large fast-food chains might complain about the pricing practices of other franchisees in

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the same image chain. If claims such as cheating on ingredients are made, this must be investigated by the franchisor. Some car dealers complain about other dealers that sell the same brand stealing sales from them by being too aggressive in their pricing and advertising. Vertical conflict refers to conflicts between different levels of the same channel and is even more common. For example, when Kmart commenced operations in Australia, some paint manufacturers were wary about supplying them with the manufacturer’s branded product because of the potential backlash that would occur from other retailers who stocked the brand. Some conflict in the channel takes the form of healthy competition. This competition can be good for the channel – without it, the channel might not be proactive or innovative. Sometimes, conflict can damage the channel. For the channel as a whole to perform well, each channel member’s role must be specified and channel conflict must be managed. Cooperation, role assignment and conflict management in the channel are attained through strong channel leadership. The channel will perform better if it contains a company, agency or mechanism that has the power to assign roles and manage conflict. In a large company, the formal organisation structure assigns roles and provides the needed leadership; however, in a marketing channel made up of independent organisations, leadership and power are not formally set. Traditionally, marketing channels have lacked the leadership needed to assign roles and manage conflict. In recent years, however, new types of channel organisations have appeared that provide stronger leadership and improved performance.

Channel organisation Marketing channels perform best when channel members’ roles are well defined and the potential for channel conflict is recognised and managed.

Conventional marketing channels Historically, marketing channels have been loose collections of independent companies, each showing little concern for overall channel performance. In conventional marketing channels, each channel member is a separate business seeking to maximise its own profits, perhaps even at the expense of the system as a whole. No channel member has much control over the other members, and no formal means exist for assigning roles and resolving channel conflict.

Vertical marketing networks In contrast to conventional marketing channels, a vertical marketing network (VMN) consists of producers, wholesalers and retailers acting as a unified system. One channel member owns the others, has contracts with them or wields so much power that all channel members cooperate. The VMN can be dominated by the producer, the wholesaler or the retailer. Figure 10.8 contrasts the two types of channel arrangements. We look now at the main types of VMNs, shown in Figure 10.9. Each type uses a different means of setting up leadership and power in the channel. In a corporate VMN, coordination and conflict management are attained through common ownership at different levels of the channel. In a contractual VMN, they are attained through contractual agreements among channel members. In an administered VMN, leadership is assumed by one or a few dominant channel members.

Corporate VMNs A corporate vertical marketing network integrates successive stages of production and distribution under single ownership. Bristol Paints and its decorator stores are one example. In such corporate networks, cooperation and conflict management are handled through regular organisational channels. And integrating the entire distribution chain – from its own design and manufacturing operations to distribution through its own managed stores – has turned Spanish clothing chain Zara into one of the world’s fastest-growing fast-fashion retailers.12

305

conventional marketing channel

A channel consisting of one or more independent producers, wholesalers and retailers, each a separate business seeking to maximise its own profits, perhaps even at the expense of profits for the system as a whole.

vertical marketing network (VMN) A distribution channel structure in which producers, wholesalers and retailers act as a unified network; one channel member owns the others, has contracts with them or wields so much power that all channel members cooperate.

corporate vertical marketing network A vertical marketing network that combines successive stages of production and distribution under single ownership; channel leadership is established through common ownership.

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CONVENTIONAL MARKETING CHANNEL

VERTICAL MARKETING NETWORK

Manufacturer

Manufacturer

Wholesaler

Wholesaler

Retailer

Retailer

Consumer

Consumer

Figure 10.8  A conventional marketing channel versus a vertical marketing network

Vertical marketing networks (VMNs)

contractual vertical marketing network A vertical marketing network in which independent firms at different levels of production and distribution join together through contracts.

Corporate VMN

Contractual VMN

Administered VMN

Wholesalersponsored voluntary chains

Retailer cooperatives

Franchise organisations

Manufacturersponsored retailer franchise network

Manufacturersponsored wholesaler franchise network

Service-firmsponsored retailer franchise network

Figure 10.9  The main types of vertical marketing networks

Contractual VMNs A contractual VMN consists of independent firms at different levels of production and distribution, which join together through contracts to obtain more economies or sales impact than they could achieve alone. Contractual VMNs have expanded rapidly in recent years. There are three types of contractual VMNs: franchise organisations, wholesaler-sponsored voluntary chains and retailer cooperatives.

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The franchise organisation is the most common type of contractual relationship. In this type of network, a channel member, called a franchisor, links several stages in the production–distribution process. Franchising has been the fastest-growing retailing form in recent years. In Australia alone, some 1060 franchises, with 79 000 individual franchise outlets, account for more than $172 billion revenue and employ some 570 000 people. Despite our awareness of the large global franchise brands, 86 per cent of franchise operations in Australia are homegrown.13 Almost every kind of business has been franchised – from motels and fast-food restaurants to dental centres and dating services, from wedding consultants and maid services to fitness centres and funeral homes. There are three forms of franchises: 1. Manufacturer-sponsored retailer franchise networks, as found in the car industry: Motor vehicle manufacturers, such as Ford, Honda and Suzuki, license dealers to sell their cars; the dealers are independent business people who agree to meet various conditions of sales and service. 2. M  anufacturer-sponsored wholesaler franchise networks, as found in the soft-drink industry: Coca-Cola’s international distribution strategy, for example, is to license bottlers (wholesalers) in various markets, such as Coca-Cola Amatil (CCA) in Australasia, that buy the syrup concentrate from Coca-Cola Corporation (CCC) of Atlanta, Georgia, and then carbonate, bottle and sell the finished product to retailers in local markets. 3. Service-firm-sponsored retailer franchise networks, in which a service firm licenses a network of retailers to bring its service to consumers: Examples are found in the car-rental business (Avis, Europcar, Hertz and Thrifty), apparel retailers (The Athlete’s Foot), the fast-food service business (Hungry Jack’s (Burger King), KFC, McDonald’s and Pizza Hut), the hotel/motel business (Holiday Inn/Homestead), the real estate business (Century 21, Ray White, LJ Hooker) and personal services (James’ Pet Grooming, Jim’s Dog Wash).14 Wholesaler-sponsored voluntary chains are networks in which wholesalers organise voluntary chains of independent retailers to help them compete with large chain organisations. The wholesaler develops a program in which independent retailers standardise their selling practices and achieve buying economies that let the group compete effectively with chain organisations. Examples include small grocery stores that trade under the IGA banner and larger stores trading under the Supa IGA banner, both owned by the grocery wholesaler, Metcash.15 Retailer cooperatives are networks in which retailers organise a new, jointly owned business to carry on wholesaling and, possibly, production. Members buy most of their goods through the retailer co-op and plan their advertising jointly. Profits are passed back to members in proportion to their purchases. Non-member retailers may also buy through the co-op but do not share in the profits.

Contractual VMN: Jim’s Mowing is one of the many different service-firm sponsored franchise networks operating in Australia. www.jims.net

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The fact that most consumers cannot tell the difference between contractual and corporate VMNs shows how successfully the contractual organisations compete with corporate chains.

Administered VMNs administered vertical marketing network

A vertical marketing network that coordinates successive stages of production and distribution, not through common ownership or contractual ties but through the size and power of one of the parties.

horizontal marketing network

A channel arrangement in which two or more companies at one level join together to follow a new marketing opportunity.

An administered vertical marketing network coordinates successive stages of production and distribution – not through common ownership or contractual ties, but through the size and power of one of the dominant channel members. Manufacturers of a top brand can obtain strong trade cooperation and support from resellers. Thus, Arnott’s, Panasonic, Unilever, Kraft and HJ Heinz can command unusual cooperation from resellers regarding displays, shelf space, promotions and price policies. Large retailers, such as Coles and Woolworths, can exert strong influence on manufacturers that supply the product they sell, even to the point of insisting on house-brand production.

Horizontal marketing networks Another channel development is horizontal marketing networks, in which two or more companies at one level join together to follow a new marketing opportunity. By working together, companies can combine their capital, production capabilities or marketing resources to accomplish more than could any one company working alone. Companies might join forces either with non-competitors, as News Corporation and Telstra Corporation have done in the case of Foxtel; or with competitors, as Microsoft (Bing) and Yahoo! did by creating a horizontal internet search alliance.16 It is claimed that the development of such strategic alliances is important as Australian products gain distribution in some overseas markets. By working together, companies can gain impact, scale and flexibility that would not be achieved if each acted by itself. When Australian bands performed in Los Angeles under the banner ‘Wizards of Oz’, they reached more booking agents than they could have achieved individually. Airlines work with the domestic tourist industry to offer tour packages and promotional activities, such as visits by travel agents and writers, to expand the overall market of visitors to this country. In Victoria’s Goulburn Valley, the fruit canners have joined forces to market their product overseas under a single brand name in order to achieve greater impact and wider distribution. Many Australian products, such as Carbon Revolution’s carbon fibre car wheels, are marketed overseas under a common brand – Australia Unlimited.17 Such symbiotic marketing arrangements have increased dramatically in recent years and the end is nowhere in sight.

Multichannel distribution networks multichannel distribution network

A multichannel distribution system in which a single firm sets up two or more marketing channels to reach one or more marketing segments.

In the past, many companies used a single channel to sell to a single market or market segment. Today, with the proliferation of customer segments and channel possibilities, more and more companies have adopted multichannel distribution networks (see Marketing in action 10.1). Such multichannel marketing occurs when a single firm sets up two or more marketing channels to reach one or more customer segments (see Figure 10.10). Orica’s Dulux paint is sold through company-owned trade stores in Australasia as well as through competing outlets, such as Bunnings and Mitre 10, and is sold directly via the internet to professional painters. Inghams and Bartter Enterprises (Steggles) sell dressed chicken portions to KFC as well as to myriad independent takeaway-food shops, and also sell breaded portioncontrolled chicken products to every part of the food services industry, including McDonald’s and KFC. The marketer using such multichannels gains sales with each new channel but also risks offending existing channels. Existing channels can cry ‘unfair competition’ and threaten to drop the marketer unless it limits the competition or repays them in some way, perhaps by offering them exclusive models or special allowances.

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Producer

Distributors Catalogues, telephone, internet

Consumer segment 1

Salesforce Retailers

Dealers

Consumer segment 2

Business segment 1

Business segment 2

Figure 10.10  Multichannel distribution system

Changing channel organisation Changes in technology and the explosive growth of direct and online marketing are having a profound impact on the nature and design of marketing channels. One major trend is towards disintermediation – a term with a clear message and important consequences. Disintermediation occurs when product or service producers cut out intermediaries and go directly to final buyers, or when radically new types of channel intermediaries displace traditional ones. Thus, in many industries, traditional intermediaries are dropping by the wayside. For example, Qantas, Virgin Australia and other airlines sell tickets directly to final buyers, thereby cutting travel agents from their marketing channels altogether for some customers. In other cases, new forms of resellers are displacing traditional intermediaries. For example, online marketers have taken business from traditional brick-andmortar retailers. Consumers can buy hotel rooms and airline tickets from Wotif.com Australia; and books, videos, toys, jewellery, sporting goods, consumer electronics, home and garden items, and almost anything else from Amazon.com – all without ever stepping into a traditional retail store. Online music download services, such as iTunes and Amazon MP3, are threatening the very existence of traditional music-store retailers. In turn, streaming music services, such as Pandora, Spotify, TuneIn Radio and Vevo, are now disintermediating digital download services. Disintermediation presents both opportunities and problems for producers and resellers. Channel innovators who find new ways to add value in the channel can displace traditional resellers and reap the rewards. In turn, traditional intermediaries must continue to innovate to avoid being swept aside. For  example, when Netflix pioneered online DVD-by-mail video rentals in the United States, it sent traditional brick-and-mortar video stores, such as Blockbuster, into ruin. Then Netflix itself faced disintermediation threats from an even hotter channel – video streaming. But instead of simply watching developments, Netflix has led them. Similarly, superstore booksellers Borders and Barnes & Noble pioneered huge book selections and low prices, shutting down most small independent bookstores. Then along came Amazon.com, which threatened even the largest brick-and-mortar bookstores. Amazon.com almost single-handedly bankrupted Borders in less than 10 years. Now, both offline and online sellers of physical books are being threatened

disintermediation The removal of marketing channel intermediaries by goods or service producers, or the displacement of traditional resellers by new and different types of intermediaries.

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Marketing in Action 10.1

Multichannel services marketing

It is rare for marketers of consumer products to use a single marketing channel to reach their target markets. Mostly, these shopping goods require wide distribution and therefore many channels are used. However, some marketing organisations use a single channel and this may allow competitors to make inroads into their target market through other channels or, by using different technologies, to bypass the traditional channel. Some use a single channel and find that channel conflict results. When Google released the HTC-made Nexus One phone in 2010, it upset the US telecommunications companies because it decided to distribute the new smartphone from its own online store. The Nexus and many others of today’s smartphones and tablets run Google’s Android operating system, which is an open-source system that puts these mobile phones in direct competition with Apple’s iPhone and iPad among others (see the sample marketing plan in

Google’s CEO, Sundar Pichai, presenting Chrome Web Store markets apps and games.

Appendix 2 for more information on the range of devices on offer). As Google released the new product further afield in early 2010 – in Europe and Hong Kong,

AFP/Stringer/Getty

initially – buyers in Australia could not ‘officially’ buy from the Google website. Their options were to import the Nexus One from Hong Kong sellers; buy through friends domiciled in the United States, or via a shipping agent such as ; or buy from a few local online retailers who were importing the

Bejeweled for their phones, tablets and for the microcomputer running from the

devices from Hong Kong. Google went on to set up its Playstore to market all

Cloud through Google’s Chrome browser.

manner of third-party apps, and the Google Store to market Nexus smartphones

Other services marketers have likewise turned to multichannels in their

and tablets. However, back in the days of the Nexus One, Google found it needed

attempt to maintain competitive advantage. The offering grid shown in Figure 1

to turn to the more traditional sellers for wider distribution.

can be used to see how organisations might approach marketing channel design.

In effect, Google has adopted the more usual multichannel approach for

The horizontal axis of the grid shows products ranging from customised products

its smartphone. Even so, it still takes a direct channel approach for those who

through to commodities. The vertical axis shows levels of distribution-value-

have purchased any smartphone and/or tablet running Android and who want to

added service, ranging from low to high.

High

Private trading

Distribution value-added

Focus

Internet trading

Low Customised

Commodity

Figure 1  Offering grid

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Taking the example of a financial services institution, such as a bank, their

personal brokers in an opulent environment. Other services are offered over

superannuation fund management offering might be shown in the top-left cell.

the telephone or via electronic kiosks and automatic teller machines (ATMs),

Superannuation funds management is a highly customised service that requires

with touch screens allowing more astute investors to interface with their

much personal interaction between customers and the bank’s relationship

stockbroking service remotely. The same concept can be applied to any service.

executive, as well as requiring information and execution. In contrast, a service that allows a stockbroker’s customers to do their own share trading from home or office over the internet would be placed at the other end of the continuum. This product might be considered simple and requiring little interaction, in much the same way that architects and engineers use the telephone to maintain contact with building sites. Thus, little value is added by the channel. Each cell on the diagonal represents a potential opportunity if there is sufficient demand. Companies that use only one channel for several products and customer

Source: This discussion is adapted from Distribution: A Competitive Weapon, The MAC Group: Cambridge, MA, 1985, pp. 14–18. Also see Adam Lashinsky, ‘Sundar Pichai: Why Google can afford to be patient’, Fortune, 29 May 2015, , accessed July 2016.

Questions ❶ Select a service of your choice. Can you apply the concept discussed in this box to that service?

groups will inevitably face increased competition. As customers become more

❷ Might this concept of multichannel services marketing apply to the retailing

knowledgeable about a service and as technology permits further automation, an

of streamed television shows and movies? If so, how would the concept

increasing number of channels will open in the lower right-hand cells of the grid, thus presenting competition to higher distribution-value-added channels. This is why stockbrokers, such as JB Were, offer a range of services. Those services provided for the very wealthy are highly customised and offered by

apply? ❸ What types of businesses might benefit from using multichannel services marketing? What types of businesses might be threatened by multichannel services marketing?

by digital-book downloads and e-readers, and print-on-demand retailers. Rather than yielding to digital developments, however, Amazon.com is leading them, with its highly successful Kindle e-readers and tablets. By contrast, Barnes & Noble – the giant that put so many independent bookstores out of business – was a latecomer with its struggling Nook e-reader and now finds itself locked in a battle for survival.18 Like resellers, to remain competitive, product and service producers must develop new channel opportunities, such as the internet and other direct channels. However, in developing these new channels, product and service producers often end up in direct competition with their established channels, resulting in conflict. To ease this problem, companies look for ways to make going direct a plus for the entire channel. For example, Volvo Car Group (now owned by Chinese car maker, Geely) recently announced plans to start selling Volvo vehicles online in all of its markets. Some 80 per cent of Volvo buyers already shop online for other goods, so cars seem like a natural extension. Few car makers have tried selling directly, with the exception of Tesla, which sells its all-electric cars online, bypassing dealers altogether. Other car companies worry that selling directly would alienate their independent dealer networks. ‘If you say e-commerce, initially dealers get nervous,’ says Volvo’s head of marketing. So, to avoid channel conflicts, Volvo will pass all online sales through established dealers for delivery. In that way, boosting sales through direct marketing will benefit both Volvo and its channel partners.19

Channel design and management decisions (pp. 311–13) We now look at several channel-design decisions manufacturers face. In designing marketing channels, manufacturers struggle between what is ideal and what is practical. A new firm with limited capital usually starts by selling in a limited market area. In this case, deciding on the best channels might not be a problem; the problem might simply be how to convince one or a few good intermediaries to handle the product line. If successful, the new firm can branch out to new markets through existing intermediaries. In smaller markets, the firm might sell directly to retailers; in larger markets, it might sell through distributors. In one part of the country, it might grant exclusive franchises; in another, it might sell through all available outlets.

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marketing channel design

Analysing consumer needs, setting channel objectives, identifying major channel alternatives and evaluating those alternatives.

Then it might add an online store that sells directly to hard-to-reach customers. In this way, channel systems often evolve to meet market opportunities and conditions. For maximum effectiveness, however, channel analysis and decision making should be more purposeful. Marketing channel design calls for (1) analysing consumer needs, (2) setting channel objectives, (3) identifying major channel alternatives and (4) evaluating those alternatives. We discuss each of these components below.

Analysing consumer needs As we have seen. marketing channels are part of the overall customer value delivery network. Each channel member and level adds value for the customer. Thus, designing the marketing channel starts with finding out what target consumers want from the channel. Do consumers want to buy nearby or are they willing to travel to more centralised locations? Would customers rather buy in person, by phone or online? Do they value breadth of assortment or do they prefer specialisation? Do consumers want many add-on services (delivery, installation, repairs) or will they obtain these services elsewhere? The faster the delivery, the greater the assortment provided, and the more add-on services supplied, the greater the channel’s service level. Providing the fastest delivery, the greatest assortment and the most services, however, may not be possible, practical or desired. The company and its channel members may not have the resources or skills needed to provide all the desired services. Also, higher levels of service result in higher costs for the channel and higher prices for consumers. The success of modern discount retailing shows that consumers often accept lower service levels in exchange for lower prices. Many companies, however, position themselves on higher service levels, and customers willingly pay the higher prices.

Setting channel objectives Companies should state their marketing channel objectives in terms of targeted levels of customer service. Usually, a company can identify several segments wanting different levels of service. The company should decide which segments to serve and the best channels to use in each case. In each segment, the company wants to minimise the total channel cost of meeting customer service requirements. The company’s channel objectives are also influenced by the nature of the company, its products, its marketing intermediaries, its competitors and the environment. For example, the company’s size and financial situation determine which marketing functions it can handle itself and which it must give to intermediaries. Companies selling perishable products, for example, may require more direct marketing to avoid delays and too much handling. In some cases, a company may want to compete in or near the same outlets that carry competitors’ products. For example, Asko and other appliance makers want their products displayed alongside competing brands to facilitate comparison shopping. In other cases, companies may avoid the channels used by competitors. Finally, environmental factors, such as economic conditions and legal constraints, may affect channel objectives and design. For example, in a depressed economy, producers will want to distribute their goods in the most economical way, using shorter channels and dropping unneeded services that add to the final price of the goods.

Identifying major channel alternatives When the company has defined its channel objectives, it should next identify its major channel alternatives in terms of the types of intermediaries, the number of intermediaries and the responsibilities of each channel member.

Types of intermediaries A firm should identify the types of channel members available to carry out its channel work. Most companies face many channel member choices. Using many types of resellers in a channel provides both benefits and drawbacks.

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Number of marketing intermediaries Companies must also determine the number of channel members to use at each level. Three strategies are available: intensive distribution, exclusive distribution and selective distribution. Producers of convenience products and common raw materials typically seek intensive distribution – a strategy in which they stock their products in as many outlets as possible. These products must be available where and when consumers want them. For example, toothpaste, chocolates and other similar items are sold in millions of outlets to provide maximum brand exposure and consumer convenience. Kraft, Coca-Cola, KimberlyClark and other consumer-goods companies distribute their products in this way. By contrast, some producers purposely limit the number of intermediaries handling their products. The extreme form of this practice is exclusive distribution, in which the producer gives only a limited number of dealers the exclusive right to distribute its products in their territories. Exclusive distribution is often found in the distribution of luxury brands. Breitling watches – positioned as ‘Instruments for Professionals’ and selling at prices from $5000 to more than $100 000 – are sold by only a few authorised dealers in any given market area. Exclusive distribution enhances Breitling’s distinctive positioning and earns greater dealer support and customer service. Between intensive and exclusive distribution lies selective distribution – the use of more than one but fewer than all of the intermediaries that are willing to carry a company’s products. Most consumer electronics, furniture and home appliance brands are distributed in this manner. For example, outdoor power-equipment maker STIHL does not sell its chain saws, blowers, hedge trimmers and other products through mass merchandisers, such as Bunnings. Instead, it sells through a select group of independent hardware and lawn-and-garden dealers. By using selective distribution, STIHL can develop good working relationships with dealers and expect a better-than-average selling effort. Exclusive distribution also enhances the STIHL brand’s image and allows for higher markups resulting from greater value-added dealer service.

intensive distribution

A distribution strategy in which companies stock their products in as many outlets as possible.

exclusive distribution

A distribution strategy in which companies give only a limited number of dealers the exclusive right to distribute the companies’ products in the dealers’ territories.

selective distribution

A distribution strategy in which companies use more than one but fewer than all of the intermediaries that are willing to carry their products.

Evaluating the major alternatives After selecting individual channel members comes the task of managing and motivating channel members. When selecting intermediaries, the company should determine what characteristics distinguish the better ones. It will want to evaluate each channel member’s years in business, other lines carried, location, growth and profit record, cooperativeness and reputation.

Channel management decisions The practice of maintaining strong partner relationship management to forge long-term partnerships with channel members is particularly important. In managing their selected channel members, many companies are now installing integrated high-tech partnership relationship management (PRM) systems to coordinate their whole-channel marketing efforts. Just as they use customer relationship management (CRM) software systems to help manage relationships with important customers, companies can now use PRM and supply chain management (SCM) software to help recruit, train, organise, manage, motivate and evaluate relationships with channel partners.

Linking the concepts We will stop again here for a moment, and apply the marketing channel concepts we have discussed so far. ● Compare the Volvo, Tesla and Ford channels for motor vehicles. Draw a diagram that shows the types of intermediaries in each channel. What kind of channel system does each company use?

● What are the roles and responsibilities of the members in each channel? How well do these channel members work together towards overall channel success?

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Retailing (pp. 314–27) retailing

All activities involved in selling goods or services directly to final consumers for their personal, non-business use.

What is retailing? We all know that Bunnings, Costco, David Jones, Harris Scarfe and Myer are retailers, but so too are Avon representatives, the local Westin Stamford Hotel, a bank or credit union, a doctor seeing patients, and the travel retailer Flight Centre using both traditional and online marketing channels via . We define retailing as all the activities involved in selling goods or services directly to final consumers for their personal, non-business use.

Retailing: Connecting brands with consumers shopper marketing

Using point-of-sale promotions and advertising to extend brand equity to ‘the last mile’ and encourage favourable in-store purchase decisions.

omni-channel retailing

Creating a seamless cross-channel buying experience that integrates in-store, online and mobile shopping.

Retailers connect brands with consumers in the final phases of the buying process and at the point of purchase. In fact, many marketers are now embracing the concept of shopper marketing, using point-of-purchase promotions and advertising to extend brand equity to ‘the last mile’ and encourage favourable point-of-purchase decisions. Shopper marketing involves focusing the entire marketing process – from product and brand development to logistics, promotion and merchandising – towards turning shoppers into buyers at the point of sale. Shopper marketing builds around what P&G calls the ‘First Moment of Truth’ – the critical three to seven seconds that a shopper considers a product on a store shelf.20 However, the dramatic growth of online and mobile shopping has added new dimensions to shopper marketing. The  retailing ‘moment of truth’ no longer takes place only in stores. Instead, Google defines a ‘zero moment of truth’, when consumers begin the buying process by searching for and learning about products online. Today’s consumers are increasingly omni-channel buyers who make little distinction between in-store and online shopping and for whom the path to a retail purchase runs across multiple channels. For these buyers, a particular purchase might consist of researching a product online and buying it from an online retailer, without ever setting foot in a retail store. Alternatively, they might use a smartphone to research a purchase on the fly, or even while in retail store aisles. For example, it is common to see a consumer examining an item on a shelf at Kmart or Big W while at the same time using a mobile app to look for coupons or check product reviews and prices online. Thus, these days, shopper marketing and the ‘point of purchase’ go well beyond in-store buying. They involve consumers working across multiple channels as they shop. Influencing consumers’ buying decisions calls for omni-channel retailing, creating a seamless cross-channel buying experience that integrates in-store, online and mobile shopping.21

Types of retailers retailer

A business whose sales come primarily from retailing.

Many institutions, financial institutions, manufacturers, wholesalers and retailers are engaged in retailing. But most retailing is done by retailers – businesses whose sales come primarily from retailing. And,  although most retailing is done in retail stores, in recent years direct and online retailing have grown: interacting and fulfilling orders or transacting by mail, by telephone, by door-to-door contact, by vending machines, by numerous electronic means including the internet and mobile phone. Regardless of type, retailing plays a very important role in most marketing channels. Ironically, at least 40 per cent of all consumer decisions are made in or near the store. Of course, every well-designed marketing effort focuses on customer buying behaviour. What differentiates the concept of shopper marketing from customer buying is the suggestion that these efforts should be coordinated around the shopping process itself. Retail stores come in all shapes and sizes, and new retail types continue to emerge. Retail stores can be classified by one or more of four characteristics: (1) amount of service, (2) product line sold, (3) relative prices and (4) how they are organised; this last characteristic now includes whether they have a physical presence,

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Table 10.1  Major store retailer types Type

Description

Examples

Specialty stores

Carry a narrow product line with a deep assortment, such as apparel stores, sporting-goods stores, furniture stores, florists and bookstores. A clothing store would be a single line store, a men’s clothing store would be a limited-line store and a men’s custom shirt store would be a superspecialty store.

The Athlete’s Foot, JB Hi-Fi, Dick Smith, JayCar, Tandy, Sydney’s Lounges, Swarovski Crystal

Department stores

Carry several product lines – typically, clothing, home furnishings and household goods – with each line operated as a separate department managed by specialist buyers or merchandisers.

David Jones, Myer, Harris Scarfe

Supermarkets

A relatively large, low-cost, low-margin, high-volume, self-service operation designed to serve the consumers’ needs for grocery and household products.

Coles Supermarkets, Woolworths, ALDI, Bi-Lo, IGA, Richies

Convenience stores

Relatively small stores located near residential areas, open long hours seven days a week, and carrying a limited line of high-turnover ­convenience products at slightly higher prices.

7-Eleven, Coles Express, NightOwl, Food Plus

Discount stores

Carry standard merchandise sold at lower prices with lower margins and higher volumes.

Big W, Kmart, Target

Mass merchants

Carry a large assortment of home and home improvement ­merchandise, including DIY hardware items.

Mitre 10, Retravision

Off-price retailers

Sell merchandise bought at less-than-regular wholesale prices and sold at less than retail prices, often leftover goods, seconds, overruns and irregulars obtained at reduced prices from manufacturers or other retailers. These include factory outlets owned and operated by ­manufacturers, independent off-price retailers owned and operated by entrepreneurs or by divisions of larger retail corporations, and ­warehouse (or wholesale) clubs selling a limited selection of brandname groceries, appliances, clothing and other goods at deep discounts to consumers who pay membership fees.

Costco, Metcash’s Campbells Cash & Carry

Superstores

Very large stores traditionally aimed at meeting consumers’ total needs for routinely purchased food and non-food items. Includes supercentres, combined supermarket and discount stores, and category killers, which are the size of aircraft hangars and carry a deep assortment in a particular category and have knowledgeable staff.

Bunnings, IKEA (category killers)

an online presence or both. The most important types of retail stores are described in Table 10.1 and discussed in detail in the following sections.

Amount of service Different products need different amounts of service, and customer service preferences vary. To meet these varying service needs, retailers may offer one of three service levels: self-service, limited service and full service. Self-service retailers serve customers who are willing to perform their own locate–compare–select process to save money. Today, self-service is the basis of all discount operations and is typically used by sellers of FMCGs (e.g. supermarkets) and nationally branded, fast-moving shopping goods (such as those found in Kmart, Target or Big W). Limited-service retailers, such as hardware chains – even the category killers – provide limited, but technically competent, sales assistance because they carry shopping goods about which many customers need less information. They also offer additional services, such as credit and merchandise return, that may not be offered by low-service stores. The increased operating costs of smaller stores result in higher prices, although, in hardware and homewares retailing, the category-killer shed concept pioneered by Bunnings and IKEA has changed the face of retailing in these sectors. Full-service retailers, such as high-end specialty stores (Swarovski Crystal) and first-class department stores (David Jones), may be distinguished by the fact that salespeople assist customers in every

category killer

A giant specialty store that carries a very deep assortment of a particular line.

self-service retailer

A retailer that provides few or no services to shoppers; shoppers perform their own locate–compare–select process.

limited-service retailer

A retailer that provides only a limited number of services to shoppers.

full-service retailer

A retailer that provides a full range of services to shoppers.

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phase of the shopping process. Full-service stores usually carry more specialty goods and slower-moving items, such as cameras, jewellery and fashions, for which customers like to be ‘waited on’. These stores provide more-liberal return policies, various credit plans, free delivery, home servicing, and extras such as cafés and restaurants. More services mean higher operating costs, costs which are passed along to customers as higher prices. However, service is a point of difference well recognised by customers. Digital retailers may also be distinguished on the basis of the service they provide. A purely transactionbased e-commerce digital retailer, such as DStore.com.au, is similar to WishList.com.au, which allows a form of customer personalisation and gift reminders, even though both offer to send customers information on new offers and the product assortment carried. Infomediaries, such as NineMSN.com.au, offer greater personalisation to members, as well as email and other services.

Product line Retailers can also be classified by the length and breadth of their product assortments. Among the most A retail store that carries important types are the specialty store, the department store, the supermarket, the convenience store, the superstore a narrow product line and the service business. with a deep assortment A specialty store carries a narrow product line with a deep assortment within that line. Examples within that line. include stores selling sporting goods, furniture, books, music and games, electronics, flowers or toys. combination store Specialty stores can be further classified by the narrowness of their product lines. A clothing store is a A combined grocery single-line store, a men’s clothing store is a limited-line store and a men’s custom shirt store is a fine-line and general merchandise specialty store. store. Today, specialty stores are flourishing for several reasons. The increasing use of market segmentation, department store market targeting and product specialisation has resulted in a greater need for stores that focus on specific A retail organisation products and segments. Moreover, because of changing consumer lifestyles and the increasing number of that carries a wide two-income households, many consumers have greater incomes but less time to spend shopping. They are variety of product lines, typically clothing, attracted to specialty stores that provide high-quality products, convenient locations, longer opening hours, home furnishings and excellent service and quick entry and exit. The growth in Australian and New Zealand specialty store sales household goods; each has been greatest among household goods retailers, with pharmacies also showing growth. line is operated as a Combination stores often merchandise a combination of products normally associated with specialty separate department, which may be managed stores, such as pharmaceutical products, grocery products and general merchandise. They are a growing by specialist buyers store type as the competition facing specialty stores becomes fiercer due to larger chains encroaching or merchandisers, or further into specialty retailing. For example, ALDI, Costco, Coles and Woolworths are involved in liquor this function may be retailing, while the middle two are also involved in petrol retailing. Woolworths also planned to sell chemistperformed centrally. dispensed pharmaceuticals from its stores until it was prevented from doing so by the Australian government. A department store carries a wide variety of product lines, typically clothing, home furnishings and household goods. Each line is operated as a separate department, which may be managed by specialist buyers or merchandisers, or this function may be performed centrally. Examples of well-known department stores in Australia include David Jones, Harris Scarfe and Myer. New Zealand has The Farmers Trading Group and Kmart, while Great Britain has Marks & Spencer, which is renowned for clothing, homewares and ready-to-eat foods, and has been one of the most profitable retail groups in the world. Singapore and Malaysia sport their own department Department stores: Since 1838, David Jones department stores stores such as Tsangs and Robinsons. have offered world-class service. Department stores such as David Jones have opened Bloomberg/Getty suburban stores and often add ‘unique’ attractions to meet

specialty store

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the discount threat presented by Kmart and Big W. Still others have remodelled their stores or set up ‘boutiques’ that compete with specialty stores. Since the 1960s, many large department stores have been joining, rather than fighting, the competition by diversifying into discount and specialty stores. Supermarkets are the most frequently shopped type of retail store. They are large, low-cost, lowmargin, high-volume self-service stores that carry a wide assortment of food, laundry and household products. The supermarket sector is the largest of the retailing groups in Australia, with turnover accounting for 34 per cent of total retail turnover of nearly $12 billion in 2013. The top two food and grocery retailers – Coles and Woolworths – account for some 70 per cent share of the market, a large jump from 35 per cent in 1975.22 Table 10.2 presents the top 25 companies in Australia, by revenue as at March 2017, showing the place of the top retailers in the economy. In the United Kingdom, Asda, Sainsbury’s and Tesco hold over 60 per cent of that market, while in the United States the lean, mean distribution machine that is Walmart has sales revenue of well over US$1 billion a day.23 In Australia and New Zealand, Woolworths and Coles compete vigorously with relative newcomer ALDI and the smaller IGA chain for a share of the $120+ billion food and grocery market.24 Wesfarmers is the largest retail group in Australia, with many different types of retailers: Bunnings and Homebase (home improvement stores); Coles Supermarkets, Bi-Lo and Coles Online

supermarket

A large, low-cost, lowmargin, high-volume, self-service store that carries a wide variety of food, laundry and household products.

Table 10.2  IBISWorld top 25 companies in Australia, by revenue, March 2017 New position

Previous position

Amount ($m)

Change (%)

 1

 1

Company (Balance date) Wesfarmers (6/16)

66 216.00

5.5

 2

 2

Woolworths (6/16)

58 563.30

–1.2

 3

 5

Commonwealth Bank of Australia (6/16)

44 379.00

–2.1

 4

 7

Westpac Banking Corporation (9/16)

37 659.00

–5.1

 5

 6

NAB (9/16)

36 697.00

–6.5

 6

 3

Rio Tinto (12/15)

36 278.00

–26.4

 7

 8

ANZ Banking Group (9/16)

34 844.00

–4.2

 8

 4

BHP Billiton (6/16)

31 646.00

–30.7

 9

 9

Telstra (6/16)

26 686.00

1.6

10

14

NSW Health (6/16)

20 330.06

4.5

11

11

QBE Insurance Group (12/16)

18 041.00

4.3

12

10

Caltex Australia (12/16)

17 942.06

–10.1

13

13

AustralianSuper (6/16)

17 540.12

–20.5

14

16

Fonterra Co-op Group (7/16)*

17 490.00

–9.1

15

20

Queensland Health (6/16)

16 977.37

7.7

16

21

IAG (6/16)

16 829.00

12.2

17

63

Viva Energy (12/15)

16 673.60

165.9

18

19

Qantas (6/16)

16 490.00

3.5

19

12

BP Australia (12/15)

15 920.00

–29.2

20

18

Suncorp Group (6/16)

15 487.00

–7.4

21

23

Lendlease Group (6/16)

15 362.20

13.4

22

15

AMP (12/15)

14 022.00

–20.3

23

22

Metcash (4/16)

13 679.70

1.3

24

25

Macquarie Group (3/16)

13 313.00

9.4

25

26

Transport for NSW (6/16)

13 212.06

10.5

317

* Signifies a New Zealand company Source: IBISWorld

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convenience store (C-store) A small store, located near a residential area, open long hours seven days a week, carrying a limited line of highturnover convenience goods.

(grocery); Pharmacy Direct; Dan Murphy’s, First Choice, Liquorland, Spirit Hotels and Vintage Cellars (alcohol); Kmart, Target and Target Home (apparel and houseware); Officeworks (officeware) and Coles Express (fuel and convenience stores); and Coles Financial Services (insurance and credit cards).25 Supermarkets continue to improve their facilities and services to attract more customers. Typical improvements are better locations, improved décor, longer trading hours, EFTPOS, home delivery, and specialised services such as banking and even car and truck fuel. Although consumers have always expected supermarkets to offer good prices, convenient locations and speedy checkout, today’s more affluent and sophisticated food buyer wants more. Many supermarkets, therefore, are ‘moving up-market’, providing ‘from-scratch’ bakeries, gourmet deli counters and seafood departments. Finally, to attract more customers, large supermarket chains are more likely to customise their stores for individual neighbourhoods. Thus, a Woolworths store in Double Bay in Sydney’s eastern suburbs, or in Elsternwick in Melbourne’s inner eastern suburbs, is more likely to carry kosher foods and delicacies such as smoked eel than is a store in the western suburbs of Melbourne or Sydney. Costco goes so far as to target Jewish families.26 They tailor store size, product assortments, prices and promotions to the economic and ethnic needs of local markets. The advent of electronic scanning at the checkout and quick-response retail systems has made this practice more cost-effective. The trend now is for Australasian supermarkets to try to reduce their costs and increase sales further by emulating their larger US (e.g. Walmart) and UK (e.g. Tesco) brethren. They are introducing more storebranded merchandise to replace manufacturers’ brands and, to capitalise on their automated reordering systems, they are cramming more merchandising space – shelving and gondola ends – into their stores, as well as carrying many lines formerly carried by the mass merchants Big W and Kmart. They continually need to improve their operations and protect their market as international competitors, such as ALDI (Germany-based) and Costco (US-based), move deeper into the Australasian marketplace. New competitors, such as Costco, represent a major threat since they dwarf the Australian retailers and may apply margins that are as low as 9 per cent of the retail selling price. Costco is one of the world’s largest retailers, with an annual global turnover of over US$150 billion – larger than the Australian food and grocery market – gained from some 700 ‘warehouses’ throughout the world. While the biggest of Costco’s megastores is larger than a Bunnings shed at 19 000 square metres, it is the sale of memberships to some 85.5 million customers that makes Costco different, and makes them money. In this respect, they are more like Metcash’s Campbells Cash & Carry, which caters to those independent retailers and food service operators who join as members.27 Convenience stores (C-stores) are small stores that carry a limited line of high-turnover convenience goods. Examples include NightOwl, 7-Eleven and Food Plus. These stores are located near residential areas and remain open for long hours, seven days a week. Convenience stores must charge high prices to make up for higher operating costs and lower sales volume. But they satisfy an important consumer need. Consumers use convenience stores for ‘fill-in’ purchases during off-peak hours or when time is short, and they are willing to pay for the convenience. The number of convenience stores has increased in recent years. Because they have taken market share from supermarkets, supermarket chains have sought, and won, legislative change to trading hours to allow them to stay open for longer. This, in turn, has had an impact on convenience stores. Their clientele is biased towards young people who are out late at night and want a range of products, including petrol and snacks. C-stores are constantly revamping their offerings in an attempt to remain strongly differentiated from other types of food stores, while adapting to today’s fast-paced consumer lifestyles. Because of their location, many service station sites operated by Shell and BP contain convenience stores, and many 7-Eleven stores sell fuel through a strong and attractive franchised network of service stations, convenience stores and truckstops. Franchising has been a stimulant to the growth of convenience stores. For example, BP franchises such operations as New Wave carwash, BP Car Care workshops and BP Express convenience stores.

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Mass merchants, such as Mitre 10 and Retravision, carry a large assortment of home and home improvement merchandise. They are dominated by the superstore category killer in this class. For example, Bunnings carries over 40 000 products, compared with some 12 000 lines carried by a supermarket. Bunnings Warehouse pioneered the ‘shed’ concept in Australian hardware and home improvement retailing and now has a national brand. However, archrival Woolworths entered the market with Masters Home Improvement Stores and then withdrew. Bunnings has now expanded into the United Kingdom. Superstores and hypermarkets combine supermarket, discount and warehouse retailing. A typical superstore or hypermarket might have 50 or more checkout counters. They carry more than routinely purchased goods such as groceries, also selling furniture, appliances, clothing and many other items found in department and discount stores. The hypermarket operates like a warehouse. Products in wire ‘baskets’ are stacked high on metal racks; forklifts move through the aisles during selling hours to restock shelves. The store gives discounts to customers who carry their own heavy appliances and furniture out of the store. Hypermarkets, such as those operated by Carrefour, have grown quickly in Europe, the United States and Asia. However, they are not successful everywhere they open. Their very size often seems to act against them. As the populations of developed countries become ‘greyer’, these older, time-rich shoppers are unlikely to want to walk the distances required when shopping in hypermarkets. Superstores and hypermarkets have not been a feature of Australian retailing, apart from Aspley Hypermarket in Queensland. Thus far, the growth of superstores has been constrained by the generally ‘overshopped’ nature of the Australian market and the absence of large concentrations of population. In the United States, they have all but been abandoned as a business design, although WalMart continues to open some 120 per year and has some 3400 superstores.28 For many businesses, the ‘product line’ is actually a service. Remember, all retailers are classified as being in the service sector. However, this class of retailer does not carry tangible goods to any great extent. Service businesses include hotels and motels, banks, airlines, universities, hospitals, movie theatres, tennis clubs, theme parks, casinos, bowling alleys, restaurants, repair services, hair-care salons and dry cleaners. Service retailers in Australia are growing faster than product retailers, and each service industry has its own retailing context. All banks, building societies and credit unions have followed the United Kingdom’s First Direct and ANZ Direct in Australia and found new ways to distribute their services. Banks use electronic dispensing machines, direct deposit and online services (internet and phone). Health organisations are changing the way consumers receive and pay for health services. H&R Block has built a franchise network to help consumers pay as little as legally possible to the Australian Taxation Office. A listing of theme parks around the world is astounding for the variety of services on offer: Disneyland/Disney World/Disney Epcot (United States, France, Hong Kong and Japan); Jurassic Park, California (billed as ‘the most technically advanced theme ride in entertainment history’); Movie World (Gold Coast, Australia); Sea World (Gold Coast, Australia); Wet ‘n’ Wild (Gold Coast, Australia); LEGOLAND® (Odense, Denmark); Tivoli (Copenhagen); Prater (Vienna); Fantasy Island (Singapore); Ocean Park (Hong Kong); and Blackpool (United Kingdom).29 However, the theme hotels/casinos in Las Vegas and Macau, such as Caesar’s Palace, Treasure Island and The Venetian, must take the award for scale and technology usage.

319

mass merchant

A type of store carrying a large assortment of merchandise, such as hardware (Bunnings Warehouse), electrical goods (Harvey Norman) or personal and health care (Priceline).

superstore

A store almost twice the size of a regular supermarket, carrying a large assortment of routinely purchased food and non-food items, and offering such services as dry cleaning, photo developing, bill paying, car care and pet care.

hypermarket

A huge store that combines supermarket, discount and warehouse retailing; in addition to food, it carries furniture, appliances, clothing and many other items.

service business

A business where the product line is actually a service – for example, hotels, motels, airlines and restaurants.

Relative prices Retailers can also be classified according to their prices. Most retailers charge regular prices and offer normal-quality goods and customer service. Some offer higher-quality goods and service at higher prices. The retailers that feature low prices are discount stores and ‘off-price’ retailers. A discount store sells standard merchandise at lower prices by accepting lower margins and selling higher volumes. The use of occasional discounts or specials does not make a discount store. A true discount store regularly sells its merchandise at lower prices, offering mostly national brands, not inferior goods. Early discount stores cut expenses by operating in warehouse-like facilities in low-rent but heavily travelled districts. They slashed prices, advertised widely and carried a reasonable width and depth of products.

discount store

A retail institution that sells standard merchandise at lower prices by accepting lower margins and selling at higher volume.

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off-price retailer A retailer that buys at less than regular wholesale prices and sells at less than retail, usually carrying a changing and unstable collection of higherquality merchandise, often leftover goods.

direct factory outlet (DFO)

An off-price retailing operation owned and operated by manufacturers, normally carrying the manufacturers’ surplus, discontinued or irregular goods.

warehouse club (wholesale club)

An off-price retailer that sells a limited selection of brandname grocery items, appliances, clothing and a hotchpotch of other goods at deep discounts to members who pay an annual membership fee.

chain stores (corporate chain) Two or more outlets that are commonly owned and controlled, employ central buying and merchandising, and sell similar lines of merchandise.

voluntary chain

A wholesaler-sponsored group of independent retailers that engages in group buying and common merchandising.

retailer cooperative

A group of independent retailers who band together to set up a jointly owned central wholesale operation and conduct joint merchandising and promotion efforts.

The most common examples specialised in selling refrigerators and other major electrical appliances (whitegoods), smaller appliances including CD players, television sets and video recorders (brown goods), and furniture. When the major discount stores traded up, a new wave of off-price retailers moved in to fill the lowprice, high-volume gap. Ordinary discounters buy at regular wholesale prices and accept lower margins to keep prices down. On the other hand, off-price retailers – factory outlets, independents and warehouse clubs – buy at less than regular wholesale prices and charge consumers less than retail. They tend to carry a changing and unstable collection of higher-quality merchandise, often leftover goods, overruns and irregulars obtained at reduced prices from manufacturers or other retailers. Off-price retailers have made the biggest inroads in clothing, accessories and footwear. Whether we look in Australasia, the United Kingdom or the United States, we find that 2 Dollar shops seem to be exploding in number. The United Kingdom has its 2 Pound shops, and the United States has Dollar General and Family Dollar, among others. Some are chains, while others are independent stores. Direct factory outlets (DFOs) are owned and operated by manufacturers and retailers alike and may carry the manufacturer’s or retailer’s surplus, or discontinued or irregular goods. Increasingly, these outlets group together in factory outlet malls – such as those adjacent to Moorabbin Airport in south-east Melbourne and Essendon Airport in Melbourne’s North; and South Wharf, where dozens of outlet stores offer prices as low as 50 per cent below retail on a wide range of items. Warehouse clubs (or wholesale clubs) sell a limited selection of brand-name grocery items, appliances, clothing and a hotchpotch of other goods at deep discounts to members who pay an annual membership fee. Costco is one wholesale club that operates in huge, low-overhead, warehouse-like facilities and offers few frills. Often, stores are draughty in winter and stuffy in summer. Customers themselves must wrestle furniture, heavy appliances and other large items into the checkout line. They are usually required to buy in bulk rather than select individual packs. Such clubs make no home deliveries and accept no credit cards. But they do offer rock-bottom prices, typically 20–40 per cent below supermarket and discount-store prices.

Organisational approach Although there are many more independently owned retail stores than any other form of ownership in Australia and New Zealand, a feature of Australia in particular is the dominance of all retailing turnover by a limited number of firms. This has implications for many marketers, who have to gain distribution with key retailers if they are to achieve market coverage. We have noted the dominance of Wesfarmers after it acquired the Coles Group, and also of Woolworths Limited. In this section, we discuss corporate chains, voluntary chains, retailer cooperatives and franchise organisations. Chain stores are two or more outlets that are commonly owned and controlled, employ central buying and merchandising, and sell similar lines of merchandise. Corporate chains appear in all types of retailing but they are strongest in consumer electronics, department stores, grocery stores, hardware stores, pharmacies, sporting and dress shoe stores, and clothing stores. Corporate chains gain many advantages over independents. Their size allows them to buy in large quantities at lower prices. They can afford to hire specialists to deal with such areas as pricing, promotion, merchandising, inventory control and sales forecasting. Moreover, chains gain promotional economies because their advertising costs are spread over many stores and a large sales volume. The great success of corporate chains caused many independents to band together in one of two forms of contractual association. One is the voluntary chain – a wholesaler-sponsored group of independent retailers that engages in group buying and common merchandising. IGA food and grocery stores are one example. The other form of contractual association is the retailer cooperative – a group of independent retailers who band together to set up a jointly owned central wholesale operation and conduct joint merchandising and promotion efforts. These organisations give independents the buying and promotion economies they need to meet the prices of corporate chains.

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A franchise is a contractual association between a manufacturer, wholesaler or service organisation (the franchisor) and independent business people (franchisees) who buy the right to own and operate one or more units in the franchise system. The main difference between a franchise and other contractual systems (voluntary chains and retail cooperatives) is that franchise systems are normally based on a unique product or service, on a method of doing business, or on the trade name, goodwill or patent that the franchisor has developed. Franchising has been prominent in fast foods, motels, petrol stations, tax-preparation services, health and fitness centres, car rentals, hairdressing, real estate, travel agencies, and dozens of other product and service areas. One of the best-known and most successful franchisers, McDonald’s, now has more than 36 000 restaurants in more than 100 countries, including more than 900 in Australia and 160 in New Zealand. It serves 70 million customers a day and earns more than US$98 billion in annual systemwide sales. More than 80 per cent of McDonald’s restaurants worldwide are owned and operated by franchisees. Not far behind is Subway, one of the fastest-growing franchise restaurants, with systemwide sales of US$18.8 billion and more than 43 000 stores in 110 countries, including more than 1400 in Australia.30 The compensation received by the franchisor might include an initial fee, a royalty on sales, lease fees for equipment and a share of the profits. McDonald’s franchisees might invest as much as $1 million in initial start-up costs for a franchise. Then McDonald’s charges a percentage service fee and a rental charge on the franchisee’s volume. It also requires franchisees to go to ‘Hamburger University’ for three weeks to learn how to manage the business.

321

franchise

A contractual association between a manufacturer, wholesaler or service organisation (a franchisor) and independent business people (franchisees) who buy the right to own and operate one or more units in the franchise system.

Linking the concepts Pause here and think about all the different kinds of retailers you deal with regularly, many of which overlap in the products they carry. ● Pick a familiar product: a camera, microwave oven, lawn tool, smartphone or something else. Shop for this product at two very different store types – say, a discount store or category killer on the one hand and a department store or smaller

specialty store on the other. Then shop for the product online. Compare the three shopping outlets in terms of product assortment, services and prices. If you were going to buy the product, where would you buy it, and why? ● What does your shopping trip suggest about the futures of the competing store formats that you sampled?strategy does it use?

Retailer marketing decisions Retailers are always searching for new marketing strategies to attract and hold customers. In the past, retailers attracted customers with unique product assortments and more or better services. Today, retail assortments and services are looking more and more alike, even though grocery retailers try to differentiate through their own brand goods, and department stores do so by linking with various apparel brands. National-brand manufacturers, in their drive for volume, have placed their branded goods everywhere. Such brands are found not only in department stores but also in mass-merchandise discount stores,­ off-price discount stores and on the web. Thus, it is now more difficult for any one retailer to offer exclusive merchandise. Service differentiation among retailers has also eroded. Many department stores have trimmed their services while, at the same time, discounters have increased theirs. Customers have become smarter and more price-sensitive. They see no reason to pay more for identical brands, especially when service differences are minimal. For all these reasons, many retailers today are rethinking their marketing strategies. As shown in Figure 10.11, retailers face major marketing decisions about their target market and positioning; product and service assortment; price; promotion; placement; and people, processes and physical evidence.

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RETAILER STRATEGY

RETAILER MARKETING MIX

Target market Retail store positioning

Product and service assortment Prices Promotion Placement (store location and merchandise in store) People, processes and physical evidence

Figure 10.11  Retailer marketing decisions

Segmentation, targeting, differentiation and positioning decisions Retailers must first define their target markets and then decide how they will position themselves in these markets. Should the store focus on upscale, midscale or downscale shoppers? Do target shoppers want variety, depth of assortment, convenience or low prices? Until they define and profile their markets, retailers cannot make consistent decisions about product assortment, services, pricing, advertising, store décor, or any of the other decisions that must support their positions. Too many retailers fail to define their target markets and positions clearly. They try to have ‘something for everyone’ and end up satisfying no market properly. In contrast, successful retailers define their target markets well and position themselves strongly.

Product and service assortment decision Retailers must decide on three main product variables: product assortment, services mix and store atmosphere. The retailer’s product assortment should differentiate the retailer while matching target shoppers’ expectations. One strategy is to offer merchandise that no other competitor carries, such as private brands or national brands that it holds exclusively. For example, David Jones and Myer secure exclusive rights to carry well-known designers’ labels in addition to their own-brand goods and services. Another strategy is to feature blockbuster merchandising events. This might mean that a department store runs spectacular shows featuring goods from a certain country, such as India or China. Or the retailer can offer surprise merchandise, such as assortments of seconds, overstocks and store-closing sales, as Costco sometimes does. Finally, the retailer can differentiate itself by offering a highly targeted product assortment. An example of this is Jaycar, which offers a wide assortment of gadgets in what amounts to an adult electronics toy store. The services mix can also help to set one retailer apart from another. For example, some retailers invite customers to ask questions or consult service representatives in person or by phone or keyboard. The store atmosphere is another important element in the reseller’s product arsenal. Retailers want to create a unique store experience, one that suits the target market and moves customers to buy. Many retailers practice experiential retailing. Apple Stores are an example, as are European car dealers which are digitising the in-store experience. Prospective customers can use touch screens and Kinect-style cameras to design and manipulate virtual, life-size cars of their dreams displayed on massive screens surrounding the showroom space. When the customer has finished, a video shows the car he or she has designed in action, complete with the exact sound of the chosen engine in full stereo fidelity.

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The car is then loaded onto a memory stick that the customer can take for later remembering and sharing.31 Successful retailers carefully orchestrate virtually every aspect of the consumer store experience. The next time you step into a retail store – whether it sells consumer electronics, hardware or high fashion – stop and carefully consider your surroundings. Think about the store’s layout and displays. Listen to the background music. Check out the colours. Smell the smells. Chances are good that everything in the store, from the layout and lighting to the music and even the colours and smells, has been carefully orchestrated to help shape the customers’ shopping experiences – and open their wallets. For example, retailers choose the colours in their logos and interiors carefully: black suggests sophistication, orange is associated with fairness and affordability, white signifies simplicity and purity (think Apple Stores), and blue connotes trust and dependability (financial institutions, such as ANZ, use this colour). Further, most large retailers have developed signature scents that you smell only in their stores.32

Price decision A retailer’s price policy must fit its target market and positioning, product and service assortment, and competition. All retailers would like to charge high markups and achieve high volume, but the two seldom go together. Most retailers seek either high markups on lower volume (most specialty stores) or low markups on higher volume (mass merchandisers and discount stores). Within the one retail shopping centre we can find upmarket clothing retailers with high markup policies and those with low markups. Like all retailers, they must also decide on the extent to which they will use sales and other price promotions to compete, rather than rely on product and service quality. Some retailers use no price promotions at all, competing instead on product and service quality rather than on price. Other retailers practise ‘high–low’ pricing – charging higher prices on an everyday basis, coupled with frequent sales and other price promotions to increase store traffic, clear out unsold merchandise, create a low-price image or attract customers who will buy other goods at full prices. Still others practise everyday low pricing (EDLP), charging constant, everyday low prices with few sales or discounts. Which pricing strategy is best depends on the retailer’s marketing strategy and the pricing approaches of competitors.33

Promotion decision Retailers use any or all of the promotion tools – advertising, personal selling, sales promotion, public relations and direct marketing – to reach consumers. They advertise in newspapers, magazines, radio and television, and on the internet. Advertising may be supported by newspaper inserts and direct mail. Personal selling requires careful training of salespeople in how to greet customers, meet their needs and handle their complaints. Sales promotions may include in-store demonstrations, displays, contests and visiting celebrities. Public relations activities, such as press conferences and speeches, store openings, special events, newsletters, magazines and public service activities, are always available to retailers. Most retailers also interact digitally with customers, using websites and digital catalogues, online ads and video, social media, mobile ads and apps, blogs and email. Almost every retailer, large or small, maintains a full social media presence.

Placement decision Retailers often point to three critical factors in retailing success: location, location, location! It is very important that retailers select locations that are accessible to the target market in areas that are consistent with the retailer’s positioning. Small retailers may have to settle for whatever locations they can find or afford. Large retailers, however, usually employ specialists who select locations using advanced methods, such as graphical information systems. Large retailers are finding it difficult to grow through productivity and must do as ALDI has done by opening new stores.

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Most stores today cluster together to increase their customer pulling power and give consumers the convenience of one-stop shopping. Central business districts (CBD) were the main form of retail cluster until the 1950s. Every large city and town had a central business district with department stores, The area of business at specialty stores, banks and cinemas. When people began to move to the suburbs, however, these central the heart of a city or business districts, with their traffic, parking and crime problems, began to lose business. Inner-city retailers town. opened branches in suburban shopping centres and the decline of the central business districts continued. In recent years, many cities have joined with merchants to try to revive central business district shopping areas by building malls and providing underground parking. shopping centre A shopping centre is a group of retail businesses planned, developed, owned and managed as a A group of retail unit. A regional shopping centre, the largest and most dramatic shopping centre, is like a small town. businesses planned, Shopping centres are large and getting larger, as such centres as Westfield/AMP’s Southland (Melbourne), developed, owned and Westfield/AXA’s Miranda, Westfield’s Parramatta and Colonial First State Global Asset Management’s managed as a unit. Chadstone (Melbourne) illustrate. Larger centres, such as Chadstone Shopping Centre, attract over 15 million visitors a year. Such shopping centres house specialty shops that include fashion stores, dry cleaning, photo developing, hardware and DIY, bill paying, eateries, post offices, photo finishing, car care, pet care and cinemas – 65 000 mostly independently owned specialty stores across all centres. The more than 1700 shopping centres in Australia generate over $120 billion in retail sales, or some 39 per cent of Australian retail sales, each year and employ approximately two-thirds of the 10.9 per cent of the Australian strip shopping workforce engaged in the retail trade.34 Australian shopping-centre operator Westfield Holdings has centre 34 shopping malls that house 6400 outlets, achieved by expanding into the United Kingdom, the United A group of retail States, Asia and Brazil.35 Like other shopping-centre managers, such as Byvan, Lend Lease and Jones businesses located along an arterial road. Lang LaSalle, Westfield is keen to ensure that store rentals reflect the growth in sales these centres have experienced. The future of shopping centres lies in creating an environment that appeals to all our senses and ‘will be all about creating places to be rather than just places to buy’. However, shopping centres may be reaching their saturation point. Many areas contain too many centres and, when sales per square metre fall, vacancy rates climb. Some experts predict a shopping centre ‘shakeout’; however, the first victims are likely to be the strip shopping areas, despite efforts by local councils and commercial bodies to stem the decline. In Australia, strip shopping centres have been a major component in the retail distribution spectrum. A strip centre is usually built along an arterial road; the larger centres also encompass side roads and other major roads where these intersect with the shopping street. Unlike other forms of shopping centre, strip shopping centres are not centrally owned or managed. Shopping strips along highways have not experienced the same pressure as neighbourhood strips, because they offer high-visibility parking and low rents. They are favoured by furniture stores, car sales outlets and, in more recent times, electrical retailers and home-furnishing chains, such as Freedom Furniture stores. Other types of store clusters that do not fall comfortably into the above classifications include: • clusters of retailers in commercial buildings or surrounding major hotels, such as the ANZ Tower and Accor’s Hotel Sofitel in Melbourne entertainment centres, such as Darling Harbour in Sydney and Southgate • Shopping centre: Westfield’s shopping town at Stratford in London is both attractive and in Melbourne functional. • arcades and the conversion of historical buildings, such as the Queen Greg Balfour Evans/Alamy Victoria Building in Sydney and the GPO in Melbourne.

central business district

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Given the low population growth and subdued growth in discretionary income for consumers, it is not surprising that some of our bigger retailers have entered international markets to continue their growth and returns to their investors.

People, digital processes and physical evidence decisions As we have mentioned, store atmosphere is an element in the reseller’s marketing mix. Every store has a physical layout that makes moving around in it either easy or difficult. Each store has a ‘feel’; one store is cluttered, another cheerful, a third plush, a fourth sombre. The retailer must design an atmosphere that suits the target market and moves customers to buy. However, while most consumers still make a majority of their purchases the old-fashioned way using the physical evidence that only feeling, tasting and experiencing products provides, many consumers now have a broad array of non-store alternatives, including direct and digital shopping via websites, mobiles apps and social media. As we discuss in Chapter 14, direct and digital marketing are currently the fastestgrowing forms of marketing. Today, thanks to advanced technologies, easier-to-use and enticing online sites and mobile apps, improved online services and the increasing sophistication of search technologies, online retailing is thriving.36 Retailer online sites, mobile apps and social media also influence a high proportion of in-store buying. An estimated 7 per cent of all Australian retail sales now take place online – a proportion of the nearly $300 million in total retail sales that will grow considerably into the future.37 Retailers of all kinds rely on social media to engage their buyer communities. For example, while some retailers rely on Facebook Likes, others are Twitter followers and more still are YouTube subscribers.38 The spurt in online, mobile and social media retailing is both a blessing and a curse to store retailers. Although it gives them new channels for engaging and selling to customers, it also creates more competition from online-only retailers, particularly from overseas retailers. To the dismay of some store retailers, many shoppers now check out merchandise at physical-store showrooms but then buy it online using a computer or mobile device, sometimes while in the store – a process called showrooming. These days, many smartphone-carrying shoppers use their phones while shopping in stores. And as many as half of all shoppers who buy products online check them out first at a traditional store.39 Store retailers have been hit hard by showrooming. In an endeavour to fight back, many store retailers are developing effective strategies to counter showrooming. Others are even embracing it as an opportunity to highlight the advantages of shopping in stores versus with online-only retailers. The flip side of showrooming is webrooming, by which consumers first check out merchandise online, then buy it in a store. The key for store retailers is to convert showrooming shoppers into buyers when they visit the store. However, it is no longer a matter of customers deciding whether to shop in a store or shop online. The internet and digital devices have spawned a whole new breed of shoppers and way of shopping. Today’s omni-channel buyers shift seamlessly across online and in-store channels during the buying process. They have become used to researching and buying anywhere, anytime – whether in the store, online, on the go or even online while in the store. To meet the needs of these omni-channel buyers, store retailers must master omni-channel retailing, integrating store and online channels into a single shopper experience. An increasing share of the growth in online sales is being captured by omni-channel retailers who successfully merge the virtual and physical worlds.

Retailing trends and developments Retailers operate in a harsh and fast-changing environment, which offers threats as well as opportunities. For example, the industry suffers from chronic overcapacity, resulting in fierce competition for customer dollars, especially in tough economic times. Consumer demographics, lifestyles and spending patterns

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are changing rapidly, as are retailing technologies. Consumer confidence has been tested by the continuing financial issues in the United States and Europe. Some retailers actually benefit from a down economy – for example, as consumers cut back and looked for ways to spend less on what they bought, big discounters such as Costco scooped up new business from bargain-hungry shoppers. Similarly, retail house-brand sales increase as shoppers seek bargains, and fast-food chains take sales away from pricier eateries. During this period, Woolworths sold its Dick Smith Electronics chain relatively cheaply to a private equity group, although the company later failed for a myriad of reasons, including competition from the likes of JB Hi-Fi, inventory issues and because the costs associated with its ‘large and varied Retail trends: JB Hi-Fi is successful in its category. JB Hi-Fi retail network made it less attractive’.40 To be successful, retailers need to choose target segments carefully and position themselves in order to meet head-on the challenges posed by new retail forms with shorter life cycles – particularly direct and online traders such as DealsDirect.com.au. However, while digital marketing channels may enable the retailer to identify individual consumers more easily, and may be more efficient, they may not be any less costly than marketing channels that involve brick-andmortar retailers. Reasons for this may be the added freight costs to deliver the goods to your postcode, or because an overseas website has identified your IP address as being in Australia or New Zealand and charges accordingly – even before currency exchange rates are involved. Other challenges come from retail convergence, where all manner of retailers from chemists to DFOs carry similar product assortments, as well as from new technologies. Perhaps the most startling advances in retail technology concern the ways in which retailers are connecting with consumers. Today’s customers have become used to the speed and convenience of buying online, and to the control that the internet gives them over the buying process. To compete, retailers are attempting to meet these new consumer expectations by bringing web-style technologies into their stores. Many retailers now routinely use technologies ranging from touch-screen kiosks, hand-held shopping assistants, customer-loyalty cards and self-scanning checkout systems, to in-store access and store-inventory databases. Moreover, they are turning to new sophisticated systems for checkout scanning, RFID inventory tracking, merchandise handling, information sharing and customer interactions as competitive weapons. They are also turning to ‘green retailing’ using such means as exterior and interior LED lighting, which consumes up to 78 per cent less energy and last 10 to 20 times longer than traditional lighting. Some have even turned to the use of solar power with battery storage while others, such as IKEA, are using wind turbines.41 International retailing presents many opportunities as well as challenges. Retailers can face dramatically different retail environments when crossing countries, continents and cultures. Simply adapting the operations that work well in the home country is usually not enough to create success abroad. Instead, when going global, retailers must understand and meet the needs of local markets. Although nine of the world’s top 20 retailers are US companies, only four of these retailers have set up stores outside North America (Walmart, Home Depot, Costco and Best Buy). Of the 12 non-US retailers in the world’s top 20, eight have stores in at least 10 countries. Foreign retailers that have gone global include France’s Carrefour, Groupe Casino and Auchan chains; Germany’s Metro, Lidl and ALDI chains; Britain’s Tesco; and Japan’s Seven & I.42

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Linking the concepts Time out! So-called experts have long predicted that online retailing eventually will replace store retailing as our primary way to shop. What do you think? ● Shop for a good book at the Angus & Robertson Bookworld website , taking time to browse the site and see what it has to offer. Next, shop at a nearby Angus & Robertson or other bookstore, such as Dymocks. Compare the two shopping experiences. Where would you rather shop? On what occasions? Why?

● A Dymocks store creates an ideal ‘community’ where people can ‘hang out’. How does its online version compare on this dimension? ● Do Angus & Robertson Bookworld’s various social media efforts create community for the retailer and its customers? For example, see , and .

Wholesaling (pp. 327–32) Wholesaling includes all activities involved in selling goods and services to those buying for resale or

wholesaling

business use. A retail bakery acts like a wholesaler when it sells pastry to the local hotel. However, we call wholesalers those firms engaged primarily in wholesaling activity. Wholesalers differ from retailers in several ways. First, wholesalers deal mostly with business customers – particularly retailers – rather than with final consumers. Second, wholesalers usually cover larger trade areas and have larger transactions than retailers. Third, wholesalers face different legal regulations and taxes. Wholesalers buy mostly from producers and sell mostly to retailers, industrial consumers and other wholesalers. But why are wholesalers used at all? For example, why would a producer use wholesalers rather than selling directly to retailers or consumers? Quite simply, wholesalers add value by performing one or more of the following channel functions: • Selling and promoting. Wholesalers’ sales teams help manufacturers to reach many small customers at a low cost. The wholesaler has more contacts, and buyers often trust the wholesaler more than they trust the distant manufacturer. • Buying and assortment building. Wholesalers can select items and build assortments needed by their customers, thereby saving consumers much work. • Bulk breaking. Wholesalers save their customers money by buying in carload lots and breaking bulk (breaking large lots into small quantities). • Warehousing. Wholesalers hold inventories, thereby reducing the inventory costs and risks of suppliers and customers. • Transportation. Wholesalers can provide quicker delivery to buyers because they are located closer to the buyers than the producers are. • Financing. Wholesalers finance their customers by giving credit, and they finance their suppliers by ordering early and paying bills on time. • Risk bearing. Wholesalers absorb risk by taking title and bearing the cost of theft, damage, spoilage and obsolescence. • Market information. Wholesalers give information to suppliers and customers about competitors, new products and price developments. • Management services and advice. Wholesalers often help retailers to train their salespeople, improve store layouts and displays, and set up accounting and inventory control systems.

All activities involved in selling goods and services to those buying for resale or business use.

Types of wholesalers

An independently owned business that takes title to the merchandise it handles.

Wholesalers fall into three main groups (see Table 10.3): (1) merchant wholesalers, (2) agents and brokers and (3) manufacturers’ sales branches and offices. Merchant wholesalers are the largest single group of

wholesaler

A firm engaged primarily in wholesaling activity.

merchant wholesaler

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Table 10.3  Main types of wholesalers Merchant wholesalers Full-service wholesalers

Limited-service wholesalers

Brokers and agents Brokers

Independently owned businesses that take title to the merchandise they handle. They are the largest single group of wholesalers and include two broad types: full-service wholesalers and limited-service wholesalers. Provide a full set of services, such as carrying stock, using a salesforce, offering credit, making deliveries and providing management assistance. Full-service wholesalers include wholesale merchants and industrial distributors. Wholesale merchants

Sell primarily to retailers and provide a full range of services. They vary in the width of their product line. Some carry several lines of goods to meet the needs of both general merchandise retailers and single-line retailers. Others carry one or two lines of goods in a greater depth of assortment. Examples are hardware wholesalers, pharmaceutical wholesalers and clothing wholesalers. Some specialty wholesalers carry only part of a line in great depth. Examples are wholesalers of health foods, seafood and car parts. They offer customers deeper choice and greater product knowledge.

Industrial distributors

Sell to producers, rather than to retailers. They provide inventory, credit, delivery and other services. They may carry a broad range of merchandise, a general line or a specialty line.

Offer fewer services to their suppliers and customers. There are several types of limited-service wholesalers: cash-and-carry wholesalers, truck wholesalers (cash-van operators), drop shippers, producers’ cooperatives and mail-order or web wholesalers. Cash-and-carry wholesalers

Carry a limited line of fast-moving goods, sell to small retailers for cash and normally do not deliver. A small fish-store retailer, for example, normally drives at dawn to a cash-and-carry fish wholesaler and buys several crates of fish, pays on the spot, drives the merchandise back to the store and unloads it. Flower retailers do much the same.

Truck wholesalers (also called cash-van operators)

Perform a selling and delivery function. They carry a limited line of goods (such as snack foods), which they sell for cash as they make their rounds of supermarkets, small grocery stores, hospitals, restaurants, factory cafeterias and hotels.

Drop shippers

Operate in bulk industries such as coal, timber and heavy equipment. They do not carry inventory or handle the product. Once an order is received, they find a producer who ships the goods directly to the customer. The drop shipper takes title and risk from the time the order is accepted to the time it is delivered to the customer. Because drop shippers do not carry inventory, their costs are lower and they can pass on some savings to customers.

Rack jobbers

Serve grocery stores and pharmacies, mostly in non-food items. Rack jobbers send delivery trucks to stores, where the delivery people set up items such as toys, paperback books, hardware items, health and beauty aids, or other goods. Rack jobbers price the goods, keep them fresh, set up point-of-purchase displays and keep inventory records.

Producers’ cooperatives

Owned by farmer members, they assemble farm produce to sell in local markets. Their profits are divided among members at the end of the year. They often try to improve product quality and promote a co-op brand name, such as Chiquita bananas.

Mail-order or web wholesalers

Send catalogues to retail, industrial and institutional customers offering jewellery, cosmetics, specialty foods and other small items. Their main customers are businesses in small outlying areas. They have no ­salesforce to call on customers. The orders are filled and sent by mail, truck or other means.

Brokers and agents differ from merchant wholesalers in two ways: they do not take title to goods and they perform only a few functions. Their main function is to aid in buying and selling, and for these services they earn a commission on the selling price. Like merchant wholesalers, they generally specialise by product line or customer type. Bring buyers and sellers together and assist in negotiation. They are paid by the parties hiring them. They do not carry inventory, get involved in financing or assume risk. The most familiar examples are food brokers, real estate brokers, insurance brokers and security brokers.

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Agents

Manufacturers’ sales branches and offices

329

Represent buyers or sellers on a more permanent basis. There are several types: manufacturers’ agents, selling agents, purchasing agents and commission merchants. Manufacturers’ agents

Represent two or more manufacturers of related lines, often in such lines as apparel, furniture and electrical goods. They have a formal agreement with each manufacturer, covering prices, territories, order-handling procedures, delivery and warranties, and commission rates. They know each manufacturer’s product line and use their wide contacts to sell the products. Most manufacturers’ agents are small businesses, with only a few employees who are skilled salespeople. They are hired by small producers who cannot afford to maintain their own field sales teams, and by large producers who want to open new territories or sell in areas that cannot support full-time salespeople.

Selling agents

Contract to sell a producer’s entire output when the manufacturer either is not interested in doing the selling or feels unqualified. They serve as a sales department and have much influence over prices, terms and conditions of sale. They normally have no territory limits. They are found in such product areas as textiles, industrial machinery and equipment, coal and coke, chemicals and metals.

Purchasing agents

Generally have a long-term relationship with buyers. They make ­purchases for buyers and often receive, inspect, warehouse and ship goods to the buyers. One type consists of resident buyers in major ­apparel markets, purchasing specialists who look for apparel lines that can be carried by small retailers located in small cities. They know a great deal about their product lines, provide helpful market information to clients, and obtain the best goods and prices available.

Commission merchants

Take physical possession of products and negotiate sales. They are not normally used on a long-term basis. They are used most often in ­agricultural marketing by farmers who do not want to sell their own output and who do not belong to cooperatives. Typically, the commission merchant will take a truckload of commodities to a central market, sell it for the best price, deduct a commission and expenses, and pay the balance to the producer.

Wholesaling operations conducted by sellers or buyers themselves, rather than through independent wholesalers. Some large retailers set up purchasing offices in major market centres elsewhere in the world. Sales branches and offices

Manufacturers often set up their own sales branches and offices to improve inventory control, selling and promotion. Sales branches carry inventory and are found in such industries as timber and car equipment and parts.

Purchasing offices

Perform a role similar to that of brokers or agents but are part of the buyer’s organisation. Many retailers set up purchasing offices in major market centres.

broker

A person or business who does not take title to goods and whose function is to bring buyers and sellers together and assist in negotiation.

agent wholesalers, accounting for roughly 50 per cent of all wholesaling. Merchant wholesalers include two broad types: full-service wholesalers and limited-service wholesalers. Full-service wholesalers provide a full set of services, whereas the various limited-service wholesalers offer fewer services to their suppliers and customers. The several different types of limited-service wholesalers perform varied specialised functions in the distribution channel. Brokers and agents differ from merchant wholesalers in two ways: they do not take title to goods and they perform only a few functions. Like merchant wholesalers, they generally specialise by product line or customer type. A broker brings buyers and sellers together and assists in negotiation. Agents represent buyers or sellers on a more permanent basis. Manufacturers’ agents (also called manufacturers’ representatives) are the most common type of agent wholesaler. The third main type of wholesaling is that done in manufacturers’ sales branches and offices by sellers or buyers themselves, rather than through independent wholesalers.

A person or business who represents buyers or sellers on a more permanent basis, performs only a few functions and does not take title to goods.

manufacturers’ sales branches and offices

Wholesaling by sellers or buyers themselves, rather than through independent wholesalers.

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Wholesaler marketing decisions Wholesalers now face growing competitive pressures, more demanding customers, new technologies, and more direct-buying programs on the part of large industrial, institutional and retail buyers. As a result, they have taken a fresh look at their marketing strategies. As with retailers, their marketing decisions include choice of target markets, positioning and the marketing mix – product and service assortment; price; promotion; placement; and people, processes and physical evidence (see Figure 10.12).

Segmentation, targeting, differentiation and positioning decisions Like retailers, wholesalers must define their target markets and position themselves effectively – they cannot serve everyone. They can choose a target group by size of customer (only large retailers), type of customer (convenience stores only), need for service (customers who need credit) or other factors. Within the target group, they can identify the more profitable customers, design stronger offers and build better relationships with them. They can propose automatic reordering systems, set up management-training and advising systems or even sponsor a voluntary chain. They can discourage less-profitable customers by requiring larger orders or adding a service charge to smaller orders.

Marketing mix decisions Like retailers, wholesalers must decide on product assortment and ancillary services; prices; promotion; placement; and people, processes and physical evidence. The wholesaler’s ‘product’ is the assortment of products and ancillary services that it offers. Wholesalers are often under great pressure to carry a full line and to stock enough for immediate delivery. However, this practice can damage profits. Wholesalers today are cutting down on the number of lines they carry, choosing to carry only the more profitable ones. They are also rethinking which services count most in building strong customer relationships and which should be dropped or charged for. The key is to find the mix of services most valued by their target customers. Price is also an important wholesaler decision. Wholesalers usually mark-up the cost of goods by a standard percentage – say, 20 per cent. Expenses may run 17 per cent of the gross margin, leaving a

WHOLESALER STRATEGY

WHOLESALER MARKETING MIX

Wholesale segmentation and targeting Differentiation and service positioning

Product and service assortment Wholesale prices Promotion Placement People, processes and physical evidence

CREATE VALUE FOR TARGETED WHOLESALE CUSTOMERS

Figure 10.12  Wholesaler marketing decisions

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profit margin of 3 per cent. In grocery wholesaling, the average profit margin is often less than 2 per cent. Wholesalers are trying new pricing approaches. They may cut their margin on some lines in order to win important new customers. They may ask suppliers for special price breaks when they can turn them into an increase in the supplier’s sales. Although promotion can be critical to wholesaler success, most wholesalers are not promotionminded. Their use of trade advertising, sales promotion, personal selling and public relations is largely scattered and unplanned. Many are behind the times in personal selling – they still see selling as a single salesperson talking to a single customer, instead of as a team effort to sell, build and service major accounts. Wholesalers also need to adopt some of the non-personal promotion techniques used by retailers. They need to develop an overall promotion strategy and make greater use of supplier promotion materials and programs. Not surprisingly, placement is important: wholesalers must choose their locations, facilities and web locations carefully. Wholesalers typically locate in low-rent, low-tax areas and tend to invest little money in their buildings, equipment and systems. As a result, their materials-handling and order-processing systems are often outdated. In recent years, however, large and progressive wholesalers are reacting to rising costs by investing in automated warehouses and online order-processing systems. Orders are fed from the retailer’s system directly into the wholesaler’s computer; items are picked up by mechanical devices and automatically taken to a shipping platform where they are assembled. Most large wholesalers are using technology to carry out accounting, billing, inventory control and forecasting. Modern wholesalers are adapting their services to the needs of target customers and finding cost-reducing methods of material handling, order processing and delivery. They are also transacting more business online. Finally, people, processes and physical evidence are every bit as important to a wholesaler’s marketing mix as they are in any service industry. Salespeople and delivery-truck drivers, particularly cash-van drivers who must both sell and deliver goods, must ensure they are adding value to their customers in every facet of the service they offer.

Wholesaling trends and developments Today’s wholesalers face considerable challenges. The industry remains vulnerable to one of its most enduring trends – the need for greater and greater efficiency. Recent economic conditions have led to demands for even lower prices and the winnowing out of suppliers who are not adding value based on cost and quality. Progressive wholesalers constantly watch for better ways to meet the changing needs of their suppliers and target customers. They recognise that their only reason for existence comes from adding value by increasing the efficiency and effectiveness of the entire marketing channel. Several developments in the wholesaling industry are likely. Consolidation will significantly reduce the number of firms in the industry. The remaining wholesaling companies will grow larger, primarily through acquisition, merger and geographical expansion. Geographical expansion will require distributors to learn how to compete effectively over wider and more diverse areas. Wholesalers will be helped in this by the increased use of information technology and automated systems. The distinction between large retailers and large wholesalers continues to blur. In Australia, the wholesaler, Metcash, provides thousands of products, as well as marketing, servicing and grocery supply, to independently owned supermarkets in the IGA banner group, enabling them to compete against the large chains, Woolworths and Coles. Metcash also wholesales hardware through its ownership of Mitre 10, thereby competing with Wesfarmers’ Bunnings and other smaller outlets, and supplies hardware products to a further 400 non-branded independent stores and trade customers. Metcash is also a liquor wholesaler, supplying 12 000 hotels in Australia through its wholly owned ALM (Australian Liquor Markets) division, and servicing the New Zealand market through its Tasman Liquor Company subsidiary. In addition, Metcash services banner groups, such as Cellarbrations, IGA Liquor, Bottle-O and Bottle-O Neighbourhood, through its IBA (Independent Brands Australia) subsidiary.43

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Wholesalers will continue to increase the services they provide to retailers, such as retail pricing, cooperative advertising, marketing and management information reports, accounting services and others. Rising costs on the one hand, and the demand for increased services on the other, will put the squeeze on wholesaler profits. Wholesalers that do not find efficient ways to deliver value to their customers will soon fall by the wayside. Like many other industries, business design is affected by technology as well as by the entry of globally oriented players. As international wholesalers enter the Australian market, Australian and New Zealand wholesalers are increasingly expanding their overseas operations, particularly into Asia.

Linking the concepts Let’s take another break and review this last section on wholesaling. ● Why might a food manufacturer use an agent? Why might a broker be used, rather than an agent? ● Research the Australian and/or New Zealand retail markets. Based on your findings, do you think that a wholesaler the

size of Metcash can help retail banner groups to compete effectively against large chains such as ALDI, Coles, Costco and Woolworths? Explain your answer.

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Student Learning Centre

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communicating with prospective buyers; by matching – shaping and fitting the offer to the buyer’s needs; and by entering into negotiation to reach an agreement on price and other terms of the offer so that ownership can be transferred. Other functions help to fulfil the completed transactions by offering physical distribution – transporting and storing goods; by financing – acquiring and using funds to cover the costs of the channel work; and by risk taking –

Reviewing the learning objectives Learning Objective 1. Describe the nature of supply chain management and how marketing channels add value. (pp. 292–300) Just as firms are giving the marketing concept increased recognition, more business

assuming the risks of carrying out the channel work. The channel will be most effective when each member is assigned the tasks it can do best. Ideally, because the success of individual channel members depends on overall channel success, all channel firms should work together smoothly. They should understand and accept their roles, coordinate their goals and activities, and cooperate to attain overall channel goals. By cooperating, they can more effectively sense, serve and satisfy the target market.

firms are paying attention to their supply chain and to supply chain management.

In a large company, the formal organisation structure assigns roles and

Supply chains and management of the customer-focused marketing channel end of

provides needed leadership. But in a distribution channel made up of independent

the supply chain are an area of potentially high cost savings and improved customer

firms, leadership and power are not formally set. Traditionally, distribution

satisfaction. Supply chain management addresses not only outbound distribution

channels have lacked the leadership needed to assign roles and manage conflict.

but also inbound distribution, conversion operations and reverse distribution –

In recent years, however, new types of channel organisations have appeared that

managing value-added flows between suppliers, the company, resellers and final

provide stronger leadership and improved performance.

users. No supply chain can both maximise customer service and minimise distribution

Each firm identifies alternative ways to reach its market. Available means

costs. Instead, the goal of supply chain management is to provide a targeted level

vary from direct selling to using one, two, three or more intermediary channel

of service at the least cost. The main supply chain functions include warehousing,

levels. Marketing channels face continuous and sometimes dramatic change.

inventory management, transportation and logistics information management.

Three of the most important trends are the growth in vertical, horizontal and

The integrated supply chain management concept recognises that improved logistics requires teamwork in the form of close working relationships across

multichannel marketing systems. These trends affect channel cooperation, conflict and competition.

functional areas inside the company and across various organisations in the

Channel design begins with assessing customer channel-service needs and

supply chain. Companies can achieve logistics harmony among functions by

company channel objectives and constraints. The company then identifies the

creating cross-functional logistics teams, integrative supply manager positions,

major channel alternatives in terms of the types of intermediaries, the number of

and senior-level logistics executives with cross-functional authority. Channel

intermediaries and the channel responsibilities of each. Each channel alternative

partnerships can take the form of cross-company teams, shared projects and

must be evaluated according to economic, control and adaptive criteria. Channel

information-sharing systems. Today, some companies are outsourcing their

management calls for selecting qualified intermediaries and motivating them.

logistics functions to third-party logistics providers to save costs, increase

Individual channel members must be evaluated regularly.

efficiency and gain faster and more effective access to global markets.

Learning Objective 2. Describe the nature of marketing channels and how they organise to create value. (pp. 300–13)

Producers vary in their ability to attract qualified marketing intermediaries. Some producers have no trouble signing up channel members. Others have to work hard to engage enough qualified intermediaries. When selecting intermediaries, the company should evaluate each channel member’s qualifications and select those that best fit its channel objectives.

In creating customer value, a company cannot go it alone. It must work within

Once selected, channel members must be continuously motivated to do their

an entire network of partners – a value delivery network – to accomplish this

best. The company must sell not only through the intermediaries, but with them.

task. Individual companies and brands do not compete; their entire value delivery

It should work to forge strong partnerships with channel members to create

networks do.

a marketing system that meets the needs of both the manufacturer and the

Most producers use intermediaries to bring their products to market. They try

partners. The company must also regularly check channel member performance

to forge a marketing channel (or distribution channel) – a set of interdependent

against established performance standards, rewarding intermediaries that are

organisations involved in the process of making a product or service available for

performing well and assisting or replacing weaker ones.

use or consumption by the consumer or business user. Through their contacts,

to complete transactions by gathering and distributing information needed

Learning Objective 3. Discuss retailing, retailers’ marketing decisions and the different ways of classifying stores, and describe retailing trends and developments. (pp. 314–27)

for planning and aiding exchange; by developing and spreading persuasive

Retailing and wholesaling consist of many organisations bringing goods and

communications about an offer; by performing contact work – finding and

services from the point of production to the point of use. In this chapter, we first

experience, specialisation and scale of operation, intermediaries usually offer the firm more than it can achieve on its own. Marketing channels perform many key functions. Some functions help

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334

Part 3  Designing a customer-driven strategy and mix

looked at the nature and importance of retailing, the main types of retailers, the

Like retailers, wholesalers must target carefully and position themselves

decisions retailers make and the future of retailing. We then examined these

strongly. And, like retailers, wholesalers must decide on product and service

same topics for wholesalers.

assortment; price; promotion; placement; and people, processes and physical

Retailing includes all activities involved in selling goods or services directly

evidence. Progressive wholesalers constantly watch for better ways to meet

to final consumers for their personal, non-business use. Retail stores come in all

the changing needs of their suppliers and target customers. They recognise

shapes and sizes, and new retail types continue to emerge. Store retailers can be

that, in the long run, their only reason for existence comes from adding value

classified by the amount of service they provide (self-service, limited service or

by increasing the efficiency and effectiveness of the entire marketing channel.

full service), product line sold (specialty stores, department stores, supermarkets,

As with other types of marketers, the goal is to build value-adding customer

convenience stores, superstores and service businesses) and relative prices

relationships.

(discount stores and off-price retailers). Today, many retailers are banding together in corporate and contractual retail organisations (corporate chains, voluntary chains and retailer cooperatives, and franchise organisations). Retailers are always searching for new marketing strategies to attract and hold customers. They face major marketing decisions about segmentation and targeting, store differentiation and positioning, and the retail marketing mix. Retailers must first segment and define their target markets and then decide how they will differentiate and position themselves in these markets. Those that try to offer ‘something for everyone’ end up satisfying no market well. In contrast, successful retailers define their target markets well and position themselves strongly. Guided by strong targeting and positioning, retailers must decide on a retail marketing mix – product and service assortment; price; promotion; placement; and people, processes and physical evidence. Retail stores are much more than simply an assortment of goods – beyond the products and services they offer, today’s successful retailers carefully orchestrate virtually every aspect of the consumer store experience. A retailer’s price policy must fit its target market and positioning, product and service assortment, and competition. Retailers use any or all of the promotion tools – advertising, personal selling, sales promotion, public relations and direct marketing – to reach consumers. Finally, it is very important that retailers select locations that are accessible to the target market in areas that are consistent with the retailer’s positioning. Retailers operate in a harsh and fast-changing environment, which offers threats as well as opportunities. New retail forms continue to emerge to meet new situations and consumer needs. Other trends in retailing include the slowed economy and tighter consumer spending, the rapid growth of non-store retailing, retail convergence (the merging of consumers, products, prices and retailers), the growing importance of retail technology, the global expansion of major retailers, and the resurgence of retail stores as consumer ‘communities’.

Discussion questions ❶ Trade-offs. Business managers seek to exceed customer service expectations at a price that ensures profits and a positive cashflow. Thinking about this statement and Figure 10.5, might it be more appropriate to consider the eight so-called trade-offs as must-dos? Why, or why not? (Learning Objectives 1 and 2) (AACSB: Communication; Analytical Thinking; Reflective Thinking) ❷ Customer service. Consider Figure 10.5 further, and how it suggests the importance of customer service. Does this notion of delivering customer service apply only to goods, or does it also apply to services? Justify your answer. (Learning Objectives 1 and 2) (AACSB: Communication; Analytical Thinking; Reflective Thinking) ❸ Cooperation and competition in marketing channels. In many cases, businesses cooperate with each other rather than compete. For example, some companies join forces with competitors or non-competitors, as News Corporation Ltd and Telstra Corporation have done in their joint ownership and management of pay-TV operator, Foxtel. Is there greater risk of businesses colluding on pricing and other matters because of such partnering and cooperation, thereby acting illegally under the Competition and Consumer Act 2010 (Cth)? Justify your answer. (Learning Objectives 1, 2 and 3) (AACSB: Communication; Analytical Thinking; Reflective Thinking) ❹ Wholesaler value-adding. Consider the functions wholesalers perform. Do wholesalers really add value, or might they have reached a stage where they face disintermediation? Justify your answer, and be sure to explain the term disintermediation. (Learning Objective 4) (AACSB: Communication; Analytical Thinking; Reflective Thinking) ❺ Private labels. Retailers in Australia have had a love–hate relationship with private labels, it seems. Consider the use of private labels by department

Learning Objective 4. Compare and contrast the different types of wholesalers and their marketing decisions, and discuss wholesaling trends. (pp. 327–32) Wholesaling includes all the activities involved in selling goods or services to those who are buying for the purpose of resale or for business use. Wholesalers fall into three groups. First, merchant wholesalers take possession of the goods. They include full-service wholesalers (wholesale merchants, industrial distributors) and limited-service wholesalers (cash-and-carry wholesalers, truck wholesalers, rack jobbers, drop shippers, producers’ cooperatives and mail-

stores and supermarkets. Do they appear to have adopted a dual strategy? Why might this be the case? What part, if any, does retail convergence play in this action by retailers? (Learning Objective 3) (AACSB: Communication; Analytical Thinking; Reflective Thinking) ❻ People, processes and physical evidence. Taking each of these marketing mix elements in turn, how important is each in retailing? Provide examples wherever possible. (Learning Objective 3) (AACSB: Communication; Analytical Thinking; Reflective Thinking)

order or web wholesalers). Second, brokers and agents do not take possession

Critical thinking exercises

of the goods but are paid a commission for aiding buying and selling. Finally,

❶ In a small group, debate whether or not the internet might result in

manufacturers’ sales branches and offices are wholesaling operations conducted

disintermediation of the following types of retail stores: (1) video rental

by non-wholesalers to bypass the wholesalers.

stores, (2) music stores, (3) grocery stores, (4) book stores and (5) clothing

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stores. (Learning Objectives 1, 2 and 3) (AACSB: Communication; Analytical

direct marketing channel  (p. 302)

off-price retailer  (p. 320)

Thinking; Reflective Thinking)

disintermediation  (p. 309)

omni-channel retailing (p. 314)

horizontal marketing network 

retailer (p. 314)

❷ Let us take the situation where you have been asked to explain to your colleagues in the marketing department of a retailer where you are employed how the use of RFID tags might benefit the company. Assuming you turn to YouTube (e.g. see ), prepare your presentation. What other consequences, if any, might there be for suppliers and consumers? (Learning Objectives 1, 2 and 3) (AACSB: Communication; Use of IT; Reflective Thinking) ❸ Shop for a product of your choice on Amazon.com. Do the consumer reviews influence your perception of a product or brand offered? Many of the product

(p. 308) marketing channel (distribution channel)  (p. 300) multichannel distribution network  (p. 308) vertical marketing network (VMN)  (p. 305)

335

retailer cooperative  (p. 320) retailing  (p. 314) selective distribution (p. 313) self-service retailer  (p. 315) service business  (p. 319) shopper marketing  (p. 314) shopping centre  (p. 324) specialty store  (p. 316)

Learning Objective 3

strip shopping centre  (p. 324)

process and discuss whether or not a review from a consumer in Amazon’s review

category killer  (p. 315)

supermarket  (p. 317)

program is more useful than one from a consumer not in this program. (Learning

central business district  (p. 324)

superstore  (p. 319)

Objectives 1, 2 and 3) (AACSB: Communication; Use of IT; Reflective Thinking)

chain stores (corporate chain)  (p. 320)

voluntary chain  (p. 320)

combination store  (p. 316)

warehouse club (wholesale club) 

reviews on Amazon.com are submitted by consumers. Learn about this review

Navigating the key terms

convenience store (C-store)  (p. 318)

(p. 320)

department store  (p. 316)

Learning Objective 1

Learning Objective 2

direct factory outlet (DFO)  (p. 320)

Learning Objective 4

distribution centre  (p. 297)

administered vertical marketing

discount store  (p. 319)

agent  (p. 329)

exclusive distribution (p. 313)

broker  (p. 329) manufacturers’ sales branches and

marketing logistics (physical

network  (p. 308)

distribution)  (p. 292)

channel conflict  (p. 304)

franchise  (p. 321)

multimodal transportation  (p. 299)

channel level  (p. 302)

full-service retailer  (p. 315)

services marketing logistics  (p. 294)

contractual vertical marketing

hypermarket  (p. 319)

merchant wholesaler  (p. 327)

supply chain  (p. 292) supply chain management  (p. 292) supply chain trade-offs  (p. 296) value delivery network  (p. 292)

offices  (p. 329)

intensive distribution (p. 313)

wholesaler  (p. 327)

conventional marketing channel  (p. 305)

limited-service retailer  (p. 315)

wholesaling  (p. 327)

corporate vertical marketing

marketing channel design (p. 312)

network  (p. 306)

network  (p. 305)

mass merchant  (p. 319)

Mini cases 10.1  Corporate VMN Value fulfilment across the globe Retailing is all about position. It certainly must be when we find that stores

prices. However, Zara’s amazing success comes not just from what it sells,

are willing to pay over $6000 per square metre per year to locate in Sydney’s

but from how fast its cutting-edge distribution system delivers what it sells.

Pitt Street Mall or a bit less – some $4500 – to locate in Melbourne’s

Zara delivers fast fashion – really fast fashion. Thanks to vertical integration,

Bourke Street. When we look at the global retail scene, we see that New York’s Fifth Avenue is the most expensive retail position, followed by Hong Kong’s Causeway Bay and then Paris’s Avenue des Champs-Élysées (which has overtaken London’s New Bond Street), followed by Milan’s Via Montenapoleone, Zurich’s Bahnhofstrasse, Tokyo’s The Ginza, Seoul’s Myeongdong, Vienna’s Kohlmarket and Munich’s Kaufinger/Neuhauser. In each of these locations, we find two ingredients that explain the Ashley Cooper/Corbis

astronomical rentals that retailers pay: high-end brands and tourists. The Spanish fashion retailer, Zara, has spread around the globe and is now found in Australia. Its Melbourne store, located on Bourke Street in the CBD, is adjacent to rival department stores and close to the many boutiques tucked away in shopping arcades and lanes. Zara has attracted a near cult-like clientele of shoppers swarming to buy its ‘cheap chic’ – stylish designs that resemble those of big-name fashion houses but at moderate

Zara’s Melbourne outlet benefits from the store’s fast cutting-edge distribution system.

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Part 3  Designing a customer-driven strategy and mix

10.1  Corporate VMN continued Zara can take a new fashion concept through design, manufacturing and

❶ How do retailers like Zara add value to the marketing system? (Learning

store-shelf placement in as little as two weeks, whereas competitors, such

Objectives 1, 2 and 3) (AACSB: Communication; Analytical Thinking;

as Gap, Benetton or H&M, often take six months or more. And the resulting

Reflective Thinking)

low costs let Zara offer the very latest mid-market chic at downmarket prices.

❷ Using the types of retail organisations described in this chapter, classify

Speedy design and distribution allow Zara to introduce a copious supply

each of the following retailers: David Jones, Myer, Gap, Benetton, H&M,

of new fashions – at three times the rate of competitor introductions. Then,

Zara. How would you classify a nearby Apple Store and Apple Store

Zara’s distribution system supplies its stores with small shipments of new

Online? (Learning Objectives 1, 2 and 3) (AACSB: Use of IT; Analytical

merchandise two to three times each week, compared with competing

Thinking; Reflective Thinking)

chains’ outlets, which get large shipments seasonally, usually just four to six

❸ Conduct a small poll among your Gen X friends and family to find out

times per year. The combination of a large number of timely new fashions

whether they think buying online is simply a gender issue. Or are there

delivered in frequent small batches gives Zara stores a continually updated

other factors at work, such as the type of product? Explain your answer.

merchandise mix that brings customers back more often. Fast turnover also

(Learning Objectives 1, 2 and 3) (AACSB: Communication; Use of IT;

results in less outdated and discounted merchandise.44

Reflective Thinking)

10.2  Multichannel distribution networks Disintermediate or be disintermediated Less than a decade ago, if you wanted to watch a movie at home, your only choice was to visit your local Blockbuster or other neighbourhood videorental store. At the time, Blockbuster dominated DVD rentals, certainly in

© Francis Vachon/Alamy Stock Photo

336

the United States, if not in Australia. But all that changed for Blockbuster – abruptly and radically in the United States. Facing losses and store closures, the once-mighty movie-rental chain declared bankruptcy in the United States in late 2010. In early 2011, it was bought for a song by Dish Network, primarily for its fledgling video-streaming services to complement Dish’s satellite-TV offerings. In Australia, Blockbuster – along with the Video Ezy and EzyDVD chains – is owned by the Franchise Entertainment Group (FEG) and continues to operate. FEG is also the franchisor for 45 franchisees under the two main brands, which operate nearly 1000 DVD vending-machine kiosks with aspirations to open a further 3000. However, FEG faces huge digital and direct competition from the likes

Netflix’s internet-based distribution system allows delivery of over 100 000 DVD titles, reaching more than 60 million global subscribers using any form of internetconnected device, from ‘smart’ TVs to game consoles, Android media players, tablets and smartphones.

of BigPond, Apple TV and subscriber-TV, as well as from Netflix and Stan. And these are only the legal sources. Quickflix is moving from a movie ‘post

device, from ‘smart’ TVs (e.g. Samsung’s Smart Hub televisions) to game

and play’ system to a ‘download and play’ approach, based on the Xbox

consoles (Wii, PS3, Xbox), Android media players, tablets and smartphones.

games console. It is also an app on internet-connected Samsung Smart Hub

Globally, Netflix now has more than 60 million subscribers, a subscriber-

television sets, set to Australia as the default country and involving a subset

base that outstrips Australia’s total population!

of the 55 000 titles in its DVD catalogue.

Perhaps, the soundest advice one could give Quickflix is to be afraid …

Given the global nature of the direct and digital market for legal movie

very afraid … of the competition – even that which has now arrived. After all,

downloads, perhaps the fiercest competitor Quickflix may face is the US-

Amazon.com, Apple and YouTube also offer streaming-video subscription

based Netflix. Netflix was rumoured to be entering the Australian market

services. Google is not far behind, and other firms must surely be preparing

but instead entered the Nordic market. In the late 1990s, Netflix pioneered

to offer cable-service streaming videos as soon as the National Broadband

the movie ‘post and play’ market that QuickFlix later emulated in Australia.

Network becomes widespread in Australia. As Blockbuster and other slower-

Netflix has over 100 000 DVD titles to choose from but has turned away

moving competitors learned the hard way, it is a case of disintermediate or

from the physical delivery mode, for which it increased its charges by a

be disintermediated.45

startling 60 per cent. The company adopted an internet-based delivery

❶ Discuss the term disintermediation. Does it really apply in the situation

model, partly explaining Blockbuster’s demise in the United States. This

Quickflix faces? Justify your answer. (Learning Objectives 1, 2 and 3)

distribution system includes delivery to every form of internet-connected

(AACSB: Communication; Use of IT; Reflective Thinking)

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❷ Conduct desk research, then compare and contrast the competitors in

❸ Thinking about the way you use the various mobile technologies

the traditional and digital home-movie rental business in Australia and

mentioned, do you believe there is a long-term market in digitally

New Zealand. Be sure to describe the distribution model the companies

delivered movies on these devices? Why, or why not? Debate this

use. (Learning Objectives 1, 2 and 3) (AACSB: Communication; Use of

with your classmates. (Learning Objectives 1, 2 and 3) (AACSB:

IT; Analytical Thinking)

Communication; Use of IT; Reflective Thinking)

10.3  Marketing analytics at work Weighted averages, breakeven point and inventory turnover UltraKleen Pty Ltd – makers of a wide selection of household cleaning

product manager – Alicia Poh – estimates retail and net selling prices and

products – have developed a 500-mL product entrant in the toilet-care

sales forecasts for the WhiteSwan 500-mL pack as shown in Table 10.4.

market in Australia under the WhiteSwan brand. The retail value of this

Based on product costings she and the new product development team

category is some $116 million in Australia. The toilet-care market continues

have calculated, fixed costs are put at $2 035 000 for the first year and unit

to be led by Reckitt Benckiser, followed by SC Johnson and Pental Products.

variable costs at $0.55.

These three companies hold over 70 per cent of the market in terms of sales

The retailer sales forecast was based on information supplied by the

revenue. This is due to the brand equity held by their brands in the category

various buyers rather than using retailer share of trade calculated by

– Harpic, Duck and White King, respectively.

Nielsen or Roy Morgan Research. After estimating opening and closing

According to UltraKleen’s research, Duck brand’s distinctive plastic bottle with the duck’s neck initially caught many customers’ attention in advertising and on retail shelves in the mid-1990s, and the neck has been adopted by the other brands. That is, the neck enables users to

inventory, the team calculated average inventory at cost for the year to be $1.8 million. Take on Alicia Poh’s role and calculate the following from the information given, ensuring that you use Appendix 3 for guidance.

squirt the thixotropic liquid contents under the toilet-bowl rim, where

❶ What is the formula to calculate breakeven point?

they believe all manner of harmful bacteria live. UltraKleen decided to

❷ Calculate the weighted average net selling price for WhiteSwan’s

accentuate this neck feature as this would highlight their unique selling

500-mL product. ❸ What sales volume (units) will UltraKleen need to sell to break even in

proposition. As Appendix 3’s Spotlight 4 tells us, one indicator of brand equity is

the first year?

distribution level and this aspect, and the level of stockturns retailers would

❹ What is/are the formula(s) for calculating inventory turnover?

find acceptable, have been at the forefront of UltraKleen management’s

❺ What is the inventory turnover figure projected for WhiteSwan’s

minds. Based on marketing research data for the category, the WhiteSwan

500-mL product? What does this tell you?

Table 10.4  WhiteSwan 500-mL pricing and sales forecast RETAILER

Coles

RSP for each retailer stocking WhiteSwan

$2.57

Retail selling price per sales unit Retailer gross margin percentage

ALDI

Others

$2.55

$2.41

$3.49

$2.57

$2.55

$2.41

$3.49

38%

33%

25%

40%

$0.9766

$0.8415

$0.6025

$1.3960

$1.59

$1.71

$1.81

$2.09

Wholesale sell price

n/a

n/a

n/a

$2.09

Wholesaler markup

n/a

n/a

n/a

10%

$1.59

$1.71

$1.81

$1.90

–6.50%

–7.00%

–5.00%

0.00%

$1.49

$1.59

$1.72

$1.90

600 000 (40%)

450 000 (30%)

100 000 (6.7%)

350 000 (23.3)

Retailer gross margin Retailer buy price

Ultraclean’s sell price less warehouse allowance UltraKleen’s net selling price Sales volume (500 mL) forecast

Woolworths

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Part 3  Designing a customer-driven strategy and mix

10.4  Ethical reflection The ethics of multichannel marketing Put yourself in the position of the owner–manager of a marketer of pet

‘O’Possum’ brand. You plan to sell into the current customer base of pet

products – we will call it Bonza Pets. Your company markets through pet

stores, using the Bonza Pets salesforce. As you are not willing to add to

stores in all Australian states except Western Australia, and does not market

salesforce costs or to sell through wholesalers, your current plans entail

in New Zealand. While on a business trip to China, you picked up the agency

setting up a transacting website to market directly to the Western Australian

to market a product throughout Australasia. The product is like a frisbee but

and New Zealand geographic markets.

made from wire and sailcloth, and the Chinese manufacturers will brand

❶ What issues (if any) could arise from using what is in effect a ‘global

it for your company. The product is lightweight, flies through the air and

medium’ to sell ‘locally’? Are these likely to be solely ethical issues?

is easily retrieved by small and medium-sized breeds of dog. You plan to

Explain your answer.

bring the product into Australia and New Zealand and market it under the

References

1 See Martha C Cooper, Douglas M Lambert & Janus D Pagh, ‘Supply chain management: More than a new name for logistics’, International Journal of Logistics Management, 8(1), 1997, pp. 1–14; and Douglas M Lambert, Martha C Cooper & Janus D Pagh, ‘Supply chain management: Implementation issues and research opportunities’, International Journal of Logistics Management, 9(2), 1998, pp. 1–19. 2 See Mary C O’Connor, ‘Can RFID save brick-and-mortar retailers after all?’, Fortune, 16 April 2016, , accessed June 2016. 3 See Liz Tay, ‘Woolworths seeks technology edge after completing $100m Project Galaxy’, Australian Financial Review, 17 March 2015, . 4 Paul Smith, ‘Netflix streams ahead of the rest’, Australian Financial Review, 27 June 2016, p. 31. 5 William Hoffman, ‘Supplying sustainability’, Traffic World, 7 April 2008. 6 Also see Jessica Stillman, ‘Green cred: Sustainability a cost-cutting move for suppliers’, Forbes, 11 December 2012, ; and , and , accessed October 2015. 7 See Andrew S Ross, ‘Forget the elves; Amazon turns to robots this holiday season’, SFGATE, 21 December 2014, ; and ‘Working at Amazon’, January 2015, . 8 See Chris Warry, ‘How to establish an RFID strategy’, pwc, 12 January 2016, , accessed June 2016. 9 Transportation percentages and other data in this section are from Australian Bureau of Statistics, Road Freight Movements, Australia, 12 months ended 31 October 2014, Cat. No. 9223.0, 29 October 2015, ; and Freight Movements, Australia, Summary, Mar 2001, Cat. No. 9220.0, 6 September 2002, ; both accessed June 2016. 10 See Sriram Narayanan, Ann S Marucheck & Robert B Handfield, ‘Electronic data interchange: Research review and future directions’, Decision Sciences, February 2009, p. 121. 11 For the location of Uncle Tobys’ operations in Wahgunyah, see Google Maps . 12 See Cecilie Rohwedder, ‘Turbocharged supply chain may speed Zara past Gap as top clothing retailer’, Globe and Mail, 26 March 2009, p. B12; Felipe Caro & Jeremie Gallien, ‘Inventory management of a fast-fashion retail network’, Operations Research, March–April 2010, pp. 257–73. 13 Franchising facts from ‘Franchising trends’, Australian Financial Review Supplement, 24 June 2016, p. 2. 14 For a listing of the top 50 franchise organisations in Australia, see Inside Retailing, , accessed July 2016. 15 See Sue Mitchell, ‘Metcash results to show how IGA retailers are hitting back’, Australian Financial Review, 20 June 2016, pp. 15, 18.

16 See ‘The Microsoft/Yahoo search alliance: The good, the bad, and the ugly’, The ROI Revolution Blog, , accessed July 2016. 17 Australian government media release, ‘Australia unlimited: The nation’s new brand’, , accessed July 2016; and Australia Unlimited, , accessed July 2016. 18 ‘Barnes & Noble abandons plan to spin off Nook business’, New York Post, 24 February 2015, . 19 Lawrence Frost, ‘Volvo to launch online car sales in marketing shift’, Reuters, 15 December 2014, ; and Diana Kuryiko, ‘Volvo dealers are hungry for the redesigned XC90’, Automotive News, 25 January 2015, . 20 See ‘Just released: P&G 2014 annual report’, P&G Corporate Newsroom, 20 August 2014, ; and ‘Procter & Gamble’, Growth Champions, March 2015, . 21 For more on digital aspects of shopper marketing and omni-channel retailing, see Tim Simmons, ‘The keys to unlocking the retail omni-channel advantage’, Forbes, 1 January 2015, ; Lisa R Melsted, ‘Retailers turn to omnichannel strategies to remain competitive’, Forbes, 9 February 2015, ; and , accessed May 2015; and ‘ZMOT’, Google Digital Services, , accessed October 2015. 22 See Australian Food and Grocery Council, ‘Competitiveness & sustainable growth’, KPMG, June 2014, , accessed July 2016; Chris Pash, ‘MOODY’S: How Aldi is about to steal market share from Woolworths and Coles’, Business Insider, 9 March 2015, , accessed July 2016. 23 See Kantar Worldpanel data, , accessed July 2016; and Phil Wahba, ‘The big cloud hanging over Walmart’s improving sales? Soft e-commerce growth’, Fortune, 17 November 2015, , accessed July 2016. 24 See ‘The Aldi effect: Australia’s changing supermarket scene’, Roy Morgan Research, 22 June 2015, , accessed July 2016; and Australian Food & Grocery Council, State of the Industry 2015, , accessed July 2016. 25 See Wesfarmers’ information at , accessed July 2016. 26 Kath Walters, ‘Costco goes Kosher’, BRW, 11 March 2010. 27 See Costco Wholesale, ‘Corporate profile’, , accessed July 2016.

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Chapter 10  Placement: Customer value fulfilment

28 WalMart, , accessed July 2016; and ‘Supermarket facts’, FMI, , accessed July 2016. 29 For a listing of Australian theme parks, visit , accessed July 2016. 30 Company and franchising information from ‘2014 Franchise Times top 200 franchise systems’, Franchise Times, October 2014, , and ; also see and , accessed October 2015; and Mike King, ‘Australia’s top ten fast food franchises’, , accessed July 2016. 31 See Rajesh Setty, ‘Re-imagining the retail experience: The Audi city store’, Huffington Post, 29 December 2013, , accessed July 2016. 32 See Justine Sharrock, ‘How manufactured smells are making people shop longer and kill better’, BuzzFeed, 15 March 2013, ; Alexandra Sifferlin, ‘My nose made me buy it’, Time, 16 December 2013, ; Sarah Nassauer, ‘Using scent as a marketing tool, stores hope it – and shoppers – will linger’, Wall Street Journal, 20 May 2014, ; and , accessed October 2015. 33 For a discussion of retail pricing and promotion strategies, see Kathleen Seiders & Glenn B Voss, ‘From price to purchase’, Marketing Management, November–December 2005, pp. 38–43. 34 See Shopping Centre Council of Australia data at , accessed July 2016. 35 See Westfield, , accessed July 2016. 36 Thad Rueter, ‘The web’s influence on U.S. retail grows’, Internet Retailer, 25 July 2014, ; and U.S. Census Bureau News, ‘Quarterly retail e-commerce sales, 3rd quarter 2014’, 17 February 2015, . 37 See National Australia Bank, NAB Online Retail Sales Index – In-depth Report, March 2016, , accessed July 2016. 38 See Greg Sterling, ‘Mobile devices: 30 percent of traffic, 15 percent of sales’, Marketing Land, 28 February 2014, ; and Thad Rueter, ‘The web’s influence on U.S. retail grows’, Internet Retailer, 25 July 2014, . 39 Lauren Johnson, ‘Target turns its stores into one big mobile game for the holidays’, Adweek, 2 December 2014, .

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40 Quotation from Chris Zappone, ‘Woolworths finds buyer for Dick Smith’, BusinessDay, 27 September 2012, , accessed December 2012. Also see Elizabeth Knight, ‘The anatomy of Dick Smith’s decline’, Sydney Morning Herald, 6 January 2016, ; Michael Smith, ‘Dick Smith’s joyless Christmas’, Australian Financial Review, 6 January 2016, p. 28; Tony Boyd, ‘Dick Smith receivership a lesson for all’, Australian Financial Review – Chanticleer, 6 January 2016, p. 40; Editorial & Opinion, ‘Dick Smith just bad shopkeeping’, Australian Financial Review, 7 January 2016, p. 38; Patrick Hatch, ‘Dick Smith’s eBay feedback a sign of oncoming meltdown’, Australian Financial Review, 12 January 2016, p. 15; Catie Low, ‘Dick Smith creditors look for answers’, Australian Financial Review, 14 January 2016, p. 15; Dick Smith ‘About us’, , accessed April 2016; and Rae Johnston, ‘Kogan buys Dick Smith’s online store’, Gizmodo, 15 March 2016, . 41 ‘Green MashUP: 7 trends transforming retail sustainability’, The Fifth Estate, 17 February 2015, ; and IKEA, IKEA Group Sustainability Report FY14, 2014, , accessed October 2015. 42 See Deloitte, Global Powers of Retailing 2015 – Embracing Innovation, 2015, , accessed July 2016. 43 See Metcash, , accessed July 2016. 44 See Cushman & Wakefield, ‘New York’s Upper Fifth Avenue world’s most expensive retail street’, 18 November 2015, , accessed July 2016; and Clara Lu, ‘Zara’s secret to retail success – its supply chain’, tradegecko, , accessed July 2016. 45 See Adam Bender, ‘Quickflix seeks to keep Netflix out of Australia’, Computerworld, 17 October 2012; QuickFlix Smart Movies, , accessed July 2016; Susan Young, ‘2014 SUCCESS achiever of the year: Reed Hastings’, SUCCESS, 10 February 2015, , accessed July 2016; Brian Stelter, ‘Netflix grabs a slice of Star Wars’, CNNMoney, 13 February 2014, , accessed July 2016; Mike Snider, ‘Netflix, adding customers and profits, will raise prices’, USA Today, 22 April 2014, , accessed July 2016; Michael Leidtke, ‘With “House of Cards”, Netflix got a winning hand’, Boston Globe, 27 February 2015, , accessed July 2016; Lisa Richwine, ‘Netflix beats forecasts with 62 million streaming subscribers’, Reuters, 15 April 2015, , accessed July 2016; and annual reports and information at , accessed October 2015.

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Chapter

11

Communicating customer value: Advertising and public relations We now forge ahead into the last of the marketing mix tools – promotion. Companies must do more than just create customer value. They must also use promotion to clearly and persuasively communicate that value. This chapter shows that promotion is not a single tool but, rather, a mix of several tools. Ideally, under the concept of integrated marketing communications, the company will carefully coordinate these promotion elements to deliver a clear, consistent and compelling message about the organisation and its products. We begin the chapter by introducing the various promotion mix tools. Next, we examine the rapidly changing communications environment – especially the addition of digital, mobile and social media – and the need for integrated marketing communications. Finally, we look more closely at two of the promotion tools – advertising and public relations. In Chapter 12, we visit two other promotion mix tools – personal selling and sales promotion. Then, in Chapter 13, we explore direct and digital marketing. For a visual representation of the chapter, please see the concept map on the following page.

Learning

Objectives

Learning Objective 1 Define the five promotion mix tools for communicating customer value. The promotion mix  p. 342 Learning Objective 2 Discuss the changing communications landscape and the need for integrated marketing communications. Integrated marketing communications  pp. 342–47 Shaping the overall promotion mix  pp. 347–50 Learning Objective 3 Describe and discuss the main decisions involved in developing an advertising program. Advertising  pp. 350–66 Learning Objective 4 Explain how companies use public relations to communicate with their publics. Public relations  pp. 366–68

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Chapter 11  Communicating customer value: Advertising and public relations

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LO 2 Discuss the changing communications landscape and the need for integrated marketing communications. (pp. 342–50)

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Describe and discuss the main decisions involved in developing an advertising program. (pp. 350–66)

P u b li c

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Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488611841—Armstrong/Principles of Marketing 7e

pact

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LO 1 Define the five promotion mix tools for communicating customer value. (p. 342)

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Part 3  Designing a customer-driven strategy and mix

The promotion mix (p. 342) promotion mix (marketing communications mix)

The specific blend of advertising, public relations, personal selling, sales promotion and direct-marketing tools that the company uses to persuasively communicate customer value and build customer relationships.

A company’s total promotion mix – also called its marketing communications mix – consists of the specific blend of advertising, public relations, personal selling, sales promotion and direct-marketing tools that the company uses to persuasively communicate customer value and build customer relationships. The five major promotion tools are defined as follows:1 • Advertising: Any paid form of non-personal presentation and promotion of ideas, goods or services by an identified sponsor. • Sales promotion: Short-term incentives to encourage the purchase or sale of a product or service. • Personal selling: Personal presentation by the firm’s salesforce for the purpose of making sales and building customer relationships. • Public relations: Building good relations with the company’s various publics by obtaining favourable publicity, building up a good corporate image and handling or pre-empting unfavourable rumours, stories and events. • Direct and digital marketing: Interacting directly with carefully targeted individual consumers and communities to both obtain an immediate response and build lasting customer relationships. Each category involves specific promotional tools used to communicate with consumers. For example, advertising includes broadcast, print, internet, outdoor and other forms. Sales promotion includes discounts, coupons, displays and demonstrations. Personal selling includes sales presentations, trade shows and incentive programs. Public relations includes press releases, sponsorships, special events and web pages. And direct marketing includes catalogues, telephone marketing, kiosks, the internet, mobile phones and more. At the same time, marketing communication goes beyond these specific promotion tools. The product’s design and price, the shape and colour of its packaging and the stores that sell the product all communicate something to buyers. Thus, although the promotion mix is the company’s primary communication activity, the entire marketing mix – promotion and product, price, place, people, process and physical evidence – must be coordinated for greatest impact.

Integrated marketing communications (pp. 342–47)

In past decades, marketers perfected the art of mass marketing – selling highly standardised products to masses of customers. In the process, they developed effective mass-media communications techniques to support these strategies. Large companies now routinely invest millions of dollars in television, magazine or other mass media advertising, reaching millions of customers with a single ad. Today, however, marketing managers face some new marketing communications realities. Perhaps no other area of marketing is changing so profoundly as marketing communications, creating both exciting and scary times for marketing communicators.

The new marketing communications model Several major factors are changing the face of today’s marketing communications. First, consumers are changing. In this digital, wireless age, they are better informed and more communications empowered. Rather than relying on marketer-supplied information, they can use the internet and other technologies to seek out information on their own. More than that, they can more easily connect with other consumers to exchange brand-related information or even to create their own marketing messages. Second, marketing strategies are changing. As mass markets have fragmented, marketers are shifting away from mass marketing. More and more, they are developing focused marketing programs designed to build closer relationships with customers in more narrowly defined micromarkets.

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Chapter 11  Communicating customer value: Advertising and public relations

Finally, sweeping changes in digital technology are causing remarkable changes in the ways in which companies and customers communicate with each other. The digital age has spawned a host of new information and communication tools – from smartphones and tablets to pay-TV, and the many faces of the internet (email, social networks, brand websites, online communities, the mobile web and so much more). Just as mass marketing once gave rise to a new generation of mass media communications, the new digital and social media have given birth to a more targeted, social and engaging marketing communications model. Although television, magazines, newspapers and other mass media remain very important, their dominance is declining. In their place, advertisers are now adding a broad selection of more specialised and highly targeted media to reach smaller customer segments with more personalised, interactive content. Today, media range from specialty television channels and made-for-the-web videos to online ads, email and texting, blogs, mobile and online catalogues, and a burgeoning list of social media. Such media have taken marketing by storm. Some advertising industry experts are even predicting that the old mass-media communications model will eventually become obsolete. Mass media costs are rising, audiences are shrinking, ad clutter is increasing and viewers are gaining control of message exposure through technologies such as video streaming or digital recorders that let them skip past disruptive television commercials. As a result, marketers are shifting everlarger portions of their marketing budgets away from old-media mainstays and moving them to online, social, mobile and other new media. Despite this shift, television is still a dominant advertising medium, attracting over one-quarter of all media expenditure in Australia and New Zealand (see Table 11.1). Spending in magazines and newspapers has declined while, at the same time, radio spend has increased. Meanwhile, digital media (internet and mobile) have come from nowhere during the past several years to account for roughly one-third of advertising spending in Australia and New Zealand, replacing television as the go-to medium. By one estimate, companies around the world now invest an average of 40 per cent of their media budgets on internet and mobile media.2 The growth in mobile media spend has been staggering. As consumers spend more time on their mobile devices, marketers spend more money on mobile advertising. One enormously successful campaign saw Australian brand Rip Curl launch a GPS watch, IOS app and a desktop website that allowed surfers to share their surf. The watch tracks surfer moves on the waves using GPS while, on the beach, surfers relive their experience by syncing with their IOS device and adding extra details, such as photos, surf conditions and the board they rode. Surfers can check-in with their mates and compare their stats. Importantly for Rip Curl, each ride that is logged is shared on social channels. Stories about Rip Curl Search have reached over 30 million people, and social media channels – including Instagram, Pinterest and Twitter – have been abuzz with surfing superstars, such as Alana Blanchard and Mick Fanning, wearing the watch #SearchGPS. The new product and mobile media campaign has been a massive commercial success, with Rip Curl profitability growing while other big surfing brands are becoming less relevant to their surfer market.3 In the new marketing communications world, rather than the old approaches that interrupt customers and force-feed them mass messages, the new media formats let marketers reach smaller communities of consumers in more engaging ways. For example, just think about what is happening to television viewing these days. Consumers can now watch their favourite programs on just about anything with a screen – on televisions, but also on laptops, mobile phones or tablets. And they can choose to watch programs whenever and wherever they wish, often without commercials. Increasingly, some programs, ads and videos are being produced only for online viewing. Despite the shift towards digital media, however, traditional mass media still capture a sizable share of the promotion budgets of most major marketing firms, a fact that is unlikely to change quickly. Thus, rather than the old-media model collapsing completely, most marketers foresee a shifting mix of both traditional mass media and online, mobile and social media that engage more-targeted consumer communities in a more personalised way. In the end, regardless of the communications channel, the key is to integrate all of these media in a way that best engages customers, communicates the brand message and enhances the customer’s brand experiences.

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Table 11.1  Advertising spend by main media, Australia and New Zealand 2003–2015 (US$, current prices) Australia (US$m) All media

Newspapers

Magazines

Television

Radio

Cinema

Outdoor

Internet

Mobile

2003

5 880.0

2 273.9

582.9

2 085.8

525.7

47.0

211.6

153.1

2004

7 457.8

2 805.3

720.0

2 641.7

680.9

60.0

264.6

285.3

2005

8 308.6

3 060.7

817.0

2 836.0

753.9

70.2

297.2

473.5

2006

8 522.5

2 966.6

818.9

2 832.7

766.0

70.8

313.7

753.8

2007

10 526.8

3 608.9

946.3

3 451.9

906.0

85.6

401.8

1 126.3

2008

10 911.9

3 666.8

947.1

3 440.6

915.0

89.0

418.8

1 434.6

2009

9 266.3

2 864.5

730.9

2 989.2

803.2

76.1

343.1

1 459.4

2010

12 193.0

3 557.3

873.8

4 092.3

1 010.3

100.3

481.6

2 077.2

2011

13 619.6

3 681.9

918.3

4 481.9

1 144.1

89.4

560.0

2 744.0

27.7

2012

13 621.9

3 136.7

766.7

4 431.7

1 152.7

101.4

571.8

3 460.9

89.3

2013

12 961.4

2 434.1

657.5

4 245.2

1 090.6

108.2

577.4

3 848.5

337.1

2014

12 403.7

1 908.4

537.8

3 895.4

1 045.1

94.5

597.2

4 325.4

686.9

2015

11 184.3

1 485.3

381.9

3 227.9

915.5

95.0

560.2

4 518.5

1 010.4

13%

3%

29%

8%

1%

5%

40%

9%

Cinema

Outdoor

Internet

Mobile

New Zealand (US$m) All media

Newspapers

Magazines

Television

Radio

2003

1 025.5

400.1

112.7

343.8

130.1

7.0

27.3

4.6

2004

1 313.7

523.6

147.8

426.2

163.7

8.6

33.8

9.9

2005

1 506.0

584.4

183.1

468.9

180.2

7.7

50.7

31.0

2006

1 378.0

525.3

162.8

415.7

174.4

6.5

51.2

42.2

2007

1 642.0

607.1

188.9

480.6

201.4

7.3

57.3

99.3

2008

1 546.4

534.2

175.0

454.8

188.4

6.3

52.0

135.8

2009

1 208.0

389.2

135.6

356.1

147.4

3.7

42.5

133.6

2010

1 462.3

451.8

157.8

437.4

173.7

5.8

50.4

185.5

2011

1 638.6

459.8

165.1

488.2

195.1

5.5

65.6

259.2

2012

1 670.8

448.0

170.1

497.5

200.9

5.7

54.3

294.3

2013

1 784.3

417.4

173.0

519.9

219.0

6.6

62.3

386.1

4.6

2014

1 884.3

401.5

175.9

509.4

232.3

7.5

68.9

488.9

10.1

2015

1 754.3

346.6

146.4

433.1

207.1

7.0

55.8

558.3

18.9

20%

8%

25%

12%

0%

3%

32%

1%

Source: Adapted from Warc, , accessed October 2016, based on data from Commercial Economic Advisory Service of Australia () and Advertising Standards Authority New Zealand ().

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As the marketing communications environment shifts, so will the role of marketing communicators. Rather than just creating and placing ‘TV ads’ or ‘print ads’ or ‘Snapchat branded story ads’, many marketers now view themselves more broadly as content marketing managers. As such, they create, inspire and share brand messages and conversations with and among customers across a fluid mix of paid, owned, earned and shared communication channels. These channels include media that are both traditional and new, as well as controlled and not controlled (see Marketing in action 11.1).

The need for integrated marketing communications

content marketing

Creating, inspiring and sharing valuable, relevant and consistent brand messages and conversations with and among consumers across a mix of paid, owned, earned and shared media channels.

integrated marketing communications (IMC) Careful integration of a company’s many communications channels to deliver a clear, consistent and compelling message about the organisation and its brands.

IX OF PRO NDED M MO BLE TIO Y L NT L U F O E Pe rso na l

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CONSISTENT, CLEAR AND COMPELLING COMPANY AND BRAND MESSAGES

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The shift towards a richer mix of media and content approaches poses a problem for marketers. Consumers today are bombarded by commercial messages from a broad range of sources. But all too often, companies fail to integrate their various communication channels. Mass media ads say one thing whereas the company’s internet site, emails, social media pages or videos posted on YouTube may say something altogether different. One problem is that marketing content often comes from different parts of the company. For example, advertising messages are prepared by the company’s advertising department while public relations messages, sales promotion events, and online or social media content are often prepared by other departments within the company. Additionally, these different departments may also engage external agencies to assist with content development. However, consumers do not distinguish between content sources the way marketers do. In the consumer’s mind, brand-related content from different sources – whether a television ad, in-store display, mobile app or a friend’s social media post – all merge into a single message about the brand or company. Conflicting content from these different sources can result in confused company images, brand positions and customer relationships. Thus, the explosion of online, mobile and social media marketing presents tremendous opportunities but also big challenges. It gives marketers rich new tools for understanding and engaging customers. At the same time, it complicates and fragments overall marketing communications. The challenge is to bring it all together in an organised way. Today, more companies are adopting the concept of integrated marketing communications (IMC). Under this concept, as illustrated in Figure 11.1, the company

345

D ir e c l t a n d d i g it a m a r k e ti n g

Figure 11.1  Integrated marketing communications

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Part 3  Designing a customer-driven strategy and mix

Marketing in Action 11.1

It’s content marketing, not advertising

In the good old days, life seemed so simple for advertisers. When a brand needed

Shared media – media shared by consumers with other consumers, such as

an advertising campaign, everybody knew what that meant. The brand team and

social media, blogs, mobile media and viral channels, as well as traditional

ad agency came up with a creative strategy, developed a media plan, produced

word of mouth.

and placed a set of television commercials and magazine or newspaper ads,

In the past, advertisers have focused on traditional paid (broadcast, print)

and perhaps issued a press release to stir up some news. But in these digital

or earned (public relations) media. Now, however, content marketers are rapidly

times, the practice of placing ‘advertisements’ in well-defined ‘media’ within the

adding the new digital generation of owned (websites, blogs, brand communities)

tidy framework of a carefully managed ‘advertising campaign’ just doesn’t work

and shared (online social, mobile, email) media. Whereas a successful paid ad

anymore.

used to be an end in itself, marketers are now developing integrated marketing

Instead, the lines are rapidly blurring between traditional advertising and

content that leverages the combined power of all the POES channels. Thus, many

new digital content. To be relevant, today’s brand messages must be social,

television ads are often not just ‘TV ads’ anymore. They are ‘video content’ you

mobile, interactively engaging and multi-platformed. Says one industry insider:

might see anywhere – on a television screen but also on a tablet or phone. Other

‘Today’s media landscape keeps getting more diverse – it’s broadcast, cable, and

video content looks a lot like television advertising but was never intended for

streaming; it’s online, tablet, and smartphone; it’s video, rich media, social media,

television, such as made-for-online videos posted on websites or social media.

branded content, banners, apps, in-app advertising, and interactive technology

Similarly, printed brand messages and pictures no longer appear only in carefully

products.’

crafted magazine ads or catalogues. Instead, such content, created by a variety of

The new digital landscape has called into question the very definition of advertising. ‘What is advertising anyway?’, asks one provocative headline. Call

sources, pops up in anything from formal ads and online brand pages to mobile and social media and independent blogs.

it whatever you want, admonishes another, but ‘Just don’t call it advertising.’

The new ‘content marketing’ campaigns look a lot different from the old

Instead, according to many marketers these days, it’s ‘content marketing’ – that

‘advertising’ campaigns. For example, Coles Supermarket has a content marketing

is, creating and distributing a broad mix of compelling content that engages

strategy that began with a magazine. Today, the Coles magazine is the most read

customers, builds relationships with and among them, and moves them to action.

in Australia, with a circulation of over 1.5 million (surpassing magazines such as

To feed today’s digital and social media machinery and to sustain ‘always-on’

The Australian Women’s Weekly, Better Homes & Gardens and Women’s Day).

consumer conversations, brands need a constant supply of fresh content across a

The  magazine solves a real problem for its readers . . .: ‘What will I have for

breadth of traditional and digital platforms.

dinner?’

Many advertisers and marketers now view themselves more broadly as content marketing managers who create, inspire, share and curate marketing content – both their own content and that created by consumers and others. Rather than using traditional media breakdowns, they subscribe to a new framework that builds on how and by whom marketing content is created, controlled and distributed. The new classification identifies four major types of media: paid, owned, earned and shared (POES): Paid media – promotional channels paid for by the marketer, including traditional media (such as television, radio, print or outdoor) and online and digital media (paid search ads, mobile ads, email marketing, or web and social media display ads and sponsored content). Owned media – promotional channels owned and controlled by the company, including company websites, corporate blogs, owned social media sites, proprietary brand communities, salesforces and events. online video sites and other media not directly paid for or controlled by the

Partnering with taste.com.au allows Coles to share content and make connections with an even wider audience.

marketer but which incorporate the content because of viewer, reader or user

www.taste.com.au/NewsLifeMedia 2016

Earned media – PR media channels, such as television, newspapers, blogs,

interest.

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But Coles content marketing strategy does not stop with its magazine. The supermarket has its own YouTube channel, ‘At Home with Coles’, which is hosted by celebrity chef Curtis Stone, as well as social media platforms on Facebook, Instagram and Twitter. Not stopping there, Coles have established an online partnership with taste.com.au, thereby solving another customer problem: filling the shopping list. By managing content across multiple platforms, Coles is able to reach out to millions of Australians with valuable,

Sources: Randall Rothenberg, ‘What is advertising anyway?’, Ad Week, 16 September 2013, p. 15; Peter Himler, ‘Paid, earned & owned: Revisited’, The Flack, 21 June 2011, ; ; ‘Customer-driven content at Coles’, Marketing, 2 September 2016, ; ‘Why Coles mag?’, Coles, ; as well as various social media sites, including , , , and ; accessed October 2016.

relevant content, creating consistent brand messages and conversations that

Questions

impact brand loyalty and company performance.

❶ Take a look online, and classify the content marketing efforts of Coles

So, we can’t just call it ‘advertising’ anymore.Today’s shifting and sometimes

by the four main types of media: paid, owned, earned and shared.

chaotic marketing communications environment calls for more than simply

❷ When advertisers develop content marketing strategies, one of the big

creating and placing ads in well-defined and controlled media spaces. Rather,

challenges is to make the content relevant. Take a look at the websites

today’s marketing communicators must be marketing content strategists,

of a few of your favourite brands. How are these marketers making

creators, connectors and catalysts who manage brand conversations with and among customers and help those conversations catch fire across a fluid

content relevant? ❸ Television advertising is still a considerable part of total advertising

mix of channels. That’s a tall order, but with today’s new thinking, anything is

expenditure. How can television be used to support content marketing

POES-ible!

efforts?

carefully integrates its many communications channels to deliver a clear, consistent and compelling message about the organisation and its brands. Often, different media play unique roles in engaging, informing and persuading consumers. For example, a recent study showed that more than two-thirds of advertisers and their agencies are planning video ad campaigns that stretch across multiple viewing platforms, such as traditional television, and digital, mobile and social media. Such video convergence combines television’s core strength – vast reach – with digital’s better targeting, interaction and engagement.4 These varied media and roles must be carefully coordinated under the overall integrated marketing communications plan. Coles Supermarkets’ content marketing shows the benefits of a well-integrated marketing communications effort (see Marketing in action 11.1). The company pays great attention to integrating its traditional media use with its content marketing, internet and mobile media strategies and its visual identity. In-store, the market experience brings the integrated media strategy to life with strong visuals, as well as links to online and magazine content. Everything is coordinated down to the smallest detail – on a recent Australia Day, the in-store soundtrack was drawn from the top-10 Aussie songs. Through its integrated communications, Coles Supermarkets continues to do well in the highly competitive grocery market.5

Shaping the overall promotion mix (pp. 347–50) The concept of integrated marketing communications suggests that the company must blend the promotion tools carefully into a coordinated promotion mix. But how does the company determine what mix of promotion tools it will use? Companies within the same industry differ greatly in the design of their

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promotion mixes. For example, Avon spends most of its promotion funds on personal selling and direct (catalogue) marketing, whereas competitor L’Oréal spends heavily on consumer advertising. We now look at factors that influence the marketer’s choice of promotion tools.

The nature of each promotion tool Each promotion tool has unique characteristics and costs. Marketers must understand these characteristics in shaping the promotion mix.

Advertising Advertising can reach masses of geographically dispersed buyers at a low cost per exposure, and it enables the seller to repeat a message many times. For example, television advertising can reach huge audiences. Over 3.2 billion people are estimated to have tuned in to watch the 2014 World Cup live; in Australia, over 4 million Aussie rules fans watched the 2016 AFL Grand Final; and each week around 1 million people tune in to watch reality television shows such as The Block, Married at First Sight and The Bachelor. For companies that want to reach a mass audience, television is the place to be.6 In addition to the size of the potential audience it can reach, large-scale advertising says something positive about the seller’s size, popularity and success. Because of advertising’s public nature, consumers tend to view advertised products as being more legitimate. Advertising is also very expressive – it allows the company to dramatise its products through the artful use of visuals, print, sound and colour. On the one hand, advertising can be used to build up a long-term image for a product (such as Coca-Cola ads). On the other hand, advertising can trigger quick sales (as when Forty Winks advertises weekend specials). Advertising also has some shortcomings. Although it reaches many people quickly, advertising is impersonal and cannot be as directly persuasive as can company salespeople. For the most part, advertising can carry on only a one-way communication with the audience, and the audience does not feel it has to pay attention or respond. In addition, advertising can be very costly. Although some advertising methods, such as newspaper and radio advertising, can be done on smaller budgets, other forms, such as network television advertising, require very large budgets.

Personal selling Personal selling is the most effective tool at certain stages of the buying process, particularly in building up buyers’ preferences, convictions and actions. It involves personal interaction between two or more people, so each person can observe the other’s needs and characteristics and make quick adjustments. Personal selling also allows all kinds of customer relationships to spring up, ranging from matter-of-fact selling relationships to personal friendships. An effective salesperson keeps the customer’s interests at heart in order to build a long-term relationship by solving customer problems. Finally, with personal selling, the buyer usually feels a greater need to listen and respond, even if the response is a polite ‘No, thank you’. These unique qualities come at a cost, however. A salesforce requires a longer-term commitment than does advertising – advertising can be increased or decreased relatively easily, Personal selling: With personal selling, the customer feels a greater but salesforce size is harder to change. Personal selling is need to listen and respond, even if the response is a polite ‘No, also the company’s most expensive promotion tool, costing thank you’. US companies as much as US$600 on average per sales call, © Arne9001 | Dreamstime.com

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depending on the industry.7 US and Australian firms spend up to three times as much on personal selling as they do on advertising.

Sales promotion Sales promotion includes a wide assortment of tools – coupons, contests, cents-off deals, premiums and others – all of which have many unique qualities. They attract consumer attention, offer strong incentives to purchase, and can be used to dramatise product offers and to boost sagging sales. Sales promotions invite and reward quick response. Whereas advertising says, ‘Buy our product’, sales promotion says, ‘Buy it now’. Sales promotion effects are often short-lived, however, and often are not as effective as advertising or personal selling in building long-run brand preference and customer relationships.

Public relations Public relations is very believable – news stories, features, sponsorships and events seem more real and believable to readers than ads do. Public relations can also reach many prospects who avoid salespeople and advertisements – the message gets to the buyers as ‘news’, rather than as a sales-directed communication. And, as with advertising, public relations can dramatise a company or product. Marketers tend to underuse public relations or to use it as an afterthought. Yet, a well-thought-out public relations campaign used with other promotion mix elements can be very effective and economical.

Direct and digital marketing Although there are many forms of direct marketing – direct mail and catalogues, online marketing, telephone marketing and others – they all share four distinctive characteristics. Direct marketing is less public: The message is normally directed to a specific person. Direct marketing is immediate and personalised: Messages can be prepared very quickly and can be tailored to appeal to specific consumers. Finally, direct marketing is interactive: it allows a dialogue between the marketing team and the consumer, and messages can be altered depending on the consumer’s response. Thus, direct marketing is well suited to highly targeted marketing efforts and to building one-to-one customer relationships.

Promotion mix strategies Marketers can choose from two basic promotion mix strategies – push promotion or pull promotion. Figure 11.2 contrasts the two strategies. The relative emphasis given to the specific promotion tools differs for push and pull strategies. A push strategy involves ‘pushing’ the product through marketing channels to final consumers. The producer directs its marketing activities (primarily personal selling and trade promotion) towards channel members to induce them to carry the product and to promote it to final consumers. Using a pull strategy, the producer directs its marketing activities (primarily advertising and consumer promotion) towards final consumers to induce them to buy the product. For example, Unilever promotes its Lynx grooming products directly to its young male target market using television and print ads, a brand website, its YouTube channel, and other channels. If the pull strategy is effective, consumers will then demand the brand from retailers, such as Woolworths and Coles, who will in turn demand it from Unilever. Thus, under a pull strategy, consumer demand ‘pulls’ the product through the channels. Some industrial-goods companies use only push strategies; some direct-marketing companies use only pull strategies. However, most large companies use some combination of both. For example, Unilever spends nearly US$8 billion worldwide each year on consumer marketing and sales promotions to create brand preference and to pull customers into stores that carry its products.8 At the same time, it uses its own and distributors’ salesforces and trade promotions to push its brands through the channels so that these products will be available on store shelves when consumers come calling.

push strategy

A promotional strategy using the salesforce and trade promotions to push the product through marketing channels to final consumers. The producer promotes the product to channel members who, in turn, promote it to final consumers.

pull strategy

The producer directs its marketing activities (primarily advertising and consumer promotion) towards final consumers to induce them to buy the product.

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Producer

Producer marketing activities (personal selling, trade promotion, other)

Retailers and wholesalers

Reseller marketing activities (personal selling, advertising, sales promotion, other)

Consumers

Push strategy

Producer

Demand

Retailers and wholesalers

Demand

Consumers

Producer marketing activities (consumer advertising, sales promotion, other) Pull strategy

Figure 11.2  Push versus pull promotional strategy

Companies consider many factors when designing their promotional mix strategies, including type of product/market and the product life-cycle stage. For example, the importance of different promotion tools varies between consumer markets and business markets. Business-to-consumer companies usually ‘pull’ more, putting more of their funds into advertising, followed by sales promotion, personal selling and then public relations. In contrast, business-to-business marketers tend to ‘push’ more, putting more of their funds into personal selling, followed by sales promotion, advertising and public relations. In general, personal selling is used more heavily with expensive and risky goods and in markets with fewer and larger sellers. Now that we have examined the concept of integrated marketing communications and the factors that firms consider when shaping their promotion mixes, we turn our focus in the next section to look more closely at the specific marketing communications tools.

Linking the concepts Pause here for a few minutes. Flip back through the chapter and link the parts of the chapter you have read so far. ● How does the integrated marketing communications (IMC ) concept relate to the promotion mix concept? ● How has the changing communications environment affected the ways in which companies communicate with you about

their products and services? If you were in the market for a new car, where might you hear about various available models? Where would you search for information?

Advertising (pp. 350–66) Advertising can be traced back to the very beginnings of recorded history. Archaeologists working in the countries around the Mediterranean Sea have dug up signs announcing various events and offers. The Romans painted walls to announce gladiator fights, and the Phoenicians painted pictures on large

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rocks along parade routes to promote their wares. During the golden age in Greece, town criers announced the sale of cattle, crafted items and even cosmetics. Modern advertising, however, is a far cry from these early efforts. Today, advertising includes any paid form of non-personal presentation and promotion of ideas, goods or services by a sponsor. Australian and New Zealand advertisers now run up an estimated combined annual advertising bill of about US$14.5 billion; worldwide ad spending exceeds an estimated US$545 billion. Procter & Gamble, the world’s largest advertiser, spent more than US$4.6 billion on advertising within the United States and US$11.5 billion worldwide.9 Although advertising is used mostly by businesses, a wide range of not-for-profit organisations, professionals and social agencies also use advertising to promote their causes to various target publics. Advertising is a good way to inform and persuade, whether the purpose is to sell Coca-Cola worldwide, to help smokers kick the habit or to get consumers in a developing nation to use birth control. Marketing management must make four important decisions when developing an advertising program (see Figure 11.3): (1) setting advertising objectives, (2) setting the advertising budget, (3) developing advertising strategy (message decisions and media decisions) and (4) evaluating advertising campaigns. We discuss each of these advertising decisions below.

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advertising

Any paid form of nonpersonal presentation and promotion of ideas, goods or services by an identified sponsor.

Setting advertising objectives The first step is to set advertising objectives. These objectives should be based on past decisions about the target market, positioning and the marketing mix, which define the job that advertising must do in the total marketing program. The overall advertising objective is to help build customer relationships by communicating customer value. Here, we discuss specific advertising objectives. An advertising objective is a specific communication task to be accomplished with a specific target audience during a specific period of time. Advertising objectives can be classified by primary purpose – whether the aim is to inform, persuade or remind. Table 11.2 lists examples of each of these specific objectives. Informative advertising is used heavily when introducing a new product category. In this case, the objective is to build primary demand. Thus, early producers of HDTVs first had to inform

advertising objective

A specific communication task to be accomplished with a specific target audience during a specific period of time.

MESSAGE DECISIONS Message strategy Message execution

OBJECTIVES SETTING

BUDGET DECISIONS

Communication objectives Sales objectives

Affordable approach Per cent of sales Competitive parity Objective and task

ADVERTISING EVALUATION MEDIA DECISIONS Reach, frequency, impact Major media types Specific media vehicles Media timing

Communication impact Sales and profit impact Return on advertising

Figure 11.3  Major advertising decisions

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Table 11.2  Possible advertising objectives Informative advertising Communicating customer value

Suggesting new uses for a product

Building a brand and company image

Informing the market of a price change

Telling the market about a new product

Describing available services and support

Explaining how a product works

Correcting false impressions

Persuasive advertising Building brand preference

Persuading customers to purchase now

Encouraging switching to a brand

Persuading customers to receive a sales call

Changing customers’ perception of product value

Convincing customers to tell others about the brand

Reminder advertising Maintaining customer relationships

Reminding consumers where to buy the product

Reminding consumers that the product may be needed in the near future

Keeping the brand in customer’s mind during off-seasons

consumers of the image quality and convenience benefits of the new product. Persuasive advertising becomes more important as competition increases. Here, the company’s objective is to build selective demand. For example, once HDTVs became established, Sony began trying to persuade consumers that its brand offered the best quality for their money. Such advertising wants to engage customers and create a feeling of community among the consumers of the brand. Some persuasive advertising has become comparative advertising (or attack advertising), in which a company directly or indirectly compares its brand with one or more other brands. You see examples of comparative advertising in almost every product category, ranging from sports drinks, coffee and soup to computers, car rentals and credit cards. For example, in a series of ads, ALDI compares a competitor and an ALDI brand, and uses the tag line, ‘Like Brands. Only Cheaper’. The ads feature ‘experts’, including a caveman judging aluminium foil, a seagull judging tomato sauce and a vampire judging sunscreen, with each ‘judge’ announcing they like both brands while the ad prominently displays a price comparison. Each ad emphasises the quality of the ALDI brand while at the same time establishing it to be cheaper.10 Advertisers should use comparative advertising with caution. All too often, such ads invite competitor responses, resulting in an advertising war that neither competitor can win. Upset competitors might also take more drastic action, such as filing complaints with the self-regulatory Advertising Claims Board of the Advertising Standards Bureau or even filing false-advertising lawsuits.11 Reminder advertising is important for mature products – it helps to maintain customer relationships and keep consumers thinking about the product. Expensive Coca-Cola television ads primarily build and maintain the Coca-Cola brand relationship, rather than inform or Reminder advertising: Catalogues and VIP customer email persuade customers to buy in the short run. messages are used as reminders for shoppers to visit stores. Advertising’s goal is to help move consumers through the buying © Joern Wolter/vario Images/age Fotostock process. Some advertising is designed to prompt people to immediate

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action. For example, a direct-response television ad by Weight Watchers urges consumers to pick up the phone and sign up right away, and a Spotlight VIP Club catalogue encourages immediate store visits. However, many other ads focus on building or strengthening long-term customer relationships. For example, a Nike television ad in which well-known athletes undergo extreme challenges while wearing their Nike gear never directly asks for a sale. Instead, the goal is to change the way customers think or feel about the brand.

Setting the advertising budget

After determining its advertising objectives, the company next sets its advertising budget for each product. Here, we look at four common methods used to set the total budget for advertising: (1) the affordable method, (2) the percentage-of-sales method, (3) the competitive-parity method and (4) the objective-andtask method.

Affordable method Some companies use the affordable method, setting the promotion budget at the level they think the company can afford. Small businesses often use this method, reasoning that the company cannot spend more on advertising than it has. When using this method, companies start with total revenues, deduct operating expenses and capital outlays, and then devote some portion of the remaining funds to advertising. Unfortunately, this method of setting budgets completely ignores the effects of promotion on sales. It tends to place promotion last among spending priorities, even in situations in which advertising is critical to the firm’s success. It leads to an uncertain annual promotion budget, which makes long-range market planning difficult. Although the affordable method can result in overspending on advertising, it more often results in underspending.

advertising budget

The dollars and other resources allocated to a product or company advertising program.

affordable method

The promotion budget is set at the level the company can afford.

Percentage-of-sales method Other companies use the percentage-of-sales method, setting their promotion budget at a certain percentage of current or forecasted sales. Alternatively, they budget a percentage of the unit sales price. The percentage-of-sales method has advantages. It is simple to use and helps management to consider the relationships between promotion spending, selling price and profit per unit. Despite these claimed advantages, however, the percentage-of-sales method has little to justify it. It wrongly views sales as the cause of promotion, rather than as the result. Although studies have found a positive correlation between promotional spending and brand strength, this relationship often turns out to be effect and cause, not cause and effect. Stronger brands with higher sales can afford the biggest ad budgets. Thus, the percentage-of-sales budget is based on availability of funds, rather than on opportunities. It may prevent the increased spending sometimes needed to turn around falling sales. Because the budget varies with year-to-year sales, long-range planning is difficult. Finally, the method does not provide any basis for choosing a specific percentage, except what has been done in the past or what competitors are doing.

percentage-ofsales method

The promotion budget is set at a certain percentage of current or forecasted sales.

Competitive-parity method Still other companies use the competitive-parity method, setting their promotion budgets to match competitors’ outlays. They monitor competitors’ advertising or access industry promotion spending estimates from publications or trade associations, and then set their budgets based on the industry average. Two arguments support this method. First, competitors’ budgets represent the collective wisdom of the industry. Second, spending what competitors spend helps prevent promotion wars. Unfortunately, neither argument is valid. There are no grounds for believing that the competition has a better idea of what a

competitiveparity method

The promotion budget is set to match competitors’ outlays.

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company should be spending on promotion than does the company itself. Companies differ greatly, and each has its own special promotion needs. Finally, there is no evidence that budgets based on competitive parity prevent promotion wars.

Objective-and-task method objective-and-task method The promotion budget is set by defining specific objectives and determining the promotional tasks required to achieve these objectives. The budget is set to cover the costs of these tasks.

The most logical budget-setting method is the objective-and-task method, whereby the company sets its promotion budget based on what it wants to accomplish with promotion. This budgeting method entails (1) defining specific promotion objectives, (2) determining the tasks needed to achieve these objectives and (3) estimating the costs of performing these tasks. The sum of these costs is the proposed promotion budget. The advantage of the objective-and-task method is that it forces management to spell out its assumptions about the relationship between dollars spent and promotion results. But it is also the most difficult method to use. Often, it is difficult to determine which specific tasks will achieve stated objectives. For example, suppose Microsoft wants 75 per cent awareness for the latest version of its Surface tablet during the threemonth introductory period. What specific advertising messages and media schedules should Microsoft use to attain this objective? How much would these messages and media schedules cost? Microsoft management must consider such questions, even though they are difficult to answer. No matter what method is used, setting the advertising budget is no easy task. John Wanamaker, the department store magnate, once said: ‘I know that half of my advertising is wasted, but I don’t know which half. I spent $2 million for advertising, and I don’t know if that is half enough or twice too much.’ As a result of such thinking, advertising is one of the easiest budget items to cut when economic times get tough. Cuts in brand-building advertising appear to do little short-term harm to sales. For example, in the wake of the 2008–09 recession, Australian and New Zealand advertising expenditures dropped by 15 per cent and 22 per cent, respectively, over the previous year (see Table 11.1). In the long run, however, slashing ad spending risks causing long-term damage to a brand’s image and market share. In fact, companies that can maintain or even increase their advertising spending while competitors are decreasing theirs can gain competitive advantage.

advertising strategy

Developing advertising strategy

Advertising strategy consists of two main elements: creating advertising messages and selecting

Consists of two main elements: creating advertising messages and selecting advertising media.

advertising media. In the past, companies often viewed media planning as being secondary to the messagecreation process. The creative department first created good advertisements, and then the media department selected and purchased the best media for carrying these advertisements to desired target audiences. This often caused friction between creatives and media planners. Today, however, soaring media costs, more-focused target-marketing strategies and the blizzard of new media have promoted the importance of the media-planning function. The decision about which media to use for an ad campaign – television, magazines, mobile phones, a website or email – is now sometimes more critical than the creative elements of the campaign. Also, brand content is now often co-created through interactions with and among consumers. As a result, advertisers are increasingly orchestrating a closer harmony between their messages and the media that deliver them. The goal is to create and manage brand content across a full range of media, whether they are paid, owned, earned or shared (see Marketing in action 11.1).

Creating the advertising message and brand content No matter how big the budget, advertising can succeed only if advertisements gain attention and communicate well. Good advertising messages are especially important in today’s costly and cluttered advertising environment. Today, Australians and New Zealanders have the choice of over 100 free-to-air and subscription television channels, and consumers have more than 2500 magazines from which to choose.12 Add the countless radio stations and a continuous barrage of catalogues, direct mail, email and online ads,

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and out-of-home media, and consumers are being bombarded with ads at home, at work and at all points in between. As a result, consumers are exposed to many advertisements almost every waking moment. In the United States, it is estimated that consumers see as many as 5000 of these messages every day. The big question, of course, is how many of these ads do consumers actually notice. One expert puts the number at fewer than 100 ads each day. Still, that is a lot!13

Breaking through the clutter If all this advertising clutter irritates some consumers, it also causes huge headaches for advertisers. Take the situation facing television advertisers. They pay between $150 000 and $250 000 to make a single 30-second ad. Then, each time they show it, they regularly pay from $30 000 to $40 000 for a 30-second spot during a popular prime-time program. They pay even more if it is an especially popular program, such as a news program like A Current Affair, a popular drama like Wentworth or Offspring or a mega-event such as the World Cup or the Olympics.14 Then, their ads are sandwiched in with a clutter of other commercials, announcements and network promotions, totalling about 15 minutes of non-program material per prime-time hour on many free-toair channels. Such clutter in television and other ad media has created an increasingly hostile advertising environment.15 Until recently, television viewers were pretty much a captive audience for advertisers. But today’s digital wizardry has given consumers a rich new set of information and entertainment options – the internet, video streaming, social and mobile media, tablets and smartphones, and others. Digital technology has also armed consumers with an arsenal of weapons for choosing what they watch or do not watch, and when. In Australia, homes now have an average of 6.4 screens while, at the same time, household television ownership has decreased. Many homes no longer have a second television. We watch catchup television on our tablets and we spend even more time watching video streaming from various online providers.16 Increasingly, thanks to the growth of DVR (digital video recorder) systems and digital streaming, consumers are choosing not to watch ads. They use ad blockers to avoid online ads and the 15-second skip button to by-pass podcast ads. Broadcasters are responding by rethinking the ad break. They are inserting ads in streaming content, using new technology that makes skipping nearly impossible. And there are benefits for viewers – ads are personalised and relevant, and they fill the gap while the video they watch is loading. However, advertisers can no longer force-feed the same old standard ad messages to captive consumers. To gain and hold attention, today’s advertising messages must be better planned, more imaginative, more entertaining and more emotionally engaging.17 Merging advertising and entertainment To break through the clutter, many marketers are now subscribing to a new merging of advertising and entertainment in an effort to create new avenues to reach consumers with more engaging messages. This merging of advertising and entertainment takes one of two forms: (1) advertainment or (2) branded entertainment. The aim of advertainment is to make advertisements themselves so entertaining, or so useful, that people want to watch them. There is no chance that you would watch ads on purpose, you say? Think again. For example, the Melbourne Metro ad, ‘Dumb Ways to Die,’ was listed on the top 10 iTunes chart within 48 hours of its launch. With a catchy tune and animated characters showing lots of

Advertising clutter: Today’s consumers, armed with an arsenal of weapons, can choose what they watch and what they don’t watch. Advertising messages must be better planned, more imaginative, more entertaining and more rewarding to consumers. © Shuttlecock | Dreamstime.com

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‘dumb’ ways to die, the ad has been shared 4.8 million times with nearly 100 million views. Two years after launching the ad, Dumb Ways to Die 2: The Game was released, quickly becoming the most popular app in 83 countries. Importantly, over 127 million people around the world say they will be more careful around trains. Melbourne Metro’s public service announcement has travelled far and wide. After all, being hit by a train is indeed a ‘dumb way to die’.18 Beyond making their regular ads more entertaining, advertisers are also creating new advertising forms that look less like ads and more like short films or shows. A range of new brand-messaging platforms – from webisodes and blogs to online videos and social media posts – now blur the line between ads and other consumer content. For example, as part of its long-running, highly successful Campaign for Real Beauty, Unilever’s Dove brand created a thought-provoking three-minute video, called ‘Dove Real Beauty Sketches’, about how women view themselves. The video compares images of women drawn by a sketch artist based on their self-descriptions versus strangers’ descriptions of them. Side-by-side comparisons show that the stranger-described images are invariably more accurate and more flattering, creating strong reactions from the women. The tagline concludes, ‘You’re more beautiful than you think.’ Although the award-winning video was never shown on television, it drew more than 163 million global YouTube views within just two months, making it one of the mostwatched videos ever.19 Air New Zealand has established a tradition of showing highly engaging in-flight safety videos. They are not ads, but they draw more – and more meaningful – views than many television ads do, and the views are initiated by consumers. The series began with the ‘Bare Essentials’ video, featuring airline staff in body-paint uniforms, a light-hearted script and an important message. More recently, the airline has run ‘An Unexpected Briefing’, featuring Peter Jackson and most of the rest of Middle Earth (characters from the movies The Hobbit and Lord of the Rings), and ‘Safety in Hollywood’, filmed at Warner Bros. Studio in Los Angeles with actors Rhys Darby and Anna Faris. Who would have thought that people would not only watch the safety video at the start of each flight – but also go looking for it after they arrived at their destination? With over 25 million online views for its safety videos, Air New Zealand has definitely cut through the clutter.20 Branded entertainment (or brand integrations) involves making the brand an inseparable part of some other form of entertainment or content. The most common form of branded entertainment is product placements – embedding brands as props within other programming. It might be a brief glimpse of Campbell’s Real Stock on MasterChef or of Qantas and Optus in the Australia episode in the fifth season of Modern Family.21 Reality television shows, such as My Kitchen Rules and The Bachelor, are a focus for product placement. So much so that, in one 60-minute episode of The Block, there were ‘61 mentions of 11 brands’. The impact is impressive. ‘Coles credited MasterChef with dramatic surges in sales of meat and other ingredients featured in the show’s recipes – in some cases reporting sales spikes of up to 1400%.’22 Originally created with television in mind, branded entertainment has spread quickly into other sectors of the entertainment industry. If you look carefully, you will see product placements in movies, video games, comic books, Broadway musicals and even music videos. For example, the highly acclaimed film, The LEGO® Movie, was essentially a 100-minute product placement for iconic LEGO® construction bricks. The LEGO® Movie boosted The LEGO Group’s sales by 11 per cent in the six months after the movie opened.23 A related form of brand integration is so-called native advertising – that is, advertising or other brandproduced online content that appears to be ‘native to’ the website or social media site in which it is placed. That is, the brand content looks, in form and function, like the other natural content surrounding it on a website or social media platform. It might be an article on a website, such as The Huffington Post, BuzzFeed or Mashable, that is paid for, written by and placed by an advertiser but uses the same format as articles written by the editorial staff. Or it might be brand-prepared videos, pictures, posts or pages integrated into social media, such as Facebook, YouTube, Instagram, Pinterest or Twitter, that match the form and

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feel of native content on those media. Examples include Twitter’s promoted tweets, Facebook’s promoted stories or BuzzFeed’s sponsored posts. Branded content is also being repackaged by merging the brand message in entertaining content on mainstream media. For example, A Current Affair shares information about great deals in infotainment sections with strong brand messages. In one recent story, consumers learned about a hamper giveaway; it offered genuine benefits and information to consumers while – at the same time – provided a vehicle for the advertisers, Woolworths, to share their brand message.24 Merging advertising and entertainment: To break through the clutter, Native advertising is an increasingly popular form advertising messages must be better planned, more imaginative, more of brand content. It lets advertisers create relevant entertaining and more rewarding to consumers. A Current Affair produces engaging, interesting and watchable content for advertisers to share brand associations between brand and consumer content. messages. According to a recent study, ‘Given today’s media Courtesy of the Nine Network landscape, where consumers can avoid ads more than ever, advertisers are looking for new ways to get their messages noticed and acted upon.’25 The goal is to make brand messages a part of the broader flow of consumer content and conversation rather than an intrusion or interruption of it. However, at the same time, advertisers must be careful they do not add to the existing congestion. With all the new brand content formats and integration, advertisers threaten to create even more of the very clutter that they hoped to break through. At that point, consumers might decide to take yet a different route.

Message and content strategy The first step in creating effective advertising messages is to plan a message strategy – to decide what general message will be communicated to consumers. The purpose of advertising is to get consumers to think about or react to the product or company in a certain way. People will react only if they believe they will benefit from doing so. Thus, developing an effective message strategy begins with identifying customer benefits that can be used as advertising appeals. Ideally, advertising message strategy will follow directly from the company’s broader positioning and customer value strategies. Message strategy statements tend to be straightforward outlines of benefits and positioning points that the advertiser wants to stress. The advertiser must next develop a compelling creative concept – or ‘big idea’ – that will bring the message strategy to life in a distinctive and memorable way. At this stage, simple message ideas become great ad campaigns. Usually, a copywriter and an art director will team up to generate many creative concepts, hoping that one of these concepts will turn out to be the big idea. The creative concept may emerge as a visualisation, a phrase or a combination of the two. The creative concept will guide the choice of specific appeals to be used in an advertising campaign. Advertising appeals should have three characteristics. First, they should be meaningful, pointing out benefits that make the product more desirable or interesting to consumers. Second, appeals must be believable – consumers must believe that the product or service will deliver the promised benefits. However, the most meaningful and believable benefits may not be the best ones to feature. Appeals should also be distinctive – they should tell how the product is better than the competing brands. For example, the most meaningful benefit of owning a wristwatch is that it keeps accurate time, yet few watch ads feature this benefit. Instead, based on the distinctive benefits they offer, watch advertisers might select any of a number of advertising themes. In its advertising, Timex plays on the durability of its watches: ‘It takes a licking and keeps on ticking’, which targets the sports and outdoors enthusiast. Similarly, Rolex ads never mention the attribute of keeping time. Instead, they talk about the brand’s ‘obsession with perfection’

creative concept

A ‘big idea’ that will bring the message strategy to life in a distinctive and memorable way.

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and the fact that ‘Rolex has been the pre-eminent symbol of performance and prestige for more than a century’.

execution style

The approach, style, tone, words and format chosen for executing the message.

Message execution The advertiser now has to turn the big idea into an actual ad execution that will capture the target market’s attention and interest. The creative team must find the best approach, style, tone, words and format for executing the message. Any message can be presented in different execution styles, such as the following: • Slice of life: This style shows one or more ‘typical’ people using the product in a normal setting. For example, Nutella’s morning-rituals ad shows families starting their day with Nutella on every type of bread and toast, by itself and with bananas; the ad finishes with ‘Rise & Shine, Nutella’. • Lifestyle: This style shows how a product fits in with a particular lifestyle. For example, an ad for The Caravan and Camping Association of NSW brings to life the experiences of family, togetherness and the great outdoors. • Fantasy: This style creates a fantasy around the product or its use. For example, Audi’s ‘The comeback’ campaign shows a T-Rex sharing its anxiety with its short arms and its joy and fulfilment with piloted driving from Audi. • Mood or image: This style builds a mood or image around the product or service, such as beauty, love, intrigue or serenity. Few claims are made about the product except through suggestion. For example, the Western Sydney University ad, ‘Deng Thiak Adut Unlimited’, does just this. The ad tells the story of Deng Adut, from child soldier at age six, to refugee and then to refugee layer. The ad ends with the tagline ‘Western Sydney University, Determination Unlimited. Optimism Unlimited. Courage Unlimited’. • Musical: This style shows people or cartoon characters singing about the product. For example, QBE uses Blondie’s 1980 hit song ‘Call me’ to highlight the insurer’s commitment to customers. In the QBE jingle, the animated characters belt out the modified lyrics ‘call on me is so easy, make the switch to QBE. Call me’. • Personality symbol: This style creates a character that represents the product. The character might be animated (Chesty Bond, Louie the fly) or real (Rhonda, AAMI’s safe driver, the Kleenex puppy).

Message execution: Audi uses fantasy to capture the target market’s attention and interest in its ironic ‘T-Rex – the Comeback’ campaign for piloted driving. Client: Audi AG, Agency: Razorfish, Production: Stink GmbH

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• Technical expertise: This style shows the company’s expertise in making the product. Thus, Bakers Delight shows its bakers carefully preparing a range of breads. The ad aims to position Bakers Delight as a real alternative to supermarket breads. • Scientific evidence: This style presents survey or scientific evidence that the brand is better or better liked than one or more other brands. For example, Nuromol ads emphasis the research that shows the product to perform better compared to paracetamol alone. • Testimonial evidence or endorsement: This style features a highly believable or likable source endorsing the product. It could be ordinary people saying how much they like a given product, or it might be a celebrity presenting the product. For example, in a recent campaign, LG uses families to explain why they love their OLED TV. The ads bring to life the decision-making process and the user experience with the brand providing a highly believable endorsement for a pricey purchase. The advertiser also must choose a tone for the ad. Procter & Gamble always uses a positive tone: its ads say something very positive about its products. Other advertisers may use edgy humour to break through the commercial clutter. Bud Light commercials are famous for this. The advertiser must use memorable and attention-getting words in the ad. For example, rather than claiming simply that the OAK brand of flavoured milk is a ‘satisfying drink’, OAK uses higher-impact phrasing: ‘Kill Hungrythirsty Dead’. In  so doing, the company extends the existing ‘special treat’ to everyday use of the product. Finally, format elements make a difference in an ad’s impact as well as in its cost. A small change in ad design can make a big difference in its effect. In a print ad, the illustration is the first thing the reader notices – it must be strong enough to draw attention. Next, the headline must effectively entice the right people to read the copy. Finally, the copy – the main block of text in the ad – must be simple, but strong and convincing. Moreover, these three elements must work together effectively to persuasively present customer value. For example, in one ad, Volkswagen used the illustration to do most of the work in emphasising the car maker’s parking assist feature.

Consumer-generated content Taking advantage of today’s digital and social media technologies, many companies are now tapping consumers for marketing content, message ideas or even actual ads and videos. Sometimes the results are outstanding; sometimes they are forgettable. If done well, however, user-generated content can incorporate the voice of the customer into brand messages and generate greater customer engagement. Brands across a wide range of industries – from car makers and fast-food chains to apparel brands and pet-food marketers – are inviting customers to participate in generating marketing content In a recent campaign, Sea Life Sydney Aquarium announced a state-wide search for ‘Sydney’s Biggest Penguin Fan’. The campaign is part of the pre-launch activity for a new penguin exhibit and it invites young fans to produce a short, 30-second video to showcase their knowledge of conservation and penguins. The lucky winner will become a conservation ambassador to help educate visitors on the impact of plastics on wild penguin colonies. In less than two days after the campaign launch, the Facebook announcement had already received hundreds of likes and comments.26 Consumer-generated content can make customers an everyday part of the brand conversation. For example, GoPro has made it an art form. Who hasn’t seen a heart-stopping Message format: In this Volkswagen ad, the illustration does most of the work in emphasising the car maker’s parking assist feature. GoPro video online? Although GoPro started the viral videoUsed with permission of Volkswagen Aktiengesellschaft. Creative studio:The Operators sharing sensation using professional stuntmen, through the

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use of a #GoPro hashtag the company has connected to the thousands of GoPro videos uploaded to social media sites every day. The company brings the very best of this customer content together on a dedicated webpage and YouTube channel. Elsewhere on the site, GoPro explain to customers how they can share their stories on social media sites. GoPro have over 20 million Facebook, Instagram and Twitter followers, and more than 4 million YouTube subscribers with over a billion online views. For GoPro, the customer content is king!27 Not all consumer-generated advertising efforts are so successful. As many companies have learned, annoying customers and publishing content without permission can be costly. Marketers also need to be constantly on the watch for negative feedback – before it goes viral. And giving people too much power can be a customer-relations nightmare – as the UK’s National Environment Research Council learned when its competition to name its new research ship resulted in the most popular name, ‘RSS Boaty McBoatface’, being rejected by the Council.28 If done well, however, consumer-generated content efforts can produce new creative ideas and fresh perspectives on the brand from consumers who actually experience it. Such campaigns can boost consumer engagement and get customers talking and thinking about a brand and its value to them.

advertising media The vehicles through which advertising messages are delivered to their intended audiences.

Selecting advertising media The main steps in advertising media selection are: (1) deciding on reach, frequency and impact; (2) choosing among major media types; (3) selecting specific media vehicles; and (4) deciding on media timing.

Deciding on reach, frequency and impact To select media, the advertiser must decide on the reach and frequency needed to achieve advertising objectives. Reach is a measure of the percentage of people in the target market who are exposed to the ad campaign during a given period of time. For example, the advertiser might try to reach 70 per cent of the target market during the first three months of the campaign. Frequency is a measure of how many times the average person in the target market is exposed to the message. For example, the advertiser might want an average exposure frequency of three. But advertisers want to do more than just reach a given number of consumers a specific number of times. The advertiser also must decide on the desired media impact – the qualitative value of a message exposure through a given medium. For example, a message appearing in one magazine (say, The Economist) may be more believable than if that same message appeared in another (say, the Sunday Telegraph). For products that need to be demonstrated, messages on television may have more impact than messages on radio because television uses sight and sound. Products for which consumers provide input on design or features might be better promoted at an interactive website than in a direct mailing. More generally, the advertiser wants to choose media that will engage consumers rather than simply reach them. For example, for television advertising, how relevant an ad is for its audience is often much more important than how many people it reaches. Although Nielsen is beginning to measure media engagement levels for some television, radio and social media, such measures are still hard to find in most cases. Current media measures include such indicators as ratings, readership, listenership and click-through rates. However, engagement happens inside the consumer. It is difficult enough to measure how many people are exposed to a given television ad, video or social media post, let alone measuring the depth of engagement with that content. Still, marketers need to know how customers connect with an ad and brand idea as a part of the broader brand relationship. Engaged consumers are more likely to act upon brand messages and even share them with others. Thus, rather than simply tracking consumer impressions for a media placement – how many people see, hear or read an ad – many companies now also track the consumer expressions that result, such as a comment, a ‘like’, uploading a photo or video, or sharing brand content on social networks. Today’s empowered consumers often generate more messages about a brand than a company can. For example, gaming companies have huge online fan communities sharing customer-generated content. Consider online gamers Lachlan and

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MoreAliA, both with millions of subscribers – when Pokémon GO launched, AliA’s first video had over 9 million views and more than 18 000 user comments. YouTube’s most popular gamer, PewDiePie with over 48 million subscribers, had over 40 000 comments on his first Pokémon GO video.29

Choosing among the main media types The media planner has to know the reach, frequency and impact of each of the main media types. As summarised in Table 11.3, the main media types are television, the internet, newspapers, direct mail, magazines, radio and outdoor. Advertisers can also choose from a wide array of digital media, such as mobile phones and other digital devices, which reach consumers directly. Each medium has advantages and limitations. Media planners consider many factors when making their media choices. They want to choose media that will effectively and efficiently present the advertising message to target customers. Thus, they must consider each medium’s impact, message effectiveness and cost. As discussed earlier in the chapter, traditional mass media still dominate today’s media mixes. However, as mass media costs rise and audiences shrink, many companies are now adding digital, mobile and social media that cost less, target more effectively and engage consumers more fully. Today’s marketers want to assemble a full mix of paid, owned, earned and shared media that create and deliver engaging brand content to target consumers. In addition to the explosion of online, mobile and social media, cable and satellite television systems are thriving. Such systems allow narrow programming formats – such as all sports, all news, nutrition, arts, home improvement and gardening, cooking, travel, history, finance and others – that target select groups. Internet and online promotions, direct mail and catalogues can be delivered to individuals or households that have been identified by membership and loyalty programs. In their efforts to find less costly and more highly targeted ways to reach consumers, advertisers have discovered a dazzling collection of alternative media. These days, no matter where you go or what you do, you will probably run into some new form of advertising. Tiny electronic billboards on table tops and advertising decals on supermarket floors urge you to choose Wonderwhite Bread or Huggies, while ads on the back of your shopping docket offer discounts at the local family restaurant. You sit on a bus, the exterior of which is wrapped in an advertisement for a private school. Step off the bus and there goes a truck sporting an ad for Glad rubbish bags. You escape to the rugby, only to find billboard-size video screens running ads for NRMA Insurance and Microsoft. How about a quiet trip to the country? Sorry – you find an enterprising farmer using his milk cows as four-legged billboards mounted with ads for ice cream.

Table 11.3  Profiles of the main media types Medium

Advantages

Limitations

Television

Good mass-marketing coverage; low cost per exposure; combines sight, sound and motion; appealing to the senses

High absolute costs; high clutter; fleeting exposure; less audience selectivity

Digital, mobile and social media

High selectivity; low cost; immediacy; interactive and engagement capabilities

Potentially low impact; the audience controls content and exposure

Newspapers

Flexibility; timeliness; good local market coverage; broad acceptability; high believability

Short life; poor reproduction quality; small pass-along audience

Direct mail

High audience selectivity; flexibility; no ad competition within the same medium; allows personalisation

Relatively high cost per exposure, ‘junk mail’ image

Magazines

High geographic and demographic selectivity; credibility and prestige; high-quality reproduction; long life and good pass-along readership

Long ad-purchase lead time; high cost; no guarantee of position

Radio

Good local acceptance; high geographic and demographic selectivity; low cost

Audio only, fleeting exposure; low attention; fragmented audiences

Outdoor

Flexibility; high repeat exposure; low cost; low message competition; good positional selectivity

Little audience selectivity; creative limitations

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These days, you are likely to find ads – well, anywhere: on taxis, DVD cases, parking-lot tickets, golf scorecards, delivery trucks, pizza boxes, ATMs, garbage trucks and church bulletins. One company even sells space on toilet paper furnished free to restaurants, stadiums and malls – the paper carries advertiser logos, coupons and codes you can scan with your smartphone to download digital coupons or link to advertisers’ social media pages. Now that’s a captive audience. Such alternative media seem a bit far-fetched, and they sometimes irritate consumers who resent it all as being ‘ad nauseam’. But for many marketers, these media can save money and provide a way to hit selected consumers where they live, shop, work and play. Alternative media: Marketers have discovered a dazzling array of alternative media and creative places to share Another important trend affecting media selection is the rapid growth their messages. in the number of media multitaskers, people who absorb more than one HeartKids Western Australia medium at a time. For example, it is not uncommon to find someone watching television with a smartphone in hand, tweeting, Snapchatting with friends and chasing down product information on Google. One recent survey found that 35 per cent of all screen time involves simultaneous use of television and a digital device. Although some of this multitasking is related to television viewing – such as looking-up related product and program information – most multitasking involves tasks unrelated to the shows or ads being watched. Marketers need to take such media interactions into account when selecting the types of media they will use.30

Selecting specific media vehicles The media planner now must choose the best media vehicles – specific media within each general media type. For example, television vehicles include The Game of Thrones and One News. Magazine vehicles include The Australian Women’s Weekly, Vogue Australia and APC. Online and mobile vehicles include Twitter, Facebook, Instagram and YouTube. Media planners must calculate the cost per thousand persons reached by a vehicle. For example, if a double-page, four-colour advertisement in The Australian Women’s Weekly costs $68 485 and the magazine’s readership is 1.7 million people, the cost of reaching each group of 1000 persons is about $40. The same advertisement in Vogue Australia may cost only $26 240 but reach only 390 000 persons – at a cost per thousand of about $67. The media planner ranks each magazine by cost per thousand and favours those magazines with the lower cost per thousand for reaching target consumers. Of course, these two magazines have a very different target audience.31 Media planners must also consider the costs of producing ads for different media. Whereas newspaper ads may cost very little to produce, flashy television ads can be very costly. Many online and social media ads cost little to produce, but costs can climb when producing made-for-the-web video and ad series. In selecting specific media vehicles, media planners must balance media costs against several media effectiveness factors. First, the planner should evaluate the media vehicle’s audience quality. For a Huggies disposable nappies advertisement, for example, Practical Parenting magazine would have a high exposure value, while North & South (a New Zealand current affairs magazine) would have a low exposure value. Second, the media planner should consider audience engagement. Readers of Vogue, for example, typically pay more attention to ads than do New Idea readers. Third, the media planner should assess the vehicle’s editorial quality. For example, The Australian and The New Zealand Herald are often perceived to be more believable and prestigious than the Sunday Telegraph or the Sunday Star-Times. Deciding on media timing The advertiser must also decide how to schedule the advertising over the course of a year. Suppose sales of a product – ice cream, for instance – peak in December and drop in March. The firm can vary its advertising

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to follow the seasonal pattern, to oppose the seasonal pattern or to be the same all year. Most firms do some seasonal advertising. For example, most retailers advertise more heavily before major holidays, such as Christmas, Easter and Valentine’s Day. And weight-loss product and service marketers tend to increase their advertising after the first of the year, targeting consumers who let their appetites get the better of them over the holiday season. Some marketers do only seasonal advertising: for instance, Johnson & Johnson advertises Codral during the cold and flu season. The advertiser also has to choose the pattern of the ads. Continuity means scheduling ads evenly within a given period. Pulsing means scheduling ads unevenly over a given time period. Thus, 52 Media timing: By responding in real-time to millennial Facebook ads could either be scheduled at one per week during the year or users Optus was able to generate a massive increase in sales. be pulsed in several bursts. The idea behind pulsing is to advertise Anatolii Babii/Alamy Stock Photo heavily for a short period to build awareness that carries over to the next advertising period. Those who favour pulsing believe it can be used to achieve the same impact as a steady schedule but at a much lower cost. However, some media planners believe that, although pulsing achieves minimal awareness, it sacrifices depth of advertising communications. Today’s online and social media let advertisers create ads that respond to events in real-time. For example, free-range egg producer, Farm Pride, launched a real-time video feed so that customers can check out the chickens on their free-range farms. Australian telecommunications company Optus used Facebook’s trending news in a campaign aimed at millennials. Each morning, Optus looked at trending topics and, by the early afternoon, approved content went live on Facebook. Optus managed to closely align their content with what was relevant to the Millennial Facebook viewer and, in doing so, achieved a massive 42 per cent increase in sales. Social engagement was high, with 354 post shares, over 6000 page likes and nearly 22 000 post likes.32

Evaluating advertising effectiveness and return on advertising investment

Measuring advertising effectiveness and return on advertising investment has become a hot issue for most companies, especially in the current tight economic environment. Top management at many companies is asking marketing managers, ‘How do we know we’re spending the right amount on advertising?’ and ‘What return are we getting on our advertising investment?’. Advertisers should regularly evaluate two types of advertising results: the communication effects, and the sales and profit effects. Measuring the communication effects of an ad or ad campaign tells the advertiser whether the ads and media are communicating the ad message well. Individual ads can be tested before or after they are run. Before an ad is placed, the advertiser can show it to consumers, ask how they like it and measure message recall or attitude changes resulting from it. After an ad is run, the advertiser can measure how the ad affected consumer recall or product awareness, knowledge and preference. Pre- and post-evaluations of communication effects can be made for entire advertising campaigns as well. Advertisers have become adept at measuring the communication effects of their ads and ad campaigns. However, sales and profit effects of advertising are often much more difficult to measure. For example, what sales and profits are produced by an ad campaign that increases brand awareness by 20 per cent and brand preference by 10 per cent? Sales and profits are affected by many factors other than advertising – such as product features, price and availability. One way to measure the sales and profit effects of advertising is to compare past sales and profits with past advertising expenditures. Another way is through experiments. For example, to test the effects of

return on advertising investment

The net return on advertising investment divided by the costs of the advertising investment.

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different advertising spending levels, Coca-Cola could vary the amount it spends on advertising in different market areas and measure the differences in the resulting sales and profit levels. More complex experiments could be designed to include other variables, such as differences in the ads or media used. However, because so many factors – some controllable and others not – affect advertising effectiveness, measuring the results of advertising spending remains an inexact science. For example, dozens of advertisers spend lavishly on high-profile AFL Grand Final ads each year. Although they sense that the returns are worth the sizable investment, few can actually measure or prove it. To help marketers in Australia, Think TV recently commissioned a million-dollar research project to investigate the returns on advertising across various media channels. The study will use actual data from advertisers and examine the effects of different media on sales. In the meantime, managers must rely on large doses of judgment, along with quantitative analysis, when assessing advertising performance.33

Other advertising considerations In developing advertising strategies and programs, the company must address two additional questions. First, how will the company organise its advertising function – who will perform which advertising tasks? Second, how will the company adapt its advertising strategies and programs to the complexities of international markets?

Organising for advertising

advertising agency A marketing services business that assists companies in planning, preparing, implementing and evaluating all or portions of their advertising programs.

Different companies organise in different ways to handle advertising. In small companies, advertising might be handled by someone in the sales department. Large companies set up advertising departments whose job it is to set the advertising budget, work with the ad agency and handle other advertising not done by the agency. Most large companies use outside advertising agencies because they offer several advantages. How does an advertising agency work? Advertising agencies were started in the mid- to late 1800s by salespeople and brokers who worked for the media and received a commission for selling advertising space to companies. As time passed, the salespeople began to help customers prepare their ads. Eventually, they formed agencies and grew closer to the advertisers than to the media. Today’s ad agencies employ specialists who can often perform advertising tasks more effectively than the company’s own staff can. Agencies also bring an outside point of view to solving the company’s problems, along with a wealth of experience from working with different clients and situations. So, today, even companies with strong advertising departments of their own use advertising agencies. Some ad agencies are huge; the largest US agency, Y&R, has annual gross revenues of US$1.69 billion. In recent years, many agencies have grown by buying up other agencies, thus creating huge agency-holding companies. The largest of these megagroups, WPP, includes several large advertising, public relations, digital and promotion agencies, with combined worldwide revenues of more than US$17 billion.34 Most large advertising agencies have the staff and resources to handle all phases of an advertising campaign for their clients, from creating a marketing plan, to developing ad and content campaigns, and preparing, placing and evaluating ads and content. Large brands commonly employ several agencies that handle everything from mass media advertising campaigns to shopper marketing and social media content.

International advertising decisions International advertisers face many complexities not encountered by domestic advertisers. The most basic issue concerns the degree to which global advertising should be adapted to the unique characteristics of markets in different countries. Some large advertisers have attempted to support their global brands with highly standardised worldwide advertising, with campaigns that work as well in Bangkok as they do in Melbourne. For example, McDonald’s now unifies its creative elements and brand presentation under the familiar ‘I’m lovin’ it’ theme in all of its 100-plus markets worldwide. VISA coordinates

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its US$500 million worldwide advertising efforts for its debit and credit cards under the ‘Everywhere you want to be’ creative platform, which works as well in Korea as it does in Brazil.35 And Snickers runs similar versions of its ‘You’re not you when you’re hungry’ ads in 80 different countries, from the United Kingdom to Mexico, Australia and even Russia. No matter what the country, the ads strike a common human emotion that everyone can relate to – people get out of sorts and do uncharacteristic things when they need nutrition. A Snickers bar can help them get back to being their ‘real selves’. Snickers lets local markets make adjustments for local languages and personalities. Otherwise, the ads are similar worldwide.36 In recent years, the increased popularity of online social networks and video sharing has boosted the need Standardised worldwide advertising: Although Snickers uses its for advertising standardisation for global brands. Most ‘You’re not you when you’re hungry’ theme globally, ads in specific big marketing and advertising campaigns include a large locales make adjustments for local languages and personalities. In one campaign, Snickers combined words in their classic Snickers logo style online presence. Connected consumers can now easily cross and typeface to get their point across. virtual borders via the internet and social media, making it Richard Levine/Alamy Stock Photo difficult for advertisers to roll out adapted campaigns in a controlled, orderly fashion. As a result, at the very least, most global consumer brands coordinate their websites internationally. For example, check out the McDonald’s websites from Germany to Jordan to China and you will find the golden arches logo, the ‘I’m lovin it’ logo and jingle, a Big Mac equivalent and maybe even Ronald McDonald himself. Standardisation produces many benefits – lower advertising costs, greater global advertising coordination and a more consistent worldwide image. But it also has drawbacks. Most importantly, it ignores the fact that markets in various countries differ greatly in their cultures, demographics and economic conditions. Thus, most international advertisers ‘think globally, but act locally’. They develop global advertising strategies that make their worldwide advertising efforts more efficient and consistent. They then adapt their advertising programs to make them more responsive to consumer needs and expectations within local markets. For example, although VISA employs its ‘Everywhere you want to be’ theme globally, ads in specific locales employ local language and inspiring local imagery that make the theme relevant to the local markets in which they appear. Global advertisers face several special problems. For instance, advertising media costs and availability differ vastly from country to country. Countries also differ in the extent to which they regulate advertising practices. Many countries have extensive systems of laws restricting how much a company can spend on advertising, the media used, the nature of advertising claims and other aspects of the advertising program. Such restrictions often require advertisers to adapt their campaigns from country to country. For example, alcohol products cannot be advertised in India or in Muslim countries. In many countries – Sweden and Canada, for example – junk-food ads are banned from children’s television programs. To play it safe, McDonald’s advertises itself in Sweden as a family restaurant. Comparative ads, although acceptable and even common in Australia and New Zealand, are less commonly used in the United Kingdom and are illegal in India and Brazil. China bans sending email for advertising purposes to people without their permission, and all advertising email that is sent must be titled ‘advertisement’. Thus, although advertisers may develop global strategies to guide their overall advertising efforts, specific advertising programs must usually be adapted to meet local cultures and customs, media characteristics and regulations.

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Linking the concepts Think about what goes on behind the scenes for the ads we all tend to take for granted. ● Pick a favourite print or television ad. Why do you like it? Do you think it is effective? Explain your answer. Describe an ad you have seen that people like but which you believe may not be effective. Justify your answer.

● Dig a little deeper and learn about the campaign behind your ad. What are the campaign’s objectives? What is its budget? Assess the campaign’s message and media strategies. What other brand content does the campaign contain? Looking beyond your own feelings about the ad, how likely is the campaign to be effective?

Public relations (pp. 366–68) public relations (PR)

Building good relations with the company’s various publics by obtaining favourable publicity, building up a good corporate image and handling or preempting unfavourable rumours, stories and events.

publicity

Favourable or unfavourable public commentary, rumours and stories about a brand, a company or its employees that are not controlled by the sponsor.

Another major mass-promotion tool is public relations (PR) – building good relations with the company’s various publics by obtaining favourable publicity, building up a good corporate image and handling or pre-empting unfavourable rumours, stories and events. The aim is to produce favourable public commentary, stories and rumours about the brand, company and its employees that are not paid for or controlled by the company. Public relations departments may perform any or all of the following functions:37 • Press relations or press agency: Creating and placing newsworthy information in the news media to attract attention to a person, product or service. • Product publicity: Publicising specific products. • Public affairs: Building and maintaining national or local community relations. • Lobbying: Building and maintaining relations with legislators and government officials to influence legislation and regulation. • Investor relations: Maintaining relationships with shareholders and others in the financial community. • Development: Public relations with donors or members of non-profit organisations to gain financial or volunteer support. Public relations is used to promote products, people, places, ideas, activities, organisations and even nations. Companies use public relations to build good relations with consumers, investors, the media and their communities. Sometimes this activity is planned but often it is about taking advantages of the opportunities that arise. For example, remember #theDress as the internet melted down with discussion regarding its colour – black and blue or white and gold? Specsavers got in the mix with a clever tweet: ‘For all of you who think #theDress is #WhiteandGold, come and visit us for an eye test #shouldve.’ Specsavers’ slogan is ‘should’ve gone to Specsavers’™.38 Trade associations also use public relations to rebuild interest in declining commodities, such as wool, apples, potatoes and milk. For example, Woolmark launched a ‘Campaign for Wool’ with the patronage of HRH The Prince of Wales. The global campaign aimed to ‘reconnect consumers with the versatility of wool, from luxurious next to skin Merino apparel to the safety and comfort of natural carpet’.39

The role and impact of public relations Public relations can have a strong impact on public awareness at a much lower cost than advertising can. The company does not pay for the space or time in the media. Rather, it pays for a staff to develop and circulate information and to manage events. If the company develops an interesting story or event, it could be picked up by several different media, having the same effect as advertising that would cost millions of dollars. What is more, public relations has the power to engage consumers and make them a part of the brand story and its telling.

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Chapter 11  Communicating customer value: Advertising and public relations

Public relations results can sometimes be spectacular. Consider the launch of Niantic’s Pokémon GO. Months before the game launched, Niantic invited gamers to ‘field test’ the experience. The following publicity and social chatter meant that, with only a few release notifications on the company website and the Pokémon GO Twitter account, Niantic was able to achieve app downloads beyond all expectation. Within 19 days of the app’s release, downloads reached 50 million and, by two months, the app had been downloaded over 500 million times worldwide, more than any other app in history. The game was released first in Australia and New Zealand and, today, it is played in over 100 countries worldwide – and all with no paid advertising.40 Despite its potential strengths, public relations is sometimes described as a marketing stepchild because of its often limited and scattered use. The PR department is often located at corporate headquarters, or PR is handled by a third-party agency. Its staff is so busy dealing with various publics – shareholders, employees, legislators, the press – that PR programs to support product marketing objectives may be ignored. Moreover, marketing managers and PR practitioners do not always speak the same language. Whereas many PR practitioners see their jobs as simply communicating, marketing managers tend to be much more interested in how advertising and public relations affect brand building, sales and profits, and customer engagement and relationships. This situation is changing, however. Although public relations still captures only a small portion of the overall marketing budgets of most firms, PR can be a powerful brand-building tool. Especially in this digital age, the lines between advertising and PR are blurring. For example, are brand websites, blogs, social media and brand videos advertising efforts or PR efforts? They are both. As the use of earned and shared digital content grows rapidly, PR may play a bigger role in marketing content management. More than any other department, PR has always been responsible for creating relevant marketing content that draws consumers to a brand rather than pushing messages out. ‘PR pros are an organization’s master storytellers. In a word, they do content,’ says one expert. ‘The rise of social media [is] moving public relations professionals from the backroom, crafting press releases and organizing events, to the forefront of brand development and customer engagement,’ says another.41 The point is that PR should work hand in hand with advertising within an integrated marketing communications program to help build customer engagement and relationships. And paid or not, the Australian Association of National Advertisers includes the PR activities controlled by marketers under its regulatory framework.42

The main public relations tools Public relations uses several tools. One of the main tools is news. PR professionals find or create favourable news about the company and its products or people. Sometimes news stories occur naturally, and sometimes the PR person can suggest events or activities that would create news. Another common PR tool is special events, ranging from news conferences and speeches, press tours, grand openings and sponsorships, to laser shows, multimedia presentations or educational programs designed to reach and interest target publics. Increasingly, company executives must field questions from the media or host major presentations, and these events can either build or hurt the company’s image. Public relations people also prepare written materials to reach and influence their target markets. These materials include annual reports, brochures, articles and company newsletters and magazines. Audiovisual materials, such as DVDs and online videos, are increasingly being used as communication tools. Corporate identity materials can also help create a corporate identity that the public immediately recognises. Logos, stationery, brochures, signs, business forms, business cards, buildings, uniforms and company cars and trucks – all become marketing tools when they are attractive, distinctive and memorable. Finally, companies can improve public goodwill by contributing money and time to public service activities. As discussed previously, the internet and social media are also important PR channels. Websites, blogs and social media, such as YouTube, Facebook, Instagram, Snapchat, Pinterest and Twitter, are

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providing new ways to reach and engage people. As noted, storytelling and engagement are core PR strengths, and that plays well into the use of online, mobile and social media. For example, The a2 Milk Company™ uses a diverse portfolio of direct and online media to share their brand stories and to create publicity. They have an important message: a2 Milk™ is different. Most cows produce milk containing a mix of A1 and A2 beta-casein milk proteins. Research has shown that it is A1 milk proteins that can cause some people difficulties with milk. a2 Milk™ is 100 per cent A1 protein-free, and contains Public relations tools: The a2 Milk Company™ website plays a big part only the A2  protein. Sharing the highly technical in sharing the science and telling stories directly to the company’s many stakeholders. message behind a2 Milk™ requires a fine balance The a2 Milk Company™ between the science and the stories. Consequently, the company focuses its PR efforts on health professionals just as much as it does on consumers using its website, social media and online discussion.43 As with the other promotion tools, in considering when and how to use product public relations, management should set PR objectives, choose the PR messages and vehicles, implement the PR plan and evaluate the results. The firm’s public relations should be blended smoothly with other promotion activities within the company’s overall integrated marketing communications effort.

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Student Learning Centre

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Learning Objective 3. Describe and discuss the main decisions involved in developing an advertising program. (pp. 350–66) Advertising – the use of media by a seller to inform, persuade and remind about its products or organisation – is a strong promotion tool that takes many forms and has many uses. Advertising decision making involves decisions about the

Reviewing the learning objectives In this chapter, we have discussed how companies use integrated marketing communications (IMC) to engage customers and communicate customer value. We have also explored two major elements of the marketing communications mix – advertising and public relations. Modern marketing calls for more than just creating customer value by developing a good product, pricing it attractively and making it available to target customers. Companies also must clearly and persuasively communicate that value to current and prospective customers. To do this, they must blend five communication mix tools, guided by a well-designed and implemented integrated marketing communications strategy.

Learning Objective 1. Define the five promotion mix tools for communicating customer value. (p. 342) A company’s total promotion mix – also called its marketing communications mix – consists of the specific blend of advertising, personal selling, sales promotion, public relations and direct and digital marketing tools that the company uses to persuasively communicate customer value and build customer relationships. Advertising includes any paid form of non-personal presentation and promotion of ideas, goods or services by an identified sponsor. In contrast, public relations focuses on building good relations with the company’s various publics. Personal selling is any form of personal presentation by the firm’s salesforce for the purpose of making sales and building customer relationships. Firms use sales promotion to provide short-term incentives to encourage the purchase or sale of a product or service. Finally, firms seeking immediate response from targeted individual customers use direct-marketing tools to communicate with customers and cultivate relationships with them.

Learning Objective 2. Discuss the changing communications landscape and the need for integrated marketing communications. (pp. 342–50)

objectives, the budget, the message, the media and, finally, the evaluation of results. Advertisers should set clear objectives as to whether the advertising is supposed to inform, persuade or remind buyers. The advertising budget can be based on what is affordable, on sales, on competitors’ spending or on the promotion objectives and tasks. The message decision calls for planning a creative concept and message strategy and executing them effectively. The media decision involves defining reach, frequency and impact goals; choosing major media types; selecting media vehicles; and deciding on media timing. Message and media decisions must be closely coordinated for maximum campaign effectiveness. Finally, evaluation calls for evaluating the communication and sales effects of advertising before, during and after the advertising is placed, and measuring advertising return on investment.

Learning Objective 4. Explain how companies use public relations to communicate with their publics. (pp. 366–68) Public relations involves building good relations with the company’s various publics. Its functions include press agency, product publicity, public affairs, lobbying, investor relations and development. Public relations can have a strong impact on public awareness at a much lower cost than advertising can, and PR results can sometimes be spectacular. Despite its potential strengths, however, public relations sometimes sees only limited and scattered use. PR tools include news, special events, written materials, audiovisual materials, corporate identity materials and public service activities. A company’s website can be a good public relations vehicle. In considering when and how to use product public relations, management should set PR objectives, choose the PR messages and vehicles, implement the PR plan and evaluate the results. Public relations should be blended smoothly with other promotion activities within the company’s overall integrated marketing communications effort.

Discussion questions

The explosive developments in communications technology and changes in

❶ Marketing communications extends beyond the specific promotional tools.

marketer and customer communication strategies have had a dramatic impact on

We have discussed at length the importance of aligning the marketing mix so

marketing communications. The new digital and social media have given birth to

that the customer communication is consistent. Suppose a disposable coffee-

a more targeted, social and engaging marketing communications model. Along

cup manufacturer wished to present its ‘eco-credentials’. How could this be

with traditional media, advertisers are now adding a broad selection of more

achieved by aligning the marketing mix and communications mix? In your

specialised and highly targeted media to engage smaller customer segments with

answer, consider how the product, price and distribution of a good or service

more-personalised, interactive content. As they adopt richer but more fragmented

can affect the brand. (Learning Objective 1) (AACSB: Reflective Thinking)

media and promotion mixes to reach their diverse markets, advertisers risk

❷ Is the notion of integrated marketing communication simply a flight of

creating a communications hotchpotch for consumers. To prevent this, more

fancy, or do advertisers really carry their creative themes through into each

companies are adopting the concept of integrated marketing communications

of the media they use in any particular campaign? To test this by way of an

(IMC). Guided by an overall IMC strategy, the company works out the roles the

experiment, choose brands from two product categories (e.g. toothpaste –

various promotional tools will play and the extent to which each will be used.

Colgate; soft drinks – Coca-Cola; and mobile phones – Optus). Next, use the

It carefully coordinates the promotional activities and the timing of when major

14 information cues suggested by Resnik and Stern to check off the contents

campaigns take place.

of the print ads, catalogues, and radio and television commercials you audit:

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‘price’; ‘quality’; ‘performance’; ‘components’ or ‘parts’; ‘availability’ or ‘available at’ or ‘available from’; ‘special offer(s)’; ‘warranties’; ‘safety’; ‘independent research’; and ‘company research’.44

climate and increased sales meant that advertisers could spend more on advertising? (Learning Objective 3) (AACSB: Reflective Thinking) ❻ Is there ever a positive reason to employ public relations? Public relations is

Next, collect various advertising pieces for each brand, such as: (1) magazine

something a company turns to when one of its ships has spewed oil into a penguin

ads; (2) direct mail – catalogues; (3) listening to any radio commercials; (4) watching

rookery, or when a social commentator sends a negative tweet. It does seem

their television commercials; and (5) checking their brand or corporate websites.

that companies and governments turn to ‘spin-doctors’ when things go wrong

Set up a spreadsheet, with the brands in the first column and the information

and they become the targets of negative publicity. However, today’s marketers

cues as the headers for the next 14 columns. Also allow one column where you

are making increasing use of PR in a systematic way to support the brand and

allocate five (5) points across a scale anchored by 0 = no advertising theme carried

company marketing communication efforts. There are also social causes and ideas

through, and one point for each instance where the same advertising theme is

that need promotional assistance if they are to receive any consideration in the

carried through into the media listed in (1) to (5) above. When you total the scores

broader community. There are a great many positive and important ways public

for each of the three brands in the last column, you may be able to answer the

relationships contribute to the communications mix. Briefly describe some of the

question about the degree of integration in marketing communication.

ways public relations has been used proactively and positively by companies and



organisations. (Learning Objective 4) (AACSB: Reflective Thinking)



Clearly, there are many opportunities for error in this small-scale

experiment; for example, not all brands use all the media indicated and so their rating will be affected by their budget size. What are your findings? Briefly outline a better method of testing the proposition that the synergistic effects of integrated marketing communication may be lost to many marketing organisations. (Learning Objective 2) (AACSB: Reflective Thinking) ❸ Is long-term (i.e. longer than 10 weeks) brand building the only reason to advertise? You will find those who argue that mass media advertising is the direct impetus to sales, even short-term sales. This may not apply across all products. In large measure, it depends on the decay rate for the advertising in individual product categories, and for particular brands, as to whether or not advertising has an effect on long-term measures, including sales. Certainly, there are short-term sales outcomes to advertising, particularly when a sales promotion (see Chapter 12) is included for the purpose of stimulating immediate or short-term sales. It seems that advertising has a long-term outcome that is best measured by intervening variables, such as awareness, attitude and relative brand positioning. The link between the intervening variables and a sales response can, however, be more tenuous. Nevertheless, companies maintain that they advertise to gain a sales response. What are your views? (Learning Objective 3) (AACSB: Reflective Thinking) ❹ Might media scheduling vary by product category and brand? An interesting perspective on this question is provided by one study which showed that 90 per cent of respondent product managers had the key objective of increasing category share for their brand. The respondent fast-moving consumer goods brand managers indicated that, for many brands, ‘their message decays rapidly in the mind of the consumer’.45 What media strategy does this suggest for such products? (Learning Objective 3) (AACSB: Reflective Thinking) ❺ Advertising impacts a company’s annual sales, so what happens when

Critical thinking exercises ❶ The manager of a small manufacturing concern is considering incorporating socially responsible marketing messages in the company’s advertising, and is seeking your marketing advice. Some companies are criticised for exploiting social issues or organisations for their own gain. Write an email to the manager providing your assessment of the risks and benefits of a marketing communications strategy that includes socially responsible messages. Be sure to include some examples of companies that have been successful and/or unsuccessful in adopting this approach. (Learning Objective 2) (AACSB: Communication; Application of Knowledge) ❷ Marketers use Q Scores to determine a celebrity’s appeal to their target audience. Research Q Scores and write a report on a specific celebrity’s Q Score for the past several years. If the score changed considerably, give possible reason(s). What else are Q Scores used for, apart from rating celebrity appeal? (Learning Objective 3) (AACSB: Communication; Application of Knowledge) ❸ In a small group, discuss the major public relations tools and develop three public relations items for each of the following: (a) your university, (b) a frozen yogurt store, (c) a dentist, (d) a bank and (e) a community centre. (Learning Objective 4) (AACSB: Communication; Teamwork; Reflective Thinking)

Navigating the key terms Learning Objective 1

advertising media  (p. 360)

promotion mix (marketing

advertising objective  (p. 351)

communications mix)  (p. 342)

Learning Objective 2

advertising budgets are set based on sales forecasts? It is marketing heresy

content marketing (p. 345)

to suggest anything other than that marketing effort (e.g. advertising

integrated marketing

expenditure) is a part determinant of sales levels. We do know that word

communications (IMC)  (p. 345)

of mouth is another such determinant. After the worldwide slowdown in

pull strategy  (p. 349)

advertising expenditure during the Global Financial Crisis, Australian and

push strategy  (p. 349)

New Zealand advertisers increased their ad spend. Today, ad spending has

advertising strategy  (p. 354) affordable method  (p. 353) competitive-parity method  (p. 353) creative concept  (p. 357) execution style  (p. 358) objective-and-task method  (p. 354) percentage-of-sales method  (p. 353) return on advertising investment  (p. 363)

stabilised and this has coincided with a general period of low economic

Learning Objective 3

growth (see Table 11.1). With a great many advertisers using the percentage-

advertising (p. 351)

Learning Objective 4

of-sales method to determine promotion budgets, discuss whether, in your

advertising agency  (p. 364)

public relations (PR) (p. 366)

view, advertising led the improvement in sales or if an improving financial

advertising budget  (p. 353)

publicity  (p. 366)

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Mini cases 11.1  Integrated marketing communication Lighting up business Small to medium-size businesses (SMBs) account for about 95 per cent of

home electrical work and repairs in your suburb. The business has a larger-

all Australian and New Zealand businesses and many do not have resources

than-usual online budget of $11 000 for the forthcoming year.46

to spare for promotion. Although newspaper, radio and the Yellow Pages

❶ Develop an integrated marketing communications plan for the business,

have been the mainstay media for local businesses, they can be expensive.

which includes a website revamp and links to Facebook and Pinterest.

Carefully executed social media marketing can be a very effective tool.

Ensure you include strategies as to how you will evaluate the return

But research has shown that only 30 per cent of small businesses are turning

on investment for the business owner. (Learning Objective 3) (AACSB:

to the internet. With marketing budgets as low as $2000 for small businesses

Communication; Analytical Thinking; Critical Thinking)

and about $12 000 for medium-sized enterprises, it is crucial that every

❷ What opportunities (if any) are there for PR for the business? How

online dollar is well spent. You, as a marketing communications expert, have

would you integrate PR with the online social media campaign?

been approached for marketing advice from a local electrician providing

(Learning Objectives 2 and 4) (AACSB: Critical Thinking)

11.2  Public relations An activist workforce Public relations efforts have changed significantly with the rising tide of digital

❶ Develop a public relations plan for your university that considers the likely

and social media. Today, marketers need to make sure integrated communication

activity of students and staff on digital media. How would you try to manage

plans include both advertising and PR. But who would have thought that the

any damage from ReActivists? You might like to complete the short online quiz

plan would need to include the company employees? A recent study has

to see how you rate as an activist for your university . (Learning Objective 4) (AACSB:

workforce can be viewed in terms of the six main types of behaviours (see the

Analytical Thinking; Information Technology; Reflective Thinking)

table below), ranging from ProActivists who are highly social and who advocate

❷ Imagine you are the marketing manager for a medium-sized company

for their workplace both online and off (22 per cent) to the ReActivists who

and the human relations manager advises you that a disaffected staff

are critical of workplace conditions and share their views online (13 per cent).

member had posted comments on the company’s FaceBook page that

In some ways, this is not a new insight. Employees have always been an

misrepresent the customer service experience. What would you do?

important part of the customer experience and most marketers understand

Prepare a draft FaceBook post in response. What other creative actions

this. However, with these new insights, companies can go further in planning

could the company take to counteract this negative social media post?

the PR efforts to include those employees who are most likely to positively

(Learning Objective 4) (AACSB: Communication; Analytical Thinking;

engage with various stakeholders.47

Information Technology; Reflective Thinking)

ProActivists (22%)

Employees with the most positive actions, with nearly no negative actions. They have the highest level of employer engagement and are highly social. PR effort: Leverage and empower activism

PreActivists (19%)

Employees that take positive actions – nearly as many as the ProActivists – but they engage in some negative actions. They are not as social as ProActivists and have an average level of engagement. PR effort: Ignite activism; Upgrade to ProActivists

HyperActives (8%)

Wildcat employees who have the most potential to help or damage an employer’s reputation. They sometimes post things online that they later regret. The majority have jobs that entail social media so they are highly social. PR effort: Handle with care; Upgrade to ProActivists

ReActivists (13%)

Employees who mainly take positive actions but who are also very likely to be critical. They are highly social. PR effort: Focus on attending to internal matters; Defuse negative social media

Detractors (11%)

Employees who take negative actions and are the least engaged and the most distrustful of leadership. They are not very social so damage is often contained offline. PR effort: Defuse negative social media (if any)

InActives (27%)

Employees who do not take either negative or positive actions. They are unengaged and least motivated. PR effort: Focus on increasing company engagement not activism

Source: Adapted from The Workforce Activism Spectrum, p. 12, , accessed October 2016.

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11.3  Marketing analytics at work Advertising-to-sales ratios Using the percentage-of-sales method, an advertiser sets its advertising

same percentage of sales on advertising next year. The average advertising-to-

budget at a certain percentage of current or forecasted sales. However,

sales ratio for the sector is 2 per cent of sales.

determining what percentage to use is not always clear. Many marketers look

❶ Using the percentage-of-sales method of advertising budgeting,

at industry averages and competitor spending for comparisons. Websites and

determine how much the company will budget for advertising if the

trade publications publish data regarding industry averages to guide marketers

budget is based on projected sales of $19 million. (Learning Objective 3)

in setting the percentage to use. For example, firms competing in the toy and

(AACSB: Analytical Reasoning; Reflective Thinking)

apparel industries spend 10 per cent or more of sales on advertising, whereas

❷ How much would the manufacturer budget if the company based

firms competing in the mortgage servicing and insulation industries spend less

its advertising spending on the industry advertising-to-sales ratio?

than 1 per cent of sales on advertising. Let us consider a large solar-panel

Is the solar-panel manufacturer consistent with average industry

manufacturer. Suppose the company had $17 million in revenue last year.

ad spending? (Learning Objective 3) (AACSB: Analytical Reasoning;

It spent $0.8 million on advertising that year and plans to continue spending the

Reflective Thinking)

11.4  Ethical reflection Ads that upset Some ads take your breath away for all the wrong reasons. They seem to be

Authority (). Pick two or three cases where

intent on upsetting people. Whether it is the recent Meat & Livestock Australia’s

complaints were upheld. What changes would you recommend to the

Australia Day ad, which came under fire for offending vegans, or the Ultra Tune

advertising message to make the ads more acceptable to consumers

‘Get into Rubber’ and ‘Unexpected Situation’ ads for objectifying women, these

and communities? (Learning Objective 3) (AACSB: Communication;

ads seem to be focused on brand attention – even if it is negative. Each year,

Reflective Thinking; Ethical Reasoning)

the Advertising Standards Bureau (in Australia) and the Advertising Standards

❷ Even when complaints are dismissed, provocative ads can generate a

Authority (in New Zealand) consider many complaints about advertising from

frenzy of social media attention that is far from ideal. Where do you

the community. When complaints are upheld, advertisers may be required to

draw the line in terms of advertising that is designed to create comment

remove the ad or correct misinformation. However, that might be a small price

(good or bad)? What factors do you think should be taken into account

to pay for the media attention that a provocative ad can produce.

by a company when considering an advertising message that might

❶ Review some of the complaints considered by the Advertising Standards

attract negative social media attention? (Learning Objectives 3 and 4)

Bureau () or the Advertising Standards

References

1 For other definitions, see , accessed October 2015. 2 See Warc, , accessed October 2016. 3 See Emma Siemasko, ‘How Rip Curl is making waves with email marketing’, Business 2 Community, 5 October 2015, ; ‘Rip Curl: Search GPS’, Warc, 2016, ; Eli Greenblat, ‘Rip Curl outshines surfwear rivals with 25pc rise in full-year net profit’, The Australian Business Review, 30 October 2015, , accessed October 2016. 4 See ‘Advertisers blend digital and TV for well-rounded campaigns’, eMarketer, 12 March 2014, , accessed October 2016. 5 ‘Customer-driven content at Coles’, Marketing, 2 September 2016, ; ‘DMG Radio and Coles enhance in-store experience’, B&T Magazine, 24 January 2014, , accessed October 2016. 6 Ratings from ‘2014 FIFA World Cup™ reached 3.2 billion viewers, one billion watched final’, FIFA.com, 16 December 2014, ; AAP, ‘More than 4 million fans watched AFL Grand Final between Western Bulldogs and Sydney’, Herald Sun, 2 October 2016, ; and , accessed October 2016. 7 See discussions at Mike Ishmael, ‘The cost of a sales call’, 22 October 2012, ; Jeff Green, ‘The new Willy Loman survives by staying home’, Bloomberg Businessweek, 14–20 January 2013, pp. 16–17; and ‘What is the real cost of a B2B sales call?’, , accessed October 2016. 8 ‘100 largest global marketers’, Advertising Age, 8 December 2014, p. 26. 9 For these and other advertising spending facts, see Advertising Age Marketing Fact Pack 2015, 29 December 2014; and ‘200 leading national advertisers’, Advertising Age, 13 July 2015, pp. 14–23. 10 For campaign details, see ; ‘Aldi continues with “Like brands. Only cheaper” campaign’, Adnews, 14 March 2016, ; ‘ALDI continues “Like Brands. Only Cheaper” campaign via BMF with a twist in every aisle’, Campaign Brief, 26 May 2016, , accessed October 2016. 11 For details of the self-regulatory advertising processes via the Advertising Claims Board, see , accessed October 2016. 12 Information sourced from , and , accessed October 2016.

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Chapter 11  Communicating customer value: Advertising and public relations

13 Sheree Johnson, ‘New research sheds light on daily ad exposures’, SJ Insights, 29 September 2014, , accessed October 2016. 14 For high-rating programs, see OzTam, , accessed October 2016; advertising costs from Donna Svanberg, Executive Producer & Company Director, CAPITOL Productions Pty Ltd, . 15 Sam Thielman, ‘The new hour is 43 minutes long’, Adweek, 24 June 2013, p. 12. 16 Adam Turner, ‘Tablets killing bedroom televisions: Australian multi-screen report’, Sydney Morning Herald, 8 June 2016, , accessed October 2016. 17 Steven Perlberg, ‘Podcasting has an ad-skipping problem, too’, Wall Street Journal, 15 July 2016, ; Mary Kay Evans, ‘How server-side ad insertion is making online ads more user-friendly’, Streaming Media.com, 21 June 2016, ; Harry Tucker, ‘Australian TV networks are trying to combat ad blockers’, Business Insider Australia, 11 April 2016, ; see also A Current Affair website for examples of branded content messages, , accessed October 2016. 18 For information about the ‘Dumb ways to die’ advertisement, see , accessed October 2016. 19 ‘Real beauty shines through: Dove wins titanium grand prix, 163 million views on YouTube’, Google: Think Insights, June 2013, ; Nina Bahadur, ‘Dove “real beauty” campaign turns 10: How a brand tried to change the conversation about female beauty’, Huffington Post, 21 January 2014, ; ‘Powerful Dove experiment shows how women can choose to feel beautiful’, Mashable, 7 April 2015, ; and , accessed October 2016. 20 Harriet Baskas, ‘Betty White adds comedy to in-flight safety video’, CNBC, 15 October 2013; Soo Kim, ‘Air New Zealand reveals “dragon plane” from The Hobbit’, The Telegraph (UK), 2 December 2013; and Air New Zealand, YouTube Channel, , accessed October 2016. 21 For examples of product placement in television and movie, see , accessed October 2016. 22 Michael Byers, ‘Getting value from product placement’, Marketing Magazine, 26 March 2013; ‘Why brands using product placement marketing on The Block are doing it wrong’, Local Direct Network, 17 July 2013. 23 Abe Sauer, ‘Announcing the 2015 Brandcameo product placement awards’, BrandChannel, 20 February 2015, , accessed October 2016. 24 ‘Hamper Giveaway’, A Current Affair, broadcast by Nine Network Australia Pty Ltd on 15 December 2015, , accessed October 2016. 25 Michael Sebastionm, ‘Nearly two-thirds of marketers plan to increase nativead spending in 2015’, 29 January 2015, Advertising Age, , accessed October 2016. 26 See and ; and also ‘Sea Life Sydney Aquarium searches for Sydney’s biggest penguin fan via History Will Be Kind’, Campaign Brief, 5 October 2016, , accessed October 2016. 27 See GoPro sites at , , and ; James Dillon, ‘The story behind GoPro’s radical user generated content marketing strategy’, Gorilla360, ; and also Joel Landau, ‘GoPro’s viral video marketing campaign turns it into top YouTube brand in the world’, New York Daily News, 22 July 2014, , all accessed October 2016. 28 Azadeh Williams, ‘5 epic fails brands make with user-generated content’, CMO, 7 September 2016, , accessed October 2016. 29 See YouTube gamers, AliA , Lachlan and PewDiePie ; and also Sophie Turton, ‘How user generated content is changing content marketing’, Econsultancy, 24 July 2015, , accessed October 2016.

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30 See Wayne Friedman, ‘Most second-screeners don’t follow ads’, Media Post, 16 December 2014, ; and ‘Aussies are clocking up long hours in front of the TV screen and glued to digital devices’, news.com.au, 24 March 2015, , accessed October 2016. 31 The Australian Women’s Weekly and Vogue Australia costs and readership data taken from and , accessed October 2016. 32 See Farm Pride free-range viewer at ; and Rosie Baker, ‘Optus, Sarcom and Facebook in global trending first’, Adnews, 15 September 2014, ; ‘Optus prepaid’, Cream, , accessed October 2016. 33 ‘Study to quantify ROI of media for advertisers’, Think TV, 29 August 2016, ; Jumuna Raj, ‘TV industry invests in world-first study of television ROI’, Marketing Magazine, 31 August 2016, , accessed October 2016. 34 Information on advertising agency revenues from ‘Agency report’, Advertising Age, 28 April 2014, pp. 8ff; and ‘Marketing fact pack 2015’, Advertising Age, 29 December 2014, pp. 26–9. 35 Stuart Elliott, ‘Visa trims slogan to expand meaning’, New York Times, 13 January 2014, p. B6. 36 See E J Schultz, ‘Behind the Snickers campaign that launched a global comeback’, Advertising Age, 4 October 2013, ; and and , accessed October 2016. 37 Based on Glen Broom & Bey-Ling Sha, Cutlip & Center’s Effective Public Relations, 11th edn, Prentice Hall: Upper Saddle River, NJ, 2013, chapter 1. 38 See tweet at , accessed October 2016. 39 See Lisa Griplas, ‘Australia celebrates campaign for wool’, 24 May 2016, ; ‘Campaign for wool’, Woolmark, 16 September 2013, ; and also ; all accessed October 2016. 40 See Niantic website and Twitter account, , and ; see also Craig Smith, ‘Pokemon Go statistics (September 2016)’, DMR, 21 September 2016, ; Dean Takahashi, ‘Analytics firms show how Pokémon Go became a phenomenon’, VB, 14 July 2016, ; and Lee Scott, ‘Why Niantic didn’t need marketing to make Pokémon Go viral’, The Conversation, 29 July 2016, ; all accessed October 2016. 41 Quotes from Sarah Skerik, ‘An emerging PR trend: Content PR strategy and tactics’, PR Newswire, 15 January 2013, ; and Mary Teresa Bitti, ‘The new mad men: How public relations firms have emerged from the shadows’, Financial Post, 28 December 2014, , accessed October 2016. 42 See Australian Association of National Advertisers website for codes of practice, ; and also Peter Roper, ‘AANA updates definition of “advertising” in response to evolving nature of PR’, 23 October 2015, ; accessed October 2016. 43 See The a2 Milk Company™ website, , and also Rob Grant, ‘Sacred cows: The secret to A2 Milk’s success’, Marketing Magazine, 2 July 2015, , accessed October 2016. 44 Avery M Abernethy & George R Franke, ‘The information content of advertising: A meta analysis’, Journal of Advertising, 25(2), 1996, pp. 1–17. 45 Vanessa Evans & Chris Wilson, ‘What media strategy is best for your brand?’, B&T Marketing and Media, 12 December 2001. 46 See ‘Only 30 per cent of SMEs use social media’, BRW, 23 May 2013; and ‘Aussies are getting socially mobile while businesses miss the mark!’, Sensis, 21 May 2013. 47 ‘The workforce activism spectrum: Infographic, including pro tips for dealing with detractors’, Marketing Magazine, 3 April 2014, ; and also ‘Employee activists spark movement in digital age’, Weber Shandwick, 3 April 2016, ; both accessed October 2016.

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Chapter

12

Personal selling and sales promotion: Creating value in relationships In Chapter 11, you learned about communicating customer value through integrated marketing communications (IMC) and about two elements of the promotion mix – advertising and public relations. In this chapter, we examine two more IMC elements – personal selling and sales promotion. Personal selling is the interpersonal arm of marketing communications, in which the salesforce interacts with customers and prospects to build relationships and make sales. Sales promotion consists of short-term incentives to encourage purchase or sale of a product or service. As you read on, remember that, although this chapter examines personal selling and sales promotion as separate tools, they must be carefully integrated with other elements of the promotion mix. For a visual representation of the chapter, please see the concept map on the following page.

Learning

Objectives

Learning Objective 1 Discuss the role of a company’s salespeople in creating value for customers and building customer relationships. Personal selling  pp. 376–78 Learning Objective 2 Identify and explain the six main salesforce management steps. Managing the salesforce  pp. 378–87 Learning Objective 3 Discuss the personal selling process, distinguishing between transaction-oriented marketing and relationship marketing. The personal selling process  pp. 387–92 Learning Objective 4 Explain how sales promotion campaigns are developed and implemented. Sales promotion  pp. 392–98

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LO 2 Identify and explain the six main salesforce management steps. pp. 378–87

and ing g t i ru tin e ec elec eopl s esp l sa

onal selling pro s r e ces ep s Th

Clo si

Represents the customers to the company

SALES FORCE

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Desig nin stra g sale te s stru gy and force ctur e Pros pec a ting qual nd ifyin g ap Pre pr o

Han objec dling tion s

-up low Fol

Company

Su sal per v esp isi eo n ple

ng

Customers

Represents the company to the customers

LO 1

s s sale tive Set objec n otio prom

Discuss the role of a company’s salespeople in creating value for customers and building customer relationships. (pp. 376–78)

Eva lua te

LO 3

Presentation and demonstration

h roac App

- ch a

Discuss the personal selling process, distinguising between transactionoriented marketing and relationship marketing. (pp. 387–92)

Compen sa salespe ting ople

g Trainin le peop s e l a s

g

R

rce managemen Salesfo t

Se lec tt oo l

S ale

s p r o m o ti o n t o ols

Dete rmine incentive size

te mo Pro

ation Par ticip ns t condi io

LO 4 Explain how sales promotion campaigns are developed and implemented. (pp. 392–98)

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Personal selling  (pp. 376–78) Robert Louis Stevenson once noted that ‘everyone lives by selling something’. Companies all around the world use salesforces to sell products and services to business customers and final consumers. But salesforces are also found in many other kinds of organisations. For example, universities use recruiters to attract new international students, and clubs use membership committees to attract new members. Museums and fine arts organisations use fundraisers to contact donors and raise money. Even governments use salesforces. In the first part of this chapter, we examine the role of personal selling in the organisation, salesforce management decisions and the personal selling process. The latter part of the chapter focuses on sales promotion.

personal selling

Personal presentation by the business’s salesforce for the purpose of making sales and building customer relationships.

The nature of personal selling

Personal selling consists of interpersonal interactions with customers and prospects to make sales and

maintain customer relationships. It is one of the oldest professions in the world. The people who do the selling go by many names: salespeople, sales representatives, district managers, account executives, sales consultants, sales engineers, agents and account development reps, to name just a few. People hold many stereotypes of salespeople – including some unfavourable ones. ‘Salesman’ may bring to mind the image of Arthur Miller’s pitiable Willy Loman in Death of a Salesman or the consummate sales team from reality TV’s Say Yes to the Dress. And then there are the real-life ‘yell-and-sell’ ‘pitchmen’, who flog everything from OxiClean (stain remover), NuWave (convection oven) and ShamWow (cleaning cloth) to the Magic Bullet (blender) and the Snuggie (blanket with sleeves) in television infomercials. However, the majority of salespeople are a far cry from these unfortunate stereotypes. Most salespeople are well-educated, well-trained professionals who add value for customers and maintain long-term customer relationships. They listen to their customers, assess customer needs and organise the company’s efforts to solve customer problems. The best salespeople are salesperson An individual the ones who work closely with customers for mutual gain. Consider Boeing, the aerospace giant representing a company competing in the rough-and-tumble worldwide commercial aircraft market. It takes more than to customers by fast talk and a warm smile to sell expensive high-tech aircraft. A single big sale can easily run into performing one or billions of dollars – for example, the list price for the Boeing 787-9 Dreamliner is US$264.6 million. more of the following activities: prospecting, Jetstar received the first of fourteen 787s in 2013. The multi-billion dollar order was placed by communicating, selling, Qantas some years ago and includes options for 50 more aircraft. After upgrading its Jetstar fleet, servicing, information Qantas is now set to bring eight new Dreamliners into service on its long-haul flights by 2019. gathering and Boeing salespeople head up an extensive team of company specialists – sales and service technicians, relationship building. financial analysts, planners, engineers – all dedicated to finding ways to satisfy airline customer needs. The selling process is nerve-rackingly slow – it can take two or three years from the first sales presentation to the day the sale is announced. After getting the order, salespeople then must stay in almost constant touch to make certain the customer stays satisfied. Success depends on building solid, longterm relationships with customers, based on performance and trust.1 The term salesperson covers a wide range of positions. At one extreme, a salesperson might be largely an order taker, Professional selling: To sell the Dreamliner 787, the Boeing sales team builds solid, long-term relationships with customers such as such as the department store salesperson standing behind the Jetstar and Qantas. counter. At the other extreme are order getters, whose positions Qantas demand creative selling, social selling and relationship building

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for products and services ranging from appliances, industrial equipment and aircraft, to insurance and information technology services. Here, we focus on the more creative types of selling and on the process of building and managing an effective salesforce.

The role of the salesforce Personal selling is the interpersonal arm of the promotion mix. Advertising consists largely of non-personal communication with target consumer groups. In contrast, personal selling involves interpersonal interactions between salespeople and individual customers – whether face-to-face, by telephone, via email, through video or web conferences, or by other means. Personal selling can be more effective than advertising in more complex selling situations. Salespeople can probe customers to learn more about their problems and then adjust the marketing offer and presentation to fit each customer’s needs. The role of personal selling varies from company to company. Some firms have no salespeople at all – for example, companies that sell only online or through catalogues, or those that sell through manufacturer’s reps, sales agents or brokers. In most firms, however, the salesforce plays a major role. In companies that sell business products and services, such as IBM or Boeing, the company’s salespeople work directly with customers. In consumer-product companies, such as Procter & Gamble and Nike, the salesforce plays an important behind-the-scenes role. It works with wholesalers and retailers to gain their support and to help them be more effective in selling the company’s products.

Linking the company with its customers The salesforce serves as a critical link between a company and its customers. In many cases, salespeople serve both masters – the seller and the buyer. First, they represent the company to customers. They find and develop new customers and communicate information about the company’s products and services. They  sell products by approaching customers, presenting their offerings, answering objections, negotiating prices and terms, closing sales, servicing accounts and maintaining account relationships. At the same time, salespeople represent customers to the company, acting inside the company as ‘champions’ of customers’ interests and managing the buyer–seller relationship. Salespeople relay customer concerns about company products and actions back inside the company to those who can manage them. They learn about customer needs and work with other marketing and non-marketing people in the company to develop greater customer value. In fact, to many customers, the salesperson is the company – the only tangible manifestation of the company they see. So, customers may become loyal to salespeople as well as to the companies and products they represent. This concept of salesperson-owned loyalty lends even more importance to the salesperson’s customer relationship-building abilities. Strong relationships with the salesperson will result in strong relationships with the company and its products. Conversely, poor salesperson relationships will probably result in poor company and product relationships.

Coordinating marketing and sales Ideally, the salesforce and the firm’s other marketing functions (marketing planners, brand managers, marketing content managers and researchers) should work closely together to create

Connecting with customers: Salespeople link the company with its customers. To many customers, the salesperson is the company. © Blue Jean Images/Alamy Stock Photo

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value for both customers and the company. Unfortunately, however, some companies still treat ‘marketing’ and ‘sales’ as separate functions. When this happens, the relationship between the separated marketing and sales functions can be dysfunctional. When things go wrong, the marketers blame the salesforce for its poor execution of an otherwise splendid strategy. In turn, the sales team blames the marketers for being out of touch with what is really going on with customers. Neither group fully values the other’s contributions. If not repaired, such disconnects between marketing and sales can damage customer relationships and company performance. A company can take several actions to help bring its marketing and sales functions closer together. At the most basic level, it can increase communications between the two groups by arranging joint meetings and by spelling out when and with whom each group should communicate. The company can create opportunities for marketers and salespeople to work together. Brand managers and researchers can tag along on sales calls or sit in on sales account-planning sessions. In turn, salespeople should help to develop marketing plans and sit in on product-planning reviews to share their first-hand customer knowledge. A company can also create joint objectives and reward systems for sales and marketing or appoint marketing– sales liaisons – people from marketing who ‘live with the salesforce’ and help to coordinate marketing and salesforce programs and efforts. Finally, the firm can appoint a high-level marketing executive who oversees both marketing and sales. Such a person can help infuse marketing and sales with the common goal of creating value for customers in order to capture value in return.2

Managing the salesforce (pp. 378–87) salesforce management

Analysing, planning, implementing and controlling salesforce activities.

We define salesforce management as analysing, planning, implementing and controlling salesforce activities. It includes designing salesforce strategy and structure, and recruiting, selecting, training, compensating, supervising and evaluating the firm’s salespeople. These major salesforce management decisions are shown in Figure 12.1 and are discussed in the following sections.

Designing salesforce strategy and structure Marketing managers face several salesforce strategy and design questions. How should salespeople and their tasks be structured? How large should the salesforce be? Should salespeople sell independently or work in teams with other people in the company? Should they sell in the field, by telephone or using online and social media? We address these issues next.

Salesforce structure A company can divide sales responsibilities along any of several lines. The structure decision is simple if the company sells only one product line to one industry with customers in many locations. In that case, the company would use a territorial salesforce structure. However, if the company sells many products to many types of customers, it might need a product salesforce structure, a customer salesforce structure or a combination of the two.

Designing salesforce strategy and structure

Recruiting and selecting salespeople

Training salespeople

Compensating salespeople

Supervising salespeople

Evaluating salespeople

Figure 12.1  The main steps in salesforce management

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Territorial salesforce structure In the territorial salesforce structure, each salesperson is assigned to an exclusive geographic area and sells the company’s full line of products or services to all customers in that territory. This organisation clearly defines each salesperson’s job and fixes accountability. It also increases the salesperson’s desire to build local customer relationships that, in turn, improve selling effectiveness. Finally, because each salesperson travels within a limited geographic area, travel expenses are relatively small. A territorial sales organisation is often supported by many levels of sales management positions. For example, individual territory sales reps may report to area managers, who in turn report to regional managers who report to a director of sales. Product salesforce structure If a company has numerous and complex products, it can adopt a product salesforce structure, in which the salesforce sells along product lines. For example, General Electric (GE) employs different salesforces within different product and service divisions of its major businesses. Within GE Infrastructure, for instance, the company has separate salesforces for aviation, energy, transportation, and water-processing products and technologies. No single salesperson can become expert in all of these product categories, so product specialisation is required. Similarly, GE Healthcare employs different salesforces for diagnostic imaging, life sciences and integrated IT products and services. In all, a company as large and complex as GE might have dozens of separate salesforces serving its diverse product and service portfolio. The product salesforce structure can lead to problems, however, if a single large customer buys many different company products. For example, several different GE salespeople might end up calling on the same large health-care customer in a given period. This means that they travel over the same routes and wait to see the same customers’ purchasing agents. These extra costs must be compared with the benefits of better product knowledge and attention to individual products. Customer salesforce structure Using a customer (or market) salesforce structure, a company organises its salesforce along customer or industry lines. Separate salesforces may be set up for different industries, for serving current customers versus finding new ones and for major accounts versus regular accounts. Organising the salesforce around customers can help a company to build closer relationships with important customers. Many companies even have special salesforces set up to handle the needs of individual large customers. In Australia, Unilever understands that the relationships it has with large retailers, such as Coles, Kmart and Target, are so important, it has a customer (or relationship) manager and an assistant customer manager. Unilever see these roles as being crucial in order to ‘cement on-going relationships with our customers’.3

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territorial salesforce structure

A salesforce organisation that assigns each salesperson to an exclusive geographic area in which that salesperson sells the company’s full line.

product salesforce structure

A salesforce organisation where salespeople specialise in selling only a portion of the company’s products or lines.

customer (market) salesforce structure

A salesforce organisation where salespeople specialise in selling only to certain customers or industries.

Complex salesforce structures When a company sells a wide variety of products to many types of customers over a broad geographic area, it often employs a complex salesforce structure, which combines several types of salesforce structures. Salespeople can be specialised by customer and territory, by product and territory, by product and customer, or by territory, product and customer. No single structure is best for all companies and situations. Each company should select a salesforce structure that best serves the needs of its customers and fits the company’s overall marketing strategy. An appropriate salesforce structure can mean the difference between success and failure. Over time, salesforce structures can grow complex, inefficient and unresponsive to customers’ needs. Companies should periodically review their salesforce organisations to be certain they serve the needs of the company and its customers.

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Salesforce size Once the company has set its structure, it is ready to consider salesforce size. Salesforces may range in size from only a few salespeople to tens of thousands. Salespeople constitute one of the company’s most productive – and most expensive – assets. Therefore, increasing their number will increase both sales and costs. Many companies use some form of workload approach to set salesforce size. Using this approach, a company first groups accounts into different classes according to size, account status or other factors related to the amount of effort required to maintain them. It then determines the number of salespeople needed to call on each class of accounts the desired number of times. Figure 12.2 illustrates the workload approach in action.

Type A: LARGE BUSINESS

Type B: SMALL BUSINESS

100×Customer account

200×Customer account

SALESFORCE WORKLOAD IS 6000 calls per year:

(100×36) + (200×12) = 6000 IF AN AVERAGE SALESPERSON COULD MAKE 1000 calls per year, then:

6000 ÷ 1000 = 6 6 SALESPEOPLE ARE REQUIRED to do the work

Figure 12.2  Workload approach in action: Calculating salesforce size

outside salesforce (field salesforce) Salespeople who travel to or call on customers in the field.

inside salesforce

Salespeople who conduct business from their offices by telephone, through online and social media interactions or by visits from buyers.

Other salesforce strategy and structure issues Sales management must also decide who will be involved in the selling effort and how various sales and sales support people will work together.

Outside and inside salesforces The company may have an outside salesforce (or field salesforce), an inside salesforce or both. Outside salespeople travel to call on customers in the field. Inside salespeople conduct business from their offices via telephone, through online and social media interactions or by visits from buyers. Some inside salespeople provide support for the outside salesforce, freeing them to spend more time selling to major accounts and finding new prospects. For example, technical sales support people provide

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technical information and answers to customers’ questions. Sales assistants provide administrative backup for outside salespeople. They track down sales leads, call ahead and confirm appointments, follow up on deliveries and answer customers’ questions when outside salespeople cannot be reached. Using such combinations of inside and outside salespeople can help to serve important customers better. The inside rep provides daily access and support; the outside rep provides face-to-face collaboration and relationship building. Other inside salespeople do more than just provide support. Telemarketers and online sellers use the phone, internet and social media to find new leads, to learn about customers and their business, and to sell and service accounts directly. Telemarketing and online Inside salesforces: For many types of selling situations, phone or selling can be very effective and less-costly ways to sell to smaller, online selling can be as effective as a personal sales call. harder-to-reach customers. Depending on the complexity of the © Blue Jean Images/Alamy Stock Photo product and customer, for example, a telemarketer can make from 20 to 33 decision-maker contacts a day, compared to the average of four that an outside salesperson can make. Although the Australian government’s Do Not Call Register put a dent in telephone sales to consumers, telemarketing remains a vital tool for many business-to-business marketers. For some smaller companies, telephone and online selling may be the primary sales approaches. However, most of the larger companies also use these tactics extensively, either to sell directly to small and mid-size customers or to assist their salesforces in selling to larger customers. In addition to cost savings, in today’s digital, mobile and social media environments, many buyers are more receptive to – or even prefer – phone and online contact versus the high level of face-to-face contact once required. Today’s customers are more inclined to gather their own information online – one study showed that a typical buyer reports contacting a sales rep only after independently completing about 60 per cent of the buying process. Then buyers routinely use the phone, online meetings and social media interactions to engage sellers and close deals. ‘With virtual meeting software such as GoToMeeting.com and WebEx, communications tools such as Skype, and social media sites such as Twitter, Facebook, and LinkedIn, it’s become easier to sell with few if any face-to-face meetings,’ says an inside sales consultant. As a result of these trends, telephone and online selling are growing much faster relative to in-person selling.4 For many types of products and selling situations, phone or online selling can be as effective as a personal sales call. That does not mean there is no salesperson at all. It is the way they work that is different. Online and telesales businesses will still need a customer service team to resolve customer concerns and answer questions. Savvy businesses are not interested only in customer service – they are also interested in customer experience management and, for the online and telesales business, that means being accessible and responsive. As one expert explains, ‘Those salespeople and companies that are not easily accessible, that take too long to respond or to deliver are going to find themselves at the back of the line, with the more agile, responsive and [nimble] footed salespeople and sales organisations taking the lion’s share of the business.’ Managed well, the phone and internet can be surprisingly personal when it comes to building customer relationships.5

Team selling As products become more complex, and as customers grow larger and more demanding, a single salesperson simply cannot handle all of a large customer’s needs. Instead, most companies now use team selling to service large, complex accounts. Sales teams can unearth problems, solutions and sales opportunities that no individual salesperson could. Such teams might include experts from any area or level of the selling firm – sales, marketing, technical and support services, research and development, engineering, operations, finance and others.

team selling

Using teams of people from sales, marketing, engineering, finance, technical support and even upper management to service large, complex customer accounts.

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In many cases, the move to team selling mirrors similar changes in customers’ buying organisations. Many large customer companies have implemented team-based purchasing, requiring marketers to employ equivalent team-based selling. When dealing with large, complex accounts, one salesperson cannot be an expert in everything the customer needs. Instead, selling is done by strategic account teams, led by senior account managers or customer business managers. Some companies, such as IBM, Xerox and Procter & Gamble (P&G), have used teams for a long time. P&G sales reps are organised into ‘customer business development (CBD) teams’. Each CBD team is assigned to a major P&G customer. The CBD organisation places the focus on serving the complete needs of each major customer. It lets P&G ‘grow Team selling: Many companies combine several types of salesforce business by working as a “strategic partner” with our accounts’, structure and work in teams to service large, complex accounts. not just as a supplier.6 Andres Rodriguez/Fotolia Team selling does have some pitfalls. For example, salespeople are by nature competitive and have often been trained and rewarded for outstanding individual performance. Salespeople who are used to having customers all to themselves may have trouble learning to work with and trust others on a team. In addition, selling teams can confuse or overwhelm customers who are used to working with only one salesperson. Finally, difficulties in evaluating individual contributions to the team-selling effort can create some tricky compensation issues.

Recruiting and selecting salespeople At the heart of any successful salesforce operation is the recruitment and selection of good salespeople. The performance difference between an average salesperson and a top salesperson can be substantial. In a typical salesforce, the top 30 per cent of the salespeople might bring in 60 per cent of the sales. Thus, careful salesperson selection can greatly increase overall salesforce performance. Beyond the differences in sales performance, poor selection results in costly turnover. When a salesperson quits, the costs of finding and training a new salesperson – plus the costs of lost sales – can be very high. One expert estimates that the cost of hiring a new salesperson can be as much as twice their salary.7 Also, a salesforce with many new people is less productive, and turnover disrupts important customer relationships. What sets great salespeople apart from all the rest? In an effort to profile top sales performers, Gallup Management Consulting Group, a division of the well-known Gallup polling organisation, has interviewed hundreds of thousands of salespeople. Its research suggests that the best salespeople possess four key talents: intrinsic motivation, disciplined work style, the ability to close a sale and, perhaps most importantly, the ability to build relationships with customers.8 Super salespeople are motivated from within – they have an unrelenting drive to excel. Some salespeople are driven by money, a desire for recognition or the satisfaction of competing and winning. Others are motivated by the desire to provide service and to build relationships. The best salespeople possess some of each of these motivations. However, another analysis found that the best salespeople are driven by a strong sense of purpose: ‘The salespeople who sold with noble purpose, who truly want to make a difference to customers, consistently outsold the salespeople focused on sales goals and money.’ Selling with such a sense of customer-related purpose is not only more successful, it is also more profitable and more satisfying to salespeople.9 Super salespeople also have a disciplined work style. They lay out detailed, organised plans and then follow through in a timely way. But motivation, discipline and effective thinking mean little unless they result in closing more sales and building better customer relationships. Super salespeople build the skills

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and knowledge they need to get the job done. Perhaps most importantly, top salespeople are excellent customer problem solvers and relationship builders. They understand their customers’ needs. Talk to sales executives and they will describe top performers in these terms: Empathetic. Patient. Caring. Responsive. Good listeners. Top performers can put themselves on the buyer’s side of the desk and see the world through their customers’ eyes. They want to add value for their customers. That said, there is no one right way to sell. Each successful salesperson uses a different approach, one that best applies his or her unique strengths and talents. For example, some salespeople enjoy the thrill of a harder sell in confronting challenges and winning people over. Others might apply ‘softer’ talents to reach the same goal. ‘The truth is, no two great sales reps are alike,’ says one sales consultant. ‘You might thrive on fierce competition, while a colleague wins by being a super-analytical problem solver. Or maybe you have a tremendous talent for building relationships, while your fellow top performer is a brilliant strategist. What’s most important is that you win business your way.’10 When recruiting, a company should analyse the sales job itself and the characteristics of its most successful salespeople to identify the traits needed by a successful salesperson in their industry. Then, it must recruit the right salespeople. The human resources department looks for applicants by seeking recommendations from current salespeople, using employment agencies, placing classified ads, searching the internet and online social media, and working through university careers and placement services. Another source is to attract top salespeople from other companies. Proven salespeople need less training and can be productive immediately. Recruiting will attract many applicants from whom the company must select the best. The selection procedure can vary from a single informal interview to lengthy testing and interviewing. Many companies give formal tests to sales applicants. Tests typically measure sales aptitude, analytical and organisational skills, personality traits and other characteristics. But test scores provide only one piece of information in a set that includes personal characteristics, references, past employment history and interviewer reactions.

Training salespeople New salespeople may spend anywhere from a few weeks or months to a year or more in training. Then, most companies provide continuing sales training via seminars, sales meetings and online e-learning throughout the salesperson’s career. Companies invest heavily in training salespeople, and sales training typically captures the largest share of the company’s overall training budget. Although training can be expensive, it can also yield dramatic returns. For instance, one training organisation reports it was able to achieve a 16 per cent increase in sales for its client, an Australian manufacturer and exporter of fibreglass swimming pools. Such massive improvements show the value of investing in training a sales team.11 Training programs have several goals. First, salespeople need to know about customers and how to build relationships with them. So, the training program must teach them about different types of customers and their needs, buying motives and buying habits. And it must teach them how to sell effectively and train them in the basics of the selling process. Salespeople Sales training: Training can make a sales team much more effective. also need to know and identify with the company, its products An Australian swimming-pool manufacturer and exporter increased and its competitors. So, an effective training program teaches sales by 16 per cent after supporting dealers to develop their sales salespeople about the company’s objectives, organisation and skills. © Alexandre Zveiger/Shutterstock.com chief products and markets, and about the strategies of major competitors.

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Today, many companies are adding e-learning to their sales training programs. Online training may range from simple text-based product training, to internet-based sales exercises that build sales skills, to sophisticated simulations that re-create the dynamics of real-life sales calls. One of the most basic forms of online training is virtual instructor-led training (VILT). Using this method, a small group of salespeople at various remote locations log in to an online conferencing site, where a sales instructor leads training sessions using online video, audio and interactive learning tools. Training online instead of on-site can cut travel and other training costs, and it takes up less of salespeople’s selling time. It also makes on-demand training available to salespeople, letting them train as little or as much as needed, whenever and wherever needed. Although most e-learning is web-based, many companies now offer on-demand training from anywhere via almost any mobile digital device. Many companies are now using imaginative and sophisticated e-learning techniques to make sales training more efficient – and sometimes even more fun. For example, one Australian sales training company uses sales simulations to develop sales skills with its clients.12

Compensating salespeople To attract good salespeople, a company must have an appealing compensation plan. Compensation is made up of several elements – a fixed amount, a variable amount, expenses and fringe benefits. The fixed amount, usually a salary, gives the salesperson some stable income. The variable amount, which might be commissions or bonuses based on sales performance, rewards the salesperson for greater effort and success. Management must decide what mix of these compensation elements makes the most sense for each sales position. Different combinations of fixed and variable compensation give rise to four basic types of compensation plans: straight salary, straight commission, salary plus bonus and salary plus commission. According to one study of salesforce compensation, 18 per cent of companies pay straight salary, 19 per cent pay straight commission and 63 per cent pay a combination of salary plus incentives. Another study showed that the average salesperson’s pay consists of about 67 per cent salary and 33 per cent incentive pay.13 The salesforce compensation plan can both motivate salespeople and direct their activities. Compensation should direct salespeople towards activities that are consistent with overall salesforce and marketing objectives. For example, if the strategy is to acquire new business, grow rapidly and gain market share, the compensation plan might include a larger commission component, coupled with a newaccount bonus to encourage high sales performance and new-account development. In contrast, if the goal is to maximise current-account profitability, the compensation plan might contain a larger base-salary component with additional incentives for current-account sales or customer satisfaction.14 In fact, more and more companies are moving away from high commission plans that may drive salespeople to make short-term grabs for business. They worry that a salesperson who is pushing too hard to close a deal may ruin the customer relationship. Instead, companies are designing compensation plans that reward salespeople for building customer relationships and growing the long-run value of each customer. When times get tough economically, some companies are tempted to cut costs by reducing sales compensation. However, although some cost-cutting measures make sense when business is sluggish, cutting salesforce compensation across the board is usually an action of last resort. Top salespeople are always in demand, and paying them less might mean losing them at a time when they are most needed. Thus, short-changing key salespeople can result in short-changing important customer relationships. If the company must reduce its compensation expenses, rather than making across-the-board cuts, companies should continue to pay top performers well while turning loose poor performers.

Supervising and motivating salespeople New salespeople need more than a territory, compensation and training – they need supervision and motivation. The goal of supervision is to help salespeople ‘work smart’ by doing the right things in the right

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ways. The goal of motivation is to encourage salespeople to ‘work hard’ and energetically towards salesforce goals. If salespeople work smart and work hard, they will realise their full potential, to both their own and the company’s benefit.

Supervising salespeople Companies vary in how closely they supervise their salespeople. Many companies help salespeople to identify target customers and set call norms. Some may also specify how much time the salesforce should spend prospecting for new accounts and set other time-management priorities. One tool is the weekly, monthly or annual call plan that shows which customers and prospects to call on and which activities to carry out. Another tool is time-and-duty analysis. In addition to time spent selling, the salesperson spends time travelling, waiting, taking breaks and doing administrative tasks. How salespeople spend their time varies from industry to industry and even from metropolitan to urban settings. International benchmarks are available for comparing similar businesses. Benchmarks are not necessarily ‘best practice’, but they do represent what is happening in similar businesses around the world. For example, Figure 12.3 shows the international benchmark for a field salesforce operating in large cities. The outer ring shows how salespeople in the benchmark business spend their time. The inner ring shows how the field salesforce for an example Australian business spends their time. A quick comparison shows there are a lot of similarities. Salespeople spend about a quarter of their time travelling, waiting and on personal activity, and about 20 per cent of their time in face-to-face sales meetings.15 But that is where the similarities end. The example Australian business’s salesforce spends much less time prospecting and a bit less time servicing customers, and a great deal more time on organisational activities. The Australian business’s salesforce is being pulled away from the active sales functions into administrative and organisational tasks. By redirecting the salesforce effort to sales-focused activities, it may be possible to generate more sales. Figure 12.3 also shows that the field salesforce for the example Australian business is spending much less time on sales-related activities (less than 40 per cent) compared to the international benchmark business

International benchmark in major cities

8%

15%

6% 19%

6%

Prospecting Face-to-face selling

19%

20%

Servicing customers 19%

Example Business

Organisational activities Travelling and waiting

13%

Personal/miscellaneous activity

36% 22% 17%

Figure 12.3  How salespeople spend their time Source: Sue Barrett, ‘How much valuable selling time are you wasting?’, Smart Company, 7 April 2013. Data used with permission.

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social selling

Using online, mobile and social media to engage customers, build strong customer relationships and augment sales performance.

(over 50 per cent). Understanding where the salesforce is spending their time, and directing more time to sales- and customer-focused activity, could help improve the overall performance of the field sales team in this example. Companies are always looking for ways to save time – by simplifying administrative duties, developing better sales-call and routing plans, supplying more and better customer information, and using phones, email or videoconferencing instead of travelling. Comparisons such as that shown in Figure 12.3 help managers to understand where those savings might be. Many firms have adopted salesforce automation systems – computerised, digitised salesforce operations that let salespeople work more effectively anytime, anywhere. Companies now routinely equip their salespeople with laptops, smartphones, wireless connections, webcams for videoconferencing, and customer-contact and relationship management software. Armed with these technologies, salespeople can more effectively and efficiently profile customers and prospects, analyse and forecast sales, schedule sales calls, make presentations, prepare sales and expense reports, and manage account relationships. The result is better time management, improved customer service, lower sales costs and higher sales performance. In all, technology has reshaped the ways in which salespeople carry out their duties and engage customers. Digital and Cloud-based solutions offer explosive potential for connecting with and engaging customers. In fact, social selling – the use of online, mobile and social media to engage customers, build strong customer relationships and augment sales performance – is the fastest-growing sales trend today. Mayo Hardware is a Sydney-based distributor of hardware to retailers such as Bunnings and Mitre 10. Each week, Mayo Hardware’s 40-plus sales reps are out with customers, pitching new product lines, conducting in-store training, taking orders and managing the various product lines. The sales team use tablets and smartphones with a Cloud-based app to connect them to Mayo Hardware’s sales system. This means that while the reps are out and about they can record in-store training and track opportunities, sales rates and overall progress – all in real-time. Social tools are used to keep the sales team connected – they can chat throughout the day, sharing information, insights and solutions to client problems. This keeps the team abreast of all the latest developments even when they are on the road. In short, salespeople are ‘armed for customer engagement’ (see Marketing in action 12.1).16

Motivating salespeople Beyond directing salespeople, sales managers must also motivate them. Some salespeople will do their best without any special urging from management. To them, selling may be the most fascinating job in the world. But selling can also be frustrating. Salespeople often work alone and they must sometimes travel away from home. They may face aggressive competing salespeople and difficult customers. Therefore, salespeople often need special encouragement to do their best. Management can boost salesforce morale and performance through its organisational climate, sales quotas and positive incentives. Organisational climate describes the feeling that salespeople have about their opportunities, value and rewards for a good performance. Some companies treat salespeople as if they are not very important, and performance suffers accordingly. Other companies treat their salespeople as valued contributors and allow virtually unlimited opportunity for Salesforce automation: Mayo Hardware use digital and Cloudbased sales systems to support the salesforce and to maintain high income and promotion. Not surprisingly, the latter companies customer engagement. enjoy higher salesforce performance and lower salesforce Mayo Hardware, www.mayohardware.com.au turnover.

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Many companies motivate their salespeople by setting sales quotas – standards stating the amount they should sell and how sales should be divided among the company’s products. Compensation is often related to how well salespeople meet their quotas. Companies also use various positive incentives to increase salesforce effort. Sales meetings provide social occasions, breaks from routine, chances to meet and talk with senior managers, and opportunities to air feelings and to identify with a larger group. Companies also sponsor sales contests to spur the salesforce to make a selling effort above what would normally be expected. Other incentives include corporate recognition, merchandise and cash awards, trips and profitsharing plans.

387

sales quota

A standard stating the amount a salesperson should sell and how sales should be divided among the company’s products.

Evaluating salespeople and salesforce performance We have described how management communicates what salespeople should be doing and how it motivates them to do it. This process requires good feedback. And good feedback means getting regular information about salespeople in order to evaluate their performance. Management gets information about its salespeople in several ways. The most important source is sales reports, including weekly or monthly work plans and longer-term territory marketing plans. Salespeople also write up their completed activities on call reports and turn in expense reports, for which they are partially or wholly repaid. The company can also monitor the sales and profit performance data in the salesperson’s territory. Additional information comes from personal observation, customer surveys and talks with other salespeople. Often, these reports are collated in real-time, using a range of digital and Cloud-based sales solutions and using data input by salespeople while they are working with customers. Using various salesforce reports and other information, sales management evaluates members of the salesforce. It evaluates salespeople on their ability to ‘plan their work and work their plan’. Formal evaluation forces management to develop and communicate clear standards for assessing performance. It also provides salespeople with constructive feedback and motivates them to perform well. On a broader level, management should evaluate the performance of the salesforce as a whole. Is the salesforce accomplishing its customer relationship, sales and profit objectives? Is it working effectively with other areas of the marketing and company organisation? Are salesforce costs in line with outcomes? As with other marketing activities, the company wants to measure its return on sales investment.

Linking the concepts Take a break and re-examine your thoughts about salespeople and sales management. ● When someone says ‘salesperson’, what image comes to mind? Have your perceptions of salespeople changed after what you have read in the chapter so far? If so, how? Be specific.

● Find and talk with someone employed in professional sales. Ask about and report on how this salesperson’s company designs its salesforce, and recruits, selects, trains, compensates, supervises and evaluates its salespeople. Would you like to work as a salesperson for this company? Why, or why not?

selling process

The personal selling process (pp. 387–92) We now turn from designing and managing a salesforce to the actual personal selling process. The selling process consists of several steps that salespeople must master. These steps focus on the goal of getting new customers and obtaining orders from them. However, most salespeople spend much of their time maintaining existing accounts and building long-term customer relationships. We discuss the relationship aspect of the personal selling process in a later section.

The steps that a salesperson follows when selling, which include: prospecting and qualifying, pre-approach, approach, presentation and demonstration, handling objections, closing and follow-up.

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Marketing in Action 12.1

Social selling: Who needs salespeople?

It is difficult to imagine a world without salespeople. But, according to some

by an average of $100 000, while adding a customer communication channel

analysts, there will be a lot fewer of them a decade from now. With the explosion

could increase revenue by as much as $160 000 per annum. The challenge for

of the internet, mobile devices, social media and other technologies that link

SMBs: fewer than 20 per cent are using social media to engage with customers.

customers directly with companies, they reason, who needs face-to-face selling

Digital technologies are providing salespeople with powerful tools for

anymore? According to the doubters, salespeople are rapidly being replaced by

identifying and learning about prospects, engaging customers, creating

websites, email, blogs, mobile apps, video sharing, virtual trade shows, social media

customer value, closing sales and nurturing customer relationships. Social selling

such as LinkedIn and Facebook, and a host of other digital-age interaction tools.

technologies can produce significant organisational benefits for salesforces.

‘Don’t believe it,’ says one sales expert. ‘There may be less face-to-face selling,’ says another, ‘but on the seller’s side, there needs to be someone in charge of that

They help conserve salespeople’s valuable time, save travel dollars and give salespeople new tools for selling and servicing accounts.

(customer) interaction. That will remain the role of the salesperson.’ Thus, online

Social selling has not really changed the fundamentals of selling. Salesforces have

and social media technologies are unlikely to make salespeople obsolete. Used

always taken the primary responsibility for reaching out to and engaging customers,

properly, however, they will make salespeople more productive and effective.

and managing customer relationships. Now, more of that is being done digitally.

A recent report from Deloitte Access Economics highlights the importance of

However, online and social media are dramatically changing the customer-buying

digital sales strategies for small and medium-sized businesses (SMBs) in Australia

process. As a result, they are also changing the selling process. In today’s digital

and New Zealand today (see also Chapter 13). Within five years, 50 per cent

world, many customers no longer rely as much as they once did on information

of sales will involve digital tools, and investment in social selling will pay off.

and assistance provided by salespeople. Instead, they carry out more of the buying

A 1 per cent increase in spending on online services will increase average revenues

process on their own – especially the early stages. Increasingly, they use online and social media resources to analyse their own problems, research solutions, get advice from colleagues and rank buying options before ever speaking to a salesperson. In response to this new digital buying environment, sellers are reorienting their selling processes around the new customer-buying process. They are ‘going where customers are’ – social media, web forums, online communities, blogs – in order to engage customers earlier in the process. They are engaging customers not just where and when they are buying but also where and when they are learning about and evaluating what they will buy. Salespeople now routinely use digital tools that monitor customer social media exchanges to spot trends, identify prospects and learn what customers would like to buy, how they feel about a vendor and what it would take to make a sale. They generate lists of prospective customers from online databases and social networking sites, such as LinkedIn and Facebook. They create dialogues when prospective customers visit their website and social media sites through live chats with the sales team. They use internet-conferencing tools, such as WebEx, Zoom or GoToMeeting, to talk live with customers about products and services. They provide videos and other information on their YouTube channels and Facebook pages. Ultimately, social selling technologies are helping to make salesforces more efficient, cost-effective and productive. The technologies help salespeople do what good salespeople have always done – build customer relationships by solving customer problems – but to do it better, faster and cheaper.

Digital technologies can help small and medium-sized businesses improve the customer experience, leading to increased sales and revenue. Salesforce Australia and NZ Blog, www.salesforce.com/au/blog

Sources: Lain Chroust Ehmann, ‘Sales up!’, Selling Power, January/February 2011, p. 40; Thomas Karemacher, ‘Research reveals how SMBs use digital to engage customers’, 22 March 2016, Salesforce Australia & NZ Blog, ; Tom Pisello, ‘Death of a salesman?’, LinkedIn, 12 March 2015, ; Tony J Hughes, ‘Back to the future of sales in 2015’, LinkedIn, 27 December 2014, ; accessed November 2016.

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Questions

389

business needs to have a face-to-face sales team? Why, or why not? What

❶ For a traditional salesperson, intrinsic motivation, disciplined work style, the ability to close a sale and the ability to build relationships with customers, are the most important traits. Search social selling online. Do you think these traits differ in social selling? Justify your answer.

social selling strategy would you recommend? ❸ Some experts are highly critical of social selling. Search online and make a list of the criticisms. Evaluate each in turn; do you think these criticisms are justified?

❷ Choose a small business that has a website (e.g. a locksmith). What social selling tools would you recommend for this business? Do you think the

Steps in the selling process As shown in Figure 12.4, the selling process consists of seven steps: (1) prospecting and qualifying, (2) pre-approach, (3) approach, (4) presentation and demonstration, (5) handling objections, (6) closing and (7) follow-up.

Prospecting and qualifying The first step in the selling process is prospecting – identifying qualified potential customers. Approaching the right potential customers is crucial to the selling success. Salespeople want to call on those who are most likely to appreciate and respond to the company’s value proposition – those the company can serve well and profitably. A salesperson must often approach many prospects to get just a few sales. Although the company supplies some leads, salespeople need skill in finding their own. The best source is referrals. Salespeople can ask current customers for referrals and cultivate other referral sources, such as suppliers, dealers, noncompeting salespeople, and online or social media contacts. They can also search for prospects in directories or on the internet, and track down leads using the telephone and email. Or, they can drop in unannounced on various offices (a practice known as ‘cold calling’). Salespeople also need to know how to qualify leads – that is, how to identify the good ones and screen out the poor ones. Prospects can be qualified by looking at their financial ability, volume of business, particular needs, location and possibilities for growth.

prospecting

The step in the selling process in which the salesperson or company identifies qualified potential clients.

Pre-approach Before calling on a prospect, the salesperson should learn as much as possible about the organisation (what it needs, who is involved in the buying) and its buyers (their characteristics and buying styles).

BUILDING AND MAINTAINING PROFITABLE CUSTOMER RELATIONSHIPS Prospecting and qualifying

Pre-approach

Approach

Presentation and demonstration

Handling objections

Closing

Follow-up

Figure 12.4  Steps in the selling process

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pre-approach

The step in the selling process in which the salesperson learns as much as possible about a prospective customer before making a sales call.

This step is known as the pre-approach. A successful sale begins long before the salesperson makes initial contact with a prospect. Pre-approach begins with good research. The salesperson can consult standard industry and online sources, acquaintances and others to learn about the company. He or she can scour the prospect’s website and social media sites for information about its products, buyers and buying processes. Then, the salesperson must apply the research to develop a customer strategy that identifies the key benefits for the customer. The salesperson should set call objectives, which may be to qualify the prospect, to gather information or to make an immediate sale. Another task is to decide on the best approach, which might be a personal visit, a phone call, an email or a text. The best timing should be considered carefully because many prospects are busiest at certain times of the day or days of the week. Finally, the salesperson should give thought to an overall sales strategy for the account.

Approach approach

The step in the selling process in which the salesperson meets the customer for the first time.

presentation

During the approach step, the salesperson should know how to meet and greet the buyer and get the relationship off to a good start. The approach might take place offline or online, in person or via digital conferencing or social media. This step involves the salesperson’s appearance, opening lines and follow-up remarks. The opening lines should be positive, to build goodwill from the beginning of the relationship. This opening might be followed by some key questions to learn more about the customer’s needs, or by showing a display or sample to attract the buyer’s attention and curiosity. As in all stages of the selling process, listening to the customer is crucial.

Presentation and demonstration

During the presentation step of the selling process, the salesperson tells the ‘value story’ to the buyer, showing how the company’s offer solves the customer’s problems. The customer-solution approach fits better with today’s relationship marketing focus than does a hard-sell or an overly friendly approach. The goal should be to show how the company’s products and services fit the customer’s needs. Buyers today want answers, not smiles; results, not razzle-dazzle. Moreover, they do not just want products. More than ever in today’s economic climate, buyers want to know how those products will add value to their businesses. They want salespeople who listen to their concerns, understand their needs and respond with the right products and services. But before salespeople can present customer solutions, they must develop solutions to present. The solutions approach calls for good listening and problem-solving skills. The qualities that buyers dislike most in salespeople include being pushy, late, deceitful, unprepared, disorganised or overly talkative. The qualities they value most include good listening, empathy, honesty, dependability, thoroughness and follow-through. Great salespeople know how to sell, but more importantly, they know how to listen and build strong customer relationships. Interaction with the customer allows the salesperson to understand the customer’s needs and to translate that insight into a clear benefit. Presentation technology: Today’s media-rich communications Finally, salespeople must also plan their presentation environment presents many new opportunities for sales presentations. methods. Good interpersonal communication skills count © Saklakova/Shutterstock.com when it comes to making effective sales presentations.

The step in the selling process in which the salesperson tells the ‘value story’ to the customer, showing how the company’s offer solves the customer’s problems.

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However, today’s media-rich and cluttered communications environment presents many new challenges for sales presenters. The goal of a sales presentation is to deliver a clear, concise and consistent message to your prospects about your product and your brand, as well as why you are better than the competition. Doing that and keeping your audience’s attention for longer than 30 minutes is the real challenge. Today’s informationoverloaded prospects demand a richer presentation experience. And sales presenters must now overcome multiple distractions from mobile phones, text messaging and other digital competition. As a result, salespeople must deliver their messages in more engaging and compelling ways. Thus, today’s salespeople are employing presentation technologies that allow for full multimedia presentations to only one or a few people. The venerable old flipchart has been replaced with tablets, sophisticated presentation software, online presentation technologies, interactive whiteboards and digital projectors.

Handling objections Customers almost always have objections during the presentation or when asked to place an order. The problem can be either logical or psychological, and objections are often unspoken. In handling objections, the salesperson should use a positive approach, seek out hidden objections, ask the buyer to clarify any objections, take objections as opportunities to provide more information and turn the objections into reasons for buying. Every salesperson needs training in the skills of handling objections.

Closing After handling the prospect’s objections, the salesperson now tries to close the sale. Some salespeople do not get around to closing, or do not handle it well. They may lack confidence, feel guilty about asking for the order or fail to recognise the right moment to close the sale. Salespeople should know how to recognise closing signals from the buyer, including physical actions, comments and questions. For example, the customer might sit forward and nod approvingly or ask about prices and credit terms. Salespeople can use one of several closing techniques. They can ask for the order, review points of agreement, offer to help write up the order, ask whether the buyer wants this model or that one, or note that the buyer will lose out if the order is not placed now. The salesperson may offer the buyer special reasons to close, such as a lower price or an extra quantity at no charge. Digital tools can also help close a sale. For example, one Optus sales rep recently secured a new smallbusiness client at the airport. Using the online offer app, the sales rep was able to develop the best telephony solution, generate a proposal and a contract, and then get the customer’s signature on the screen – all before the customer boarded their flight. The Cloud-based sales tool has reduced the sales cycle by five days, reduced the delays between a verbal agreement and a signed contract, and resulted in a 10 per cent increase in sales conversions in the small- and medium-business market.17

Follow-up The last step in the selling process – follow-up – is necessary if the salesperson wants to ensure customer satisfaction and repeat business. Right after closing, the salesperson should complete any details on delivery time, purchase terms and other matters. The salesperson should then schedule a follow-up call when the initial order is received to make sure there is proper installation, instruction and servicing. This visit would reveal any problems, assure the buyer of the salesperson’s interest and reduce any buyer concerns that might have arisen since the sale.

handling objections

The step in the selling process in which the salesperson seeks out, clarifies and overcomes customer objections to buying.

closing

The step in the selling process in which the salesperson asks the customer for an order.

follow-up

The last step in the selling process in which the salesperson follows up after the sale to ensure customer satisfaction and repeat business.

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Personal selling and managing customer relationships The steps in the selling process as just described are transaction-oriented – their aim is to help salespeople close a specific sale with a customer. But, in most cases, the company is not simply seeking a sale. Rather, it wants to serve the customer over the long term in a mutually profitable relationship. The salesforce usually plays an important role in customer relationship building. Thus, as shown in Figure 12.4, the selling process must be understood in the context of building and maintaining profitable customer relationships. Moreover, today’s buyers are increasingly moving through the early stages of the buying process themselves, before ever engaging sellers. Salespeople must adapt their selling process to match the new buying process. That means discovering and engaging customers on a relationship basis rather than on a transaction basis. Successful sales organisations recognise that winning and keeping accounts requires more than making good products and directing the salesforce to close lots of sales. If the company wishes only to close sales and capture short-term business, it can do this by simply slashing its prices to meet or beat those of competitors. Instead, most companies want their salespeople to practise value selling – demonstrating and delivering superior customer value and capturing a return on that value that is fair for both the customer and the company. Value selling requires listening to customers, understanding their needs and carefully coordinating the whole company’s collective efforts to create lasting relationships based on customer value. Recent research suggests that buyers do not need more information – they have already done research online. Instead, they want to understand how the sales offering will create better outcomes for them. Research indicates that stories and case studies that show how the product will make a difference for the customer is much more effective than simply presenting information about the product. And that means getting to know the customer and really understanding their needs.

Linking the concepts Let us reflect on the personal selling process. ● You likely get emails or Facebook posts every week from one company or another trying to sell you something. That is social selling – but it is not really that different from any other sales process. Using Figure 12.4, review one of those emails or Facebook posts to see how the business is working through the sales process.

● Think back to your last purchase where you interacted with a salesperson. What was the value story that made the difference for you in terms of deciding to make the purchase? What was it about the story or case study that captured your attention?

Sales promotion (pp. 392–98) sales promotion

Consists of short-term incentives to encourage the purchase or sale of a product or service.

Personal selling and advertising often work closely with another promotion tool – sales promotion. Sales promotion consists of short-term incentives to encourage purchase or sales of a product or service. Whereas advertising offers reasons to buy a product or service, sales promotion offers reasons to buy now. Examples of sales promotions are found everywhere. A free-standing insert in the Sunday newspaper contains a coupon offering $1 off Schmackos treats for your dog. An email from Officeworks offers free shipping on your next purchase over $100. A retail website offers a free gift with your purchase. The end-of-the-aisle display in the local supermarket tempts impulse buyers with a wall of Coke cases. An executive buys a new Samsung tablet and gets a case cover, or a family buys a new Holden Commodore and the dealer pays the on-road costs. A hardware store chain receives a 10 per cent discount on selected

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Black & Decker portable power tools if it agrees to advertise them in local newspapers. Sales promotion includes a wide variety of promotion tools designed to stimulate an earlier or stronger market response.

Rapid growth of sales promotion Sales promotion tools are used by most organisations, including manufacturers, distributors, retailers and notfor-profit institutions. They are targeted towards final buyers (consumer promotions), retailers and wholesalers (trade promotions), business customers (business promotions) and members of the salesforce (salesforce promotions). Sales promotion: Sales promotions are found everywhere – in Today, in the average consumer packaged-goods company, magazines and newspapers, and on businesses’ websites, such as this sales promotion accounts for 60 per cent of all marketing one for Bob Jane T-Marts offering a set of four tyres for the price of budgets. In Australia, marketers spend more than three. $1.34 billion each year on promotional products alone. Bob Jane T-Marts In New Zealand, the spend is lower but still a notable NZ$144 million.18 Several factors have contributed to the rapid growth of sales promotion, particularly in consumer markets. First, inside the company, product managers face greater pressures to increase their current sales, and promotion is viewed as an effective short-run sales tool. Second, externally, the company faces more competition, and competing brands are less differentiated. Increasingly, competitors are using sales promotion to help differentiate their offers. Third, advertising efficiency has declined because of rising costs, media clutter and legal restraints. Finally, consumers have become more deal-oriented. In today’s marketing environment, consumers routinely make comparisons online before purchasing – even when they plan to shop in-store. One study estimates that 84 per cent of smartphone owners use their phone while shopping in-store. Consumers are demanding lower prices and better deals. Sales promotions can help attract today’s more thrift-oriented consumers.19 The growing use of sales promotion has resulted in promotion clutter, similar to advertising clutter. A given promotion runs the risk of being lost in a sea of other promotions, weakening its ability to trigger immediate purchase. Manufacturers are now searching for ways to rise above the clutter, such as offering larger coupon values, creating more dramatic point-of-purchase displays, or delivering promotions through interactive media, such as the internet or mobile phones. According to one study, 88 per cent of retailers now see digital promotions – such as mobile coupons, shopper emails and online deals – as an important part of their shopper marketing efforts.20 In developing a sales promotion program, a company must first set sales promotion objectives and then select the best tools for accomplishing these objectives.

Sales promotion objectives Sales promotion objectives vary widely. Sellers may use consumer promotions to urge short-term customer buying or to enhance customer brand involvement. Objectives for trade promotions include getting retailers to carry new items and more inventory, to buy ahead or to promote the company’s products and give them more shelf space. Business promotions are used to generate business leads, stimulate purchases, reward customers and motivate salespeople. For the salesforce, objectives include getting more salesforce support for current or new products or getting salespeople to sign up new accounts.

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Sales promotions are usually used together with advertising, personal selling, direct marketing or other promotion mix tools. Consumer promotions must usually be advertised and can add excitement and ‘pulling power’ to ads. Trade and salesforce promotions support the firm’s personal selling process. When the economy tightens and sales lag, it is tempting to offer deep promotional discounts to spur consumer spending. In general, however, rather than creating only shortterm sales or temporary brand switching, sales promotions should help to reinforce the product’s position and build long-term customer relationships. If properly designed, every Sales promotion objectives: One of sales promotion tool has the potential to build both short-term excitement and longAustralia’s favourite loyalty programs, term consumer relationships. Marketers should avoid ‘quick fix’, price-only promotions Coles-powered FlyBuys, offers members in favour of promotions designed to build brand equity. Examples of such promotions discounts and bonus loyalty points for reaching activity-tracker step milestones. include all of the ‘frequency marketing programs’ and loyalty cards that have mushroomed © izf/Shutterstock.com in recent years. Most hotels, supermarkets and airlines offer frequent-guest/buyer/flyer programs, giving rewards to regular customers to keep them coming back. All kinds of companies now offer rewards programs. Such promotional programs can build loyalty through added value rather than through discounted prices. For example, around 45 per cent of Australian consumers carry a Coles-powered FlyBuys membership card, and nearly half of those members rate the program as excellent. Members collect points by shopping at Coles and a myriad of other FlyBuys partners; they can accelerate using Coles insurance and credit cards; and then receive rewards with multiple rewards-category options. In collaboration with Medibank, Flybuys members are offered discounts on Coles fruit and vegetables when they reach Fitbit and Garmen activity-tracker step milestones and Medibank members collect 2000 bonus points for reaching all five milestones. But that is not all. Members receive offers tailored to their purchasing patterns – everything from bonus points on select Coles purchases to thousands of bonus points for switching their electricity supply to AGL online and another 500 for paying their energy bill by direct debit. By working with its partners, FlyBuys is able to offer members real benefits that they love.21

Major sales promotion tools Many tools can be used to accomplish sales promotion objectives. Descriptions of the main consumer, trade and business promotion tools follow.

Consumer promotions consumer promotion

Consumer promotions include a wide range of tools – from samples, coupons, refunds, premiums and

A sales promotion tool used to boost shortterm customer buying and involvement or to enhance a long-term customer relationship.

point-of-purchase displays to contests, sweepstakes and event sponsorships. Samples are offers of a trial amount of a product. Sampling is the most effective – but most expensive – way to introduce a new product or to create new excitement for an existing one. Some samples are free; for others, the company charges a small amount to offset its cost. The sample might be delivered doorto-door, sent by mail, handed out in a store or kiosk, attached to another product or be featured in an ad. Sometimes, samples are combined into sample packs, which can then be used to promote other products and services. Sampling can be a powerful promotional tool and can be used for wholesale and retail customers. For example, Melbourne-based French patisserie and bakery, Noisette, offers free samples to its wholesale customers.22 Coupons are certificates that give buyers a saving when they purchase specified products. Most consumers love coupons. Coupons can promote early trial of a new brand or stimulate sales of a mature brand. However, as a result of coupon clutter, redemption rates have been declining in recent years. Thus, most major consumer-goods companies are issuing fewer coupons but targeting them more carefully.

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Marketers are also cultivating new outlets for distributing coupons, such as supermarket shelf dispensers, electronic point-of-sale coupon printers, email and online media, or even mobile text-messaging systems. Digital couponing is very popular in Europe, India, Japan and the United States, and is gaining popularity in Australia. For example, consider Vouchr, an Australian digital-couponing company. Vouchr () and Groupon allow users to clip and save coupons, access digital coupons from subscribed businesses and redeem coupons at the point of purchase. The mobile app uses the location facility in smartphones to prompt users when they are near a store for which they have a saved coupon, and users can set reminders to alert them when coupons are near their expiry date. To use the coupons, users simply call up the stored coupon list in their smartphone, navigate to the digital coupon they want and show it to the store cashier.23 Mobile and digital coupons offer distinct advantages to both consumers and marketers. Consumers do not have to find and clip paper coupons, or print out web coupons and bring them along when they shop. They always have their mobile coupons with them. For marketers, mobile coupons allow more careful targeting and eliminate the costs of printing and distributing paper coupons. Companies pay for redemptions and customers redeem digital coupons about 8 per cent of the time compared to 2 per cent for conventional coupons. Other reports are even more favourable, with digital redemption rates as high as 20 per cent. Although still relatively new in Australia and New Zealand, mobile and digital couponing is emerging as a new promotional tool.24 Cash refunds (or rebates) are similar to coupons except that the price reduction occurs after the purchase, rather than at the retail outlet. The consumer sends a ‘proof of purchase’ to the manufacturer, who then refunds part of the purchase price by mail. Price packs (also called cents-off deals) offer consumers savings off the regular price of a product. The producer marks the reduced prices directly on the label or package. Price packs can be single packages sold at a reduced price (such as two for the price of one) or two related products banded together (such as a toothbrush and toothpaste). Price packs are very effective – even more so than coupons – in stimulating short-term sales (see Chapter 9 for more on pricing). Premiums are goods offered either free or at low cost as an incentive to buy a product, ranging from toys included with children’s products to phone cards and DVDs. A premium may come inside the package (in-pack), outside the package (on-pack) or through the mail. For example, over the years, McDonald’s has offered a variety of premiums in its Happy Meals – from Trolls and Hot Wheels, to Barbie Spy Squad and Mr Men books. Customers can visit and play games and interact with various sponsor-related content on the site.25 Advertising specialties, also called promotional products, are useful articles imprinted with an advertiser’s name, logo or message that are given as gifts to consumers. Typical items include T-shirts and other apparel, pens, coffee mugs, calendars, key rings, mouse pads, matchbooks, tote bags, coolers, caps and golf balls. These items can be very effective, keeping the brand message in front of the user for months. The Australasian Promotional Products Association (APPA) report that many people keep their promotional product for over a year, with marketing managers achieving increased brand interest and more favourable brand impressions.26 Point-of-purchase (POP) promotions include displays and demonstrations that take place at the point of sale. Think of your last visit to the local supermarket. Chances are good that Promotional products: Australian companies spend over $1 billion you were tripping over aisle displays, promotional signs, ‘shelf each year on promotional products because, as noted by the Australasian Promotional Products Association, they work, increasing talkers’ or demonstrators offering free tastes of featured food favourable brand impressions and brand recall. products. Unfortunately, many retailers do not like to handle Krisztian Bocsi/Bloomberg via Getty Images the hundreds of displays, signs and posters they receive from

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manufacturers each year. Manufacturers have responded by offering better POP materials, offering to set them up and tying them in with television, print or online messages. Contests, sweepstakes and games give consumers the chance to win something, such as cash, trips or goods, by luck or through extra effort. A contest calls for consumers to submit an entry – a jingle, guess, suggestion – to be judged by a panel that will select the best entries. Sweepstakes call for consumers to submit their names for a draw. A game presents consumers with something – bingo numbers, missing letters – every time they buy, Event sponsorship: The passion of Australian Football aligns closely with the which may or may not help them win a prize. Toyota brand, as summed up in the clever use of the Toyota brand tag-line for the AFL sponsorship: ‘Footy. Oh what a feeling!’ Such promotions can create considerable brand Toyota/AFL attention and consumer involvement. Marketers running contests, sweepstakes and games must take care to check local and national laws regarding running competitions. These laws vary from state to state, and between Australia and New Zealand.27 event marketing Finally, marketers can promote their brands through event marketing (or event sponsorships). They can Creating a brandcreate their own brand-marketing events or serve as sole or participating sponsors of events created by others. marketing event or The events might include anything from mobile brand tours to festivals, reunions, marathons, concerts or other servicing as a sole or sponsored gatherings. Event marketing is huge, and it may be the fastest-growing area of promotion. Event participating sponsor of events created by marketing can provide a less-costly alternative to expensive television commercials. When it comes to event others. marketing, sports are in a league of their own. Marketers often spend millions of dollars in event marketing or sponsorship. In 2016, Toyota signed up to continue sponsorship of the Australia Football League (AFL, or Aussie Rules to locals). The new deal is believed to be one of the largest sports-sponsorship arrangements in Australia, with Toyota supporting the league at all levels. As explained in the AFL press release, the alignment between Australia’s iconic sport and its favourite car brand is excellent. ‘Toyota is delighted to support and help grow the game we love, aligning our brand to the spirit and passion of Australian Football, and reinforcing our commitment to the game at all levels.’ On top of the multi-million dollar sponsorship, Toyota also supports grassroots footy with its Toyota Good for Footy raffle, which raised a record half a million dollars for better facilities and equipment in 2016 and the AFL National Women’s league.28

Trade promotions trade promotion A sales promotion tool used to persuade resellers to carry a brand, give it shelf space, promote it in advertising and push it to consumers.

Manufacturers direct more sales promotion dollars towards retailers and wholesalers (79 per cent of all promotion dollars) than to final consumers (21 per cent).29 Trade promotions can persuade resellers to carry a brand, give it shelf space, promote it in advertising and push it to consumers. Shelf space is so scarce these days that manufacturers often have to offer price-offs, allowances, buy-back guarantees or free goods to retailers and wholesalers to get products on the shelf and, once there, to keep them on it. Manufacturers use several trade promotion tools. Many of the tools used for consumer promotions – contests, premiums, displays – can also be used as trade promotions. Or the manufacturer may offer a straight discount off the list price on each case purchased during a stated period of time (also called a price-off, off-invoice or off-list). Manufacturers also may offer an allowance (usually so much off per case) in return for the retailer’s agreement to feature the manufacturer’s products in some way. An advertising allowance compensates retailers for advertising the product. A display allowance compensates them for using special displays. Manufacturers may offer free goods, which are extra cases of merchandise, to resellers who buy a certain quantity or who feature a certain flavour or size. They may offer push money – cash or gifts to dealers or their

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salesforces to ‘push’ the manufacturer’s goods. Manufacturers may give retailers free specialty advertising items that carry the company’s name, such as pens, pencils, calendars, paperweights and notepads.

Business promotions Companies spend billions of dollars each year on promotion to industrial customers. Business promotions are used to generate business leads, stimulate purchases, reward customers and motivate salespeople. Business promotions include many of the same tools used for consumer or trade promotions. Here, we focus on two additional major business promotion tools – conventions and trade shows, and sales contests. Trade shows: Exhibitors at trade shows reach many prospects not Many companies and trade associations organise reached through their salesforces. conventions and trade shows to promote their products. © Eugenio Marongiu/Shutterstock.com Firms selling to the industry show their products at the trade show. Vendors receive many benefits, such as opportunities to find new sales leads, contact customers, introduce new products, meet new customers, sell more to business present customers and educate customers with publications and audiovisual materials. Trade shows promotion also help companies to reach many prospects not reached through their salesforces. For example, at A sales promotion tool used to generate the 2016 Fine Food Australia Expo, approximately 1000 exhibitors attracted 26 805 visitors over the business leads, stimulate four days of the exhibition. Exhibitors and visitors also connected via the Expo’s smartphone app and purchases, reward on Facebook. One exhibitor explained the benefits of this type of promotion: ‘A great event to broaden customers and motivate our customer database, reconnect with suppliers and manufacturers and share food ideas with industry salespeople. professionals.’30 A sales contest is a contest for salespeople or dealers to motivate them to increase their sales performance over a given period. Sales contests motivate and recognise good company performers, who may receive trips, cash prizes or other gifts. Some companies award points for performance, which the receiver can turn in for any of a variety of prizes. Sales contests work best when they are tied to measurable and achievable sales objectives, such as finding new accounts, reviving old accounts or increasing account profitability.

Developing the sales promotion program Beyond selecting the types of promotions to use, marketers must make several other decisions in designing the full sales promotion program. First, they must decide on the size of the incentive. A certain minimum incentive is necessary if the promotion is to succeed; a larger incentive will produce more sales response. The marketer also must set conditions for participation. Incentives might be offered to everyone or only to select groups. Marketers must decide how to promote and distribute the promotion program itself. A $2-off coupon could be given out in a package, at the store, via the internet or in an advertisement. Each distribution method involves a different level of reach and cost. Increasingly, marketers are blending several media into a total campaign concept. The length of the promotion is also important. If the sales promotion period is too short, many prospects (who may not be buying during that time) will miss it. If the promotion runs too long, the deal will lose some of its ‘act now’ force. Evaluation is also very important. Many companies fail to evaluate their sales promotion programs, and others evaluate them only superficially. Yet, marketers should work to measure the returns on their sales promotion investments, just as they should seek to assess the returns on other marketing activities. The most common evaluation method is to compare sales before, during and after a promotion. Marketers should ask: Did the promotion attract new customers or more purchasing from current customers?

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Can we hold on to these new customers and purchases? Will the long-run customer relationship and sales gains from the promotion justify its costs? Clearly, sales promotion plays an important role in the total promotion mix. To use it well, the marketer must define the sales promotion objectives, select the best tools, design the sales promotion program, implement the program and evaluate the results. Moreover, sales promotion must be coordinated carefully with other promotion mix elements within the overall integrated marketing communications program.

Linking the concepts Let us reflect on the sales promotion process. ● Record all the different sales promotions you see over the next day or two. What types of sales promotion tools did you observe? Were some types of sales promotion tools used more frequently than others? Suggest reasons why marketers might favour some types of sales promotion.

● Sales promotions are sometimes used in-store in combination with personal selling when a salesperson demonstrates the product, offering a coupon, price pack or samples. What might be the benefits of combining personal selling and a sales promotion?

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Student Learning Centre

399

through employment agencies, classified ads and the internet, and by contacting university careers and placement services. In the selection process, the procedure can vary from a single informal interview to lengthy testing and interviewing. After the selection process is complete, training programs familiarise new salespeople not only with the art of selling but also with the company’s history, its products and policies, and the characteristics of its market and competitors. The salesforce compensation system helps to reward, motivate and direct

Reviewing the learning objectives

salespeople. In compensating salespeople, companies try to have an appealing

This chapter is the second of three chapters covering the final marketing mix

plan, usually close to the going rate for the type of sales job and needed skills.

element – promotion. Chapter 11 dealt with overall integrated marketing

In addition to compensation, all salespeople need supervision, and many need

communications, and advertising and public relations. This chapter investigates

continuous encouragement because they must make many decisions and face

personal selling and sales promotion. Personal selling is the interpersonal arm

many frustrations. Periodically, the company must evaluate the performance of its

of the communications mix. Sales promotion consists of short-term incentives to

salesforce in order to identify ways that will enable it to perform more effectively.

encourage the purchase or sale of a product or service.

In evaluating salespeople, the company relies on regular information, gathered

Learning Objective 1. Discuss the role of a company’s salespeople in creating value for customers and building customer relationships. (pp. 376–78)

through sales reports, personal observations, customers’ letters and complaints, customer surveys and conversations with other salespeople. Digital technologies are providing salespeople with powerful tools for identifying and learning about prospects, engaging customers, creating customer value, closing sales and nurturing customer relationships. Many of today’s

Most companies use salespeople, and many companies assign them an important

customers no longer rely as much on assistance provided by salespeople. Instead,

role in the marketing mix. For companies selling business products, the firm’s

increasingly, they use online and social media resources to analyse their own

salespeople work directly with customers. Often, the salesforce is the customer’s

requirements, research solutions, get advice from colleagues and rank buying

only direct contact with the company and therefore may be viewed by customers

options before ever speaking to a salesperson. In response, sellers are reorienting

as representing the company itself. In contrast, for consumer-product companies

their selling processes around the new customer-buying process. They are using

that sell through intermediaries, consumers usually do not meet salespeople or

social media, mobile devices, web forums, online communities, blogs and other

even know about them. The salesforce works behind the scenes, dealing with

digital tools to engage customers earlier and more fully. Ultimately, online,

wholesalers and retailers to obtain their support and helping them to become

mobile and social media technologies are helping to make salesforces more

effective in selling the firm’s products.

efficient, cost-effective and productive.

As an element of the promotion mix, the salesforce is very effective in

But, with companies becoming more market-oriented, a customer-focused

Learning Objective 3. Discuss the personal selling process, distinguishing between transaction-oriented marketing and relationship marketing. (pp. 387–92)

salesforce also works to produce both customer satisfaction and company profit.

Selling involves a seven-step selling process: prospecting and qualifying, pre-

The salesforce plays a key role in developing and managing profitable customer

approach, approach, presentation and demonstration, handling objections,

relationships.

closing and follow-up. These steps help marketers to close a specific sale and,

achieving certain marketing objectives and carrying out such activities as prospecting, communicating, selling and servicing, and information gathering.

Learning Objective 2. Identify and explain the six main salesforce management steps. (pp. 378–87)

as such, are transaction-oriented. However, a seller’s dealings with customers should be guided by the larger concept of relationship marketing. The company’s salesforce should help to orchestrate a whole-company effort to develop

High salesforce costs necessitate an effective sales management process

profitable long-term relationships with key customers based on superior customer

consisting of six steps: designing salesforce strategy and structure, recruiting and

value and satisfaction.

selecting, training, compensating, supervising, and evaluating salespeople and

such as what type of salesforce structure will work best (territorial, product,

Learning Objective 4. Explain how sales promotion campaigns are developed and implemented. (pp. 392–98)

customer or complex structure); how large the salesforce should be; who will be

Sales promotion campaigns call for setting sales promotion objectives (in general,

involved in the selling effort; and how its various salespeople and sales-support

sales promotions should be aimed at building consumer relationships); selecting

people will work together (inside or outside salesforces and team selling).

tools; and developing and implementing the sales promotion program by using

salesforce performance. In designing a salesforce, sales management must address strategy issues

Salespeople must be recruited and selected carefully. In recruiting

consumer promotion tools (from coupons, refunds, premiums and point-of-

salespeople, a company may look to job duties and the characteristics of its

purchase promotions, to contests, sweepstakes and events), trade promotion

most successful salespeople to suggest the traits it wants in its salespeople.

tools (discounts, allowances, free goods, push money) and business promotion

It must then look for applicants through recommendations of current salespeople,

tools (conventions, trade shows, sales contests), as well as deciding on such things

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Part 3  Designing a customer-driven strategy and mix

as the size of the incentive, the conditions for participation, how to promote and

they are working 12-hour days. For this reason, a company’s culture is

distribute the promotion package, and the length of the promotion. After this

most important. Some companies and managers handle sales teams better

process is completed, the company evaluates its sales promotion results.

than others do, ensuring that their human assets are allowed to ‘fail’ on

Discussion questions

occasions, and helping to build them up. Such companies often maintain flexibility in their management of salespeople. Returning to the payment

❶ Sales and marketing – as different as chalk and cheese? If you listen to

issue, the perennial question is what proportion should be paid as salary and

salespeople, you will sometimes hear them talk disparagingly about the

what proportion provides the ‘carrot and stick’? What is your view? Explain

marketing function: ‘The reason we didn’t reach budget was the lousy ad

your answer. (Learning Objective 2) (AACSB: Reflective Thinking)

campaign!’ And, sometimes, marketing people will blame the salesforce for

❹ The personal selling process and ways of managing customer relationships

a drop in market share: ‘The only thing our sales team can do well is cut the

have changed irrevocably in the last decade – or have they? There is no

price, and even that didn’t save us from losing market share this year. They

question that digital technologies have radically impacted how the salesforce

don’t seem to appreciate that we make the bullets for them to fire!’ If we

works. Today’s sales reps are more connected than ever before. They use their

believed such talk, sales and marketing would seem to be two functions,

tablets and smartphones to access information and to stay connected with

rather than one. Marketing science embraces personal selling and sales

their customers. Social media sites, such as LinkedIn and Facebook, provide

management as a vital aspect of marketing communication – it is taught

rich sources of information as well as ways to stay connected. Cloud-based

this way. So, why do they often seem to be so far apart in practice? (Learning

technologies allow the salesforce to stay connected with the office even

Objective 1) (AACSB: Reflective Thinking)

when they have been ‘in the field’ for long periods. There is no question

❷ Team selling – or is it a case of how many salespeople does it take to

that advances in sales technologies, social media and the internet have

change a light bulb? Some companies have a large range of complex

all radically changed the way the sales team works – but has it changed

products. Pharmaceutical companies fall into this category, as do those

the personal selling process? How do you think the selling process – from

selling medical equipment. They send in wave after wave of salespeople

prospecting to follow-up – has changed as a result of the technological

representing different product ranges, such as antidepressants or gastric

environment? (Learning Objective 3) (AACSB: Reflective Thinking)

reflux drugs. Other companies, such as IBM, have teams that undertake

❺ Sales promotions – if they are so effective, why do many sales teams and

market development, with other teams that go on to service the newly won

retailers dislike them? Sales promotions enable a brand to present a value

clients. Some companies may form pods made up of salespeople together

proposition, such as ‘more for the same’ or ‘more for less’. It is often explicit

with representatives from engineering, operations, logistics, finance and

from on-pack offers that a company, such as the one behind the Coca-Cola

information systems. Thus, team selling may take many forms. But it is

brand (Coca-Cola Amatil Ltd, or CCA), is the hero when such value is added

certainly not a case of too many people being involved. Team selling often

for the consumer. Retailers would like to be seen as the hero and make deep

requires the expertise and foresight of individuals from different facets of

price cuts, paid for by the supplying company, to lift their unit and dollar

the business to let the customer see just how a supplying company can

sales. In doing so, their margin is protected by the supplying company so

assist them. What are your views? (Learning Objective 2) (AACSB: Reflective

they make a lot more than when a marketing company diverts its cents-

Thinking)

off budget away from the sales team’s direct control (and therefore the

❸ Money makes the world go around – and it takes only bonuses to get

retailer’s margin) and into sales promotions. Thus, when the sales team loses

salespeople to perform! Many companies set sales targets and give bonuses

an opportunity to maintain or enhance the relationship with retail buyers,

in cash and other forms to salespeople who meet or exceed their budgets.

members of the team, too, may lose sight of their company’s aim of making

However, it would be unwise to believe that all it takes to get salespeople

profitable sales. If you feel particularly brave, debate this perspective with a

to perform to the optimum level for the company is to give them bonuses.

member of a sales team. (Learning Objective 4) (AACSB: Reflective Thinking)

There are several dangers in doing this. For one thing, it can set up pressures to lower sales targets. Another issue is what to do when consumer and

Critical thinking exercises

business confidence falls away after a major world event and salespeople do

❶ There are considerable free sales-training resources available on the internet.

not meet the targets set for them, resulting in a major part of their income

Search ‘free sales training’ to find some of these resources and review them.

being lost through no fault of their own.

Do the resources discuss the traits and behaviours required of an ethical

There are other issues. Salespeople experience many knock-backs as

salesperson? Create a presentation, highlighting your findings regarding

they go about their daily duties. More obstacles are put in their path than

ethical sales training. (Learning Objective 2) (AACSB: Communication;

most other company employees experience, and it requires considerable

Ethical Reasoning)

internal recognition to maintain feelings of positive worth in the face of

❷ Select a product or service and role-play a sales call – from the approach

such adversity. In addition, salespeople can spend most of their time away

to the close – with another student. Have one member of the team act as

from others in the company, maintaining their links through mobile phones,

the salesperson, with the other member acting as the customer, who raises

text messages, or email received through their laptops and tablet devices.

at least three objections. Select another product or service, and perform

Sometimes, the only company people they see are sales managers who

this exercise again with your roles reversed. (Learning Objective 3) (AACSB:

are intent on accompanying them to assess their capabilities and ensure

Communication; Teamwork; Application of Knowledge)

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inside salesforce  (p. 380)

follow-up  (p. 391)

media and mobile marketing for a small business or organisation in your

outside salesforce (field

handling objections  (p. 391)

community. Develop a presentation to pitch your campaign to the business

salesforce)  (p. 380)

❸ In a small group, design a sales promotion campaign using online, social

pre-approach  (p. 390)

or organisation and incorporate what you have learned about the selling

product salesforce structure  (p. 379)

presentation  (p. 390)

process. (Learning Objective 4) (AACSB: Communication; Reflective

sales quota  (p. 387)

prospecting  (p. 389)

Thinking)

salesforce management  (p. 378)

selling process  (p. 387)

social selling  (p. 386)

Navigating the key terms Learning Objective 1

Learning Objective 2

personal selling  (p. 376)

customer (market) salesforce

salesperson  (p. 376)

structure  (p. 379)

team selling  (p. 381) territorial salesforce structure  (p. 379)

Learning Objective 3

Learning Objective 4 business promotion  (p. 397) consumer promotion  (p. 394) event marketing  (p. 396)

approach  (p. 390)

sales promotion  (p. 392)

closing  (p. 391)

trade promotion  (p. 396)

Mini cases 12.1  Supervising salespeople Time on task Supervising salespeople is crucial. Too much time spent on active selling

❶ Review the data for time spent on sales activity for the practice, and

and too little time on prospecting may affect the long-term viability of the

prepare a brief report analysing how these data compare to the

business. A local legal practice dealing in commercial law has asked you

benchmark for a small commercial law practice. In your report, indicate

to evaluate their practice and provide some advice on how to improve

how the way in which the practice spends its time might affect its

their ‘sales performance’. Each of the three lawyers is responsible for

future success. (Learning Objective 2) (AACSB: Communication;

bringing in new business, managing the case-load and completing all the

Analytical Thinking)

administrative work in the office. They split their time between sales-related

❷ Research commercial law practice websites. What are the main

activities and legal work. On average, about 20 per cent of their total time is

value propositions used by the practices? With this in mind,

spent on sales (assume this is normal for the profession). The practice has a

develop a guideline for lawyers in the practice for each step

receptionist/legal secretary who is run off his feet and really cannot take on

in the selling process, from prospecting to follow-up. (Learning

any sales work. The following table shows the average time spent on selling

Objective 3) (AACSB: Information Technology, Application of

activities for the practice compared to a benchmark commercial law practice.

Knowledge)

Practice (%)

Benchmark (%)

6

15

Face-to-face selling (building referral relationships)

15

28

Servicing existing customers (maintaining relationships)

49

27

Organisational activities

12

11

Travelling and waiting

15

14

Prospecting

Personal/Miscellaneous activity

3

5

Total time on sales activity

100

100

12.2  Sales promotion Building brand loyalty with gifts and rewards Each year, small and medium-sized businesses (SMBs) around Australia

have promotional products. And the best news is that people remember the

spend over $30 000 on promotional products; everything from umbrellas

brands and keep the product because they are useful. That’s good news for

and pen sets to beach totes and cheese platters. Australasian Promotional

Major Motors, an Isuzu truck dealership, in Perth. Each year, they give their

Products Association research shows that almost every home in Australia has

truck-driving customers a gift pack. ‘It’s our way of providing “value add”

a promotional product or two in their kitchen. Offices all over the country

to loyal customers – loyalty which we don’t take for granted. Like many

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401

402

Part 3  Designing a customer-driven strategy and mix

12.2  Sales promotion continued SMBs, we operate in a competitive environment and we want to provide our

❷ Membership and loyalty programs are a useful strategy for retaining

customers with “a little love” while also promoting our brand,’ explains the

customers. However, getting the benefit package right is not easy.

sales manager from Major Motors.31

Toni&Guy Salons have a program which offers gifts and services for

❶ Develop a sales promotion program using promotional products for

loyal customers. Review a selection of loyalty programs (see Toni &

a hair salon with a customer base of 500 regular customers and an

Guy’s loyalty program at ). What benefits do you find attractive in loyalty

would you recommend? How would you evaluate the effectiveness

programs? Do you think membership and loyalty are worthwhile

of the sales promotion program? (Learning Objective 4) (AACSB:

for customers? Justify your answer. (Learning Objective 4) (AACSB:

Analytical Thinking; Application of Knowledge)

Information Technology; Reflective Thinking)

12.3  Marketing analytics at work Sales conversions In clothing retail, it is not uncommon for everyone from a sales assistant to

❶ Review the data in the table. The store manager thinks Sam has real

the store manager to receive a part of their pay by commission. It is a fine

potential (even though Sam costs the most per sales dollar) and has

balancing act for the sales team. The more time spent with each customer

concerns about Jae (who has the most customer contacts resulting in a

usually increases the likelihood of a sale but too much time with one

sale). Why might that be? (Hint: Look at the average sales per customer

customer and there is a good chance that another customer will walk out

contact with purchases and the ratio of customer contacts to contacts

the door without buying something. So, sales managers and sales assistants

with purchases.) (Learning Objective 2) (AACSB: Communication;

are interested in understanding sales effectiveness. Let us consider three

Analytical Thinking)

sales assistants: Jae, Chili and Sam. Each is paid differently, and has different

❷ Develop a training plan for each of the three sales assistants. What

customer contacts and overall sales. Chili is paid the most and also earns

do you think should be the main area of improvement for each team

the most, but actually costs only 5 cents for every dollar in sales. In contrast,

member? (Learning Objective 2) (AACSB: Communication; Application

Sam earns the least and costs more for each sale she makes.

of Knowledge)

Jae

Pay rate per hour

Commission on sales

Total pay for day (excluding on costs)

Customer contacts

Customer contact with purchase

Total sales per day

Sales cost per sales dollar

$20.00

1.0%

$189.75

50

35

$2975

$0.06

Chili

$22.00

1.5%

$243.50

35

30

$4500

$0.05

Sam

$18.00

1.0%

$166.50

30

25

$2250

$0.07

12.4  Ethical reflection Let’s get rid of telemarketers YIt is six o’clock in the evening and you are about to sit down to chill with

Now let’s take a look at the other side. Pest Control Sydney is a family-

your family (you are staying home tonight – it’s a once-a-week thing you do).

run business and they call previous customers to remind them that their next

The home phone rings and it’s a telemarketer. Actually it does not ring just

inspection or treatment is due. It is a great service, but sometimes those calls

once; it rings three times over the next hour. The calls are all from telemarketers.

are not welcomed! Clearly, once a customer has said ‘put me on your do

In frustration, you search online for ‘how to get rid of telemarketers’ and come

not call list’ it would not be ethical to continue. But, repeat business is the

across a Lifehacker Australia story about just that. Tips range from what not

lifeblood of the small business operator – how else should such a business

to do to a very helpful ‘what to do when you do not want a telemarketer call’.

reach out to its customers?32

In 2016 alone, Australians reported over 50 000 phone scams. No wonder

❶ Develop an ethical sales protocol for Pest Control Sydney to reach its

people are suspicious and frustrated with telemarketers.

existing customers. What do you recommend as a standard practice

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Chapter 12  Personal selling and sales promotion: Creating value in relationships

to make sure their customers get a reminder service that works for

are very sophisticated and use a wide range of digital and online

both parties? (Learning Outcome 4) (AACSB: Communication; Ethical

media. What type of personal selling strategy would you recommend

Reasoning)

for a medium-sized online retailer aiming to protect their business and

❷ Go to and review some of the buying and selling scams reported on the site. Some of these scams are obvious but some

References

1 See Boeing commercial aircraft prices at ; and see details of the Qantas and JetStar order at Matt O’Sullivan, ‘New Dreamliners for Jetstar’, Sydney Morning Herald, 7 October 2013, ; David Flynn, ‘Qantas to buy Boeing 787, first flights from 2017’, Australian Business Traveller, 20 August 2015, ; and ‘Boeing 787-9 Dreamliner’, Qantas, ; all accessed October 2016. 2 See Chanin Ballance, ‘End your sales and marketing tug-of-war’, Sales & Marketing Management, 26 September 2014, ; and Philip Kotler & Kevin Lane Keller, Marketing Management, 15th edn, Prentice Hall: Hoboken, NJ, 2016, p. 644. 3 Role details were developed from company advertising on the job-search website, Seek.com, , accessed December 2010; and , accessed October 2016. 4 Jeff Green, ‘Sales moves beyond face-to-face deals, onto the web’, Bloomberg, 11 January 2013, ; Dave Stein, ‘The evolution of social selling’, Sales & Marketing Management, May/June 2013, p. 14; and Andris A Zoltners, P K Sinha & Sally E Lorimer, ‘The growing power of inside sales’, Harvard Business Review, 29 July 2013, ; Matt Mayberry, ‘The amazing evolution and power of inside sales’, Entrepreneur, 8 December 2015, ; accessed October 2016. 5 See Sue Barrett, ‘Why the web is making salespeople more, not less important’, Barrett Sales Blog, 17 September 2013, ; and Sue Barrett, ‘Customer experience management (CX) will replace CRMs’, Barrett Sales Blog, 17 October 2013, ; accessed October 2016. 6 ‘Customer business development’, , accessed September 2015. 7 Katherine Graham-Leviss, ‘The high cost of sales team turnover’, Entrepreneur, 15 September 2011, ; see also ‘The cost of turnover calculator’, Drake International Australia, , accessed October 2016. 8 For this and more information and discussion, see , accessed July 2012; Lynette Ryals & Iain Davies, ‘Do you really know who your best salespeople are?’, Harvard Business Review, December 2010, pp. 34–5; and Donal Daly, ‘6 things successful salespeople do’, Salesforce.com, 17 April 2015, , accessed October 2016. 9 See Steve Denning, ‘The one thing the greatest salespeople all have’, Forbes, 29 November 2012, , accessed October 2016. 10 ‘Strengths based selling’, , accessed October 2015. 11 ‘Case study: General insurer’, Salesmaster International, , accessed October 2016. 12 See Barrett, , accessed October 2016. 13 For this and more discussion, see Joseph Kornak, ‘07 compensation survey: What’s it all worth?’, Sales & Marketing Management, May 2007, pp. 28–39; and Alexander Group, ‘2014 sales compensation trends survey results’, August 2014, . 14 For more discussion, see Mark Roberge, ‘The right way to use compensation’, Harvard Business Review, April 2015, pp. 70–5; and ‘Getting beyond “show me the money”’, Harvard Business Review, April 2015, pp. 77–81.

403

customers from scammers? (Learning Outcome 4) (AACSB: Ethical Reasoning; Application of Knowledge)

15 Data obtained from Sue Barrett, ‘How much valuable selling time are you wasting?’, Smart Company, 7 April 2013, , accessed October 2016. 16 See Mayo Hardware’s website, ; and also ‘Mayo Hardware’, Salesforce.com, , accessed October 2016. 17 ‘Adaptable enterprise: Optus fast-tracks SMB sales with Salesforce’, Salesforce.com, , accessed October 2016. 18 Kantar Retail, Making Connections: Trade Promotion Integration across the Marketing Landscape, Kantar Retail: Wilton, CT, July 2012, p. 5; and Australasian Promotion Products Association, ‘Industry stats’, , accessed November 2016. 19 ‘How mobile is transforming the shopping experience in stores’, Google Think Insight, May 2013, , accessed November 2016. 20 Kantar Retail, Making Connections: Trade Promotion Integration across the Marketing Landscape, Kantar Retail: Wilton, CT, July 2012, p. 6. 21 Lucy Cormack, ‘Customer loyalty schemes attracting nearly three-quarters of Australian shoppers’, Sydney Morning Herald, 27 September 2016, ; ‘82% of Aussies are in a loyalty program with Coles Flybuys ranked as our favourite’, B&T, 11 August 2016, ; and see also the FlyBuys Powered by Coles website, , accessed November 2016. 22 See Noisette’s website, , accessed November 2016. 23 See Vouchr website, , accessed November 2016. 24 Simon Sharwood, ‘The hot new marketing tactic that will let bricks and mortar retailers combat online stores’, , accessed November 2016. 25 See , accessed November 2016. 26 See Australasian Promotional Products Association (APPA) website, , accessed November 2016. 27 See, for example, the NSW Fair Trading website, , accessed November 2016. 28 Caroline Wilson, ‘Toyota gears up to sponsor women’s AFL’, The Age, 5 April 2016, ; Toyota Australia, ‘Toyota and AFL extend sponsorship deal’, 31 August 2016, ; ‘AFL statement: AFL extends partnership with Toyota’, 6 March 2014, ; accessed November 2016. 29 Kantar Retail, Making Connections: Trade Promotion Integration across the Marketing Landscape, Kantar Retail: Wilton, CT, July 2012, p. 10. 30 See ‘Show report 2016’, Fine Food Australia, 2016; and Fine Food Australia website, , and Facebook page. 31 See ‘The average Aussie SME spends $31 000 on promotional products’, Marketing Magazine, 6 August 2014, ; and also the websites for Major Motors, , and the Australasian Promotional Products Association (APPA), ; accessed November 2016. 32 Erica Elson, ‘I’m a telemarketer. Here’s how to get rid of me’, Lifehacker Australia, 3 November 2016, ; and see also Scamwatch website, , and Pest Control Sydney website, ; accessed November 2016.

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Chapter

13

Direct and digital marketing: Interactivity and fulfilment In Chapters 11 and 12, you learned about communicating customer value through integrated marketing communication (IMC) and about four specific elements of the marketing communications mix – advertising, publicity, personal selling and sales promotion. In this chapter, we look at the final IMC element, direct marketing, and at its fastest-growing form, digital marketing. Actually, direct and digital marketing can be viewed as more than just a communications tool. In many ways, it constitutes an overall marketing approach – a blend of communication and distribution channels (see Chapter 10 for more) all rolled into one. For a visual representation of the chapter, please see the concept map on the following page.

Learning

Objectives

Learning Objective 1 Define direct and digital marketing, and discuss its benefits for consumers and marketing organisations. The direct and digital marketing model  pp. 406–8 Benefits of direct and digital marketing to buyers and sellers  p. 408 Learning Objective 2 Examine and discuss direct and digital marketing, interactivity and fulfilment. Direct marketing  pp. 409–10 Digital marketing  pp. 411–18 Social media marketing  pp. 418–19 Other forms of online interaction  pp. 419–20 Interactivity  pp. 420–21 Fulfilment response  pp. 421–22 Learning Objective 3 Explain how companies use customer databases in direct and digital marketing. Customer database use in direct and digital marketing  pp. 422–26 Learning Objective 4 Describe how marketing organisations evaluate direct and digital database marketing. Evaluating direct and digital marketing results  pp. 426–30 Learning Objective 5 Gain an overview of the public policy and ethical issues presented by direct and digital marketing. Public policy issues in direct and digital marketing  pp. 430–32

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Chapter 13  Direct and digital marketing: Interactivity and fulfilment

LO 1 Define direct and digital marketing and discuss its benefits for consumers and marketing organisations. (pp. 406–8)

LO 2

adv Onl er

Digi tal ma r

Sear ch mark engin etin e g

ma

rk

e

s al

g

es ma Telerke ti n g

Eva

C at a

lo g ue

s

D ir e c t m ail

luat ing p erforma nce

Digital marketing communication Digital marketing channels Online relationship management Customer databases

e s ers issund consum ful g n i r Conside anisations a or harm rg ng Marketing o irritati s against Must guard eting practice direct mark

Public policy issues Ethical issues

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ng Data mini

Search engin e optimisation

ating ctiv Rea tomer cus ices serv

ct

CUSTOMER

tin

e Tel

Gain an overview of the public policy and ethical issues presented by direct and digital marketing. (pp. 430–32)

Cu sto m

COMPANY

D ir e

ctDire s e on res p io n is tele v a dio r and

LO 5

Fulfilment

g tin ke

INTERACTIVITY

Kios k a n d e le c t r o n i c g di sp e n s in

LO 4 Describe how marketing organisations evaluate direct and digital database marketing. (pp. 426–30)

De loy e

ine ing tis

ases tab da er

LO 3 Explain how companies use consumer databases in direct and digital marketing. (pp. 422–26)

Tar cust get ome rs n pe y alt

Examine and discuss direct and digital marketing, interactivity and fulfilment. (pp. 409–22)

Identify prospects

Email

ine eng rch ting a e S arke m

405

406

Part 3  Designing a customer-driven strategy and mix

The direct and digital marketing model (pp. 406–8) Many of the marketing and promotion tools we have examined in previous chapters were developed in the context of mass marketing: targeting broad markets with standardised messages and making offers distributed through intermediaries. As we explore the exploding world of direct and digital marketing, do remember that, although this chapter examines direct marketing and digital or online marketing as separate models, this one-to-one approach must be carefully integrated with other elements of the marketing mix.

Direct and digital marketing

direct and digital marketing

Interacting directly with carefully targeted individual consumers and communities to both obtain an immediate response and build lasting customer relationships.

Early direct marketers – catalogue companies, direct mailers and telemarketers – gathered customer names and their profiles in company databases, and sold goods mainly by mail and landline telephone. Today, however, in response to the fact that over 13 million Australians and 4 million New Zealanders are internet subscribers and that 79 per cent access the internet daily – from smartphones, tablets and other digital devices – most companies have adopted direct and digital marketing, either as a primary marketing approach (e.g. Dick Smith online) or as a supplement to other approaches (e.g. JB Hi-Fi), thus becoming omnichannel retailers.1 Direct and digital marketing involves interacting directly with carefully targeted individual customers and communities to both obtain an immediate response and build lasting relationships. See Figure 13.1. This is where social media has come to the fore, as it enables individuals and groups to interact with one another and with marketing organisations, ranging from not-for-profit organisations to commercial suppliers of goods and services. The key point is that such interactions are mostly synchronous and, because they rely on database information, they are conducted on a one-to-one basis and generate a measurable response, or fulfilment. It is of note that fulfilment may involve purchasing the company offering, or it may involve information, or it may mean assurance of trust in a company or brand. Also, please note that when we refer to ‘direct marketers’ throughout this chapter, we mean direct and digital marketers. Beyond brand and relationship building, direct and digital marketers usually seek a direct, immediate and measurable consumer response. As we can readily see when visiting Amazon.com, the company interacts directly with customers on its websites to help them discover and buy almost anything and everything on the internet, often with a single click of the mouse button or touch-screen link. Similarly, 1300Insurance.com.au interacts

FULFILMENT RESPONSE

Company-initiated direct Customers and digital interactivity

Companies

• Direct marketing using direct print and reproduction, direct-response television and radio, telemarketing, telesales, kiosks and electronic dispensing, and landline telephone and fax • Digital marketing using the internet/web and mobile cellular networks Customer-initiated interactivity with other customers and companies

Figure 13.1  Direct and digital interaction and fulfilment

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407

directly with customers – by telephone, through its website or even on Facebook and Twitter – to give insurance quotes, sell policies or service customer accounts. These are but two of many companies that either commenced their commercial lives using digital marketing or have integrated a direct and digital marketing approach into their business model. And if proof is needed of the impact of social media on company marketing, consider that, in a decade, Facebook, with a global profit of US$8.15  billion in 2015, had signed up more than 1.71 billion active users (defined as those who had logged in during the past 30 days) by the end of the second quarter of 2016.2 To get these socially interconnected eyeballs focused on a company’s brand and eliciting positive word of mouth is a major objective of direct and digital marketers. And to get these subscribers to ‘like’ a Facebook brand page, as one of the over Aid organisations, such as YourTown, use email alerts to send out reminders to those 50 million ‘Likes’ a day they contribute to, signed on to their database service to contribute donations and buy tickets in lotteries. is often a major fulfilment response set as a Also shown are ‘Likes’ from people engaged on YourTown’s Facebook page. marketing objective. We discuss fulfilment YourTown, www.yourtown.com.au response in more detail later in this chapter. Other companies have their entire catalogues on Facebook and actively sell from there. In previous chapters, we referred to direct marketing as direct distribution – that is, as marketing channels that contain no intermediaries. We also included direct marketing as one element of the promotion mix – that is, as an approach for communicating directly with consumers. In actuality, direct marketing is both of these, and more. When using direct and digital marketing, any media can be used, particularly as acquisition media to gain subscribers. Importantly, a measured response is sought from a measured input of expenditure. This response may take many forms, one of which is to subscribe to an information service; another is the placement of an order; and yet another is to seek the advice of others – whether consumers or potential consumers. And the response, or a transaction, can take place in any one of a number of ways, as Figure 13.1 illustrates. A response or transaction may entail paying an energy bill at a kiosk, or opting-in to receive product update information rather than buying the current model of the product. Or a response may mean placing an order by telephone in response to receipt of a communication directed to the receiver by name, by direct mail or email, or delivered en masse via a television commercial. Or, it may mean paying for and downloading an airline ticket. In each case, there is customer fulfilment. Many companies still use direct and digital marketing as a supplementary channel or medium. Thus, BMW markets mostly through mass media advertising and its high-quality dealer network, but also supplements these channels with direct marketing. Its direct marketing includes its web page, , which provides consumers with information about various models, competitive comparisons, financing and dealer locations, but includes links to access social media. BMW also relies

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Part 3  Designing a customer-driven strategy and mix

Mobile marketing: ANZ offers smartphone and tablet access. © Australia and New Zealand Banking Group (ANZ)

on customers communicating with each other via such online forums as Bimmerpost.com. Online communities interact on new models before they are released, and play a part in the design of and inclusions in many new cars. Similarly, most department stores, such as David Jones and Myer, sell the majority of their merchandise off their store shelves but also sell through directmail and online catalogues, even if only in the form of gift cards. For all companies, the direct and digital marketing model is rapidly changing the way they think about building relationships with customers. While most banks commenced business in the physical world they have gone so far as to integrate the most pervasive form of digital marketing – mobile marketing – into their business model, with specially designed websites for smartphones.

Benefits of direct and digital marketing to buyers and sellers (p. 408) For buyers, direct and digital marketing is convenient, easy and private. This approach gives buyers anywhere, anytime access to an almost unlimited assortment of goods and a wealth of product and buying information. For example, on its website and mobile app, Amazon.com offers more information than most of us can digest, ranging from top-10 product lists, extensive product descriptions and expert and user product reviews, to recommendations based on customers’ previous searches and purchases. Through direct marketing, buyers can interact with sellers by phone or on the seller’s website or mobile app to create exactly the configuration of information, products or services they want, and then order them on the spot. Finally, for consumers who want it, digital marketing through online, mobile and social media provides a sense of brand engagement and community – a place to share brand information and experiences with other brand fans. For sellers, direct marketing often provides a low-cost, efficient and speedy alternative for reaching their markets. Today’s direct marketers can target small groups or individual customers. Because of the oneto-one nature of direct marketing, companies can interact with customers by phone or online, learn more about their needs and personalise products and services to specific customer tastes. In turn, customers can ask questions and volunteer feedback. Direct and digital marketing also offers greater flexibility. It allows marketers to make ongoing adjustments to their prices and programs, or to make immediate, timely and personal announcements and offers. Finally, direct and digital marketing gives sellers access to buyers that they could not reach through other channels. Smaller firms can mail catalogues to customers outside their local markets and post 1-800 telephone numbers to handle orders and inquiries. Internet marketing is a truly global medium that allows buyers and sellers to click from one country to another in seconds. For example, a web user from Paris or Istanbul can access Boots Online’s digital catalogue and make a purchase just as easily as can someone living in Melbourne – where the company behind BootsOnline.com.au, the Stitching Horse Saddlery, has its home. Even small and medium enterprises (SMEs) find they have Direct and digital marketing: Even small and medium enterprises (SMEs), such as Boots Online, find they have ready access to ready access to global markets. Not even the threat of a cut to the global markets using the internet and the web. GST exemption for online imports valued at less than $1000 is www.bootsonline.com.au worrying many online businesses.

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409

Direct marketing (pp. 409–10) We examined selling (direct selling to customers) in depth in Chapter 12. Here, we examine the more traditional forms of direct marketing companies use to tailor their offers and content to the needs and interests of narrowly defined segments or individual buyers. In this way, companies build customer engagement, brand community and sales by using methods which include (1) direct print and reproduction, (2) direct-response television and radio, (3) telemarketing, (4) telesales and (5) kiosks and electronic dispensing. (See Mini case 13.3 for your opportunity to put a point of view.) We examine each of these below. We examine the other forms of direct and digital marketing, the major one today being use of the internet and mobile tools and technologies, in the next section.

Direct print and reproduction

Direct print and reproduction involves direct-mail marketing and catalogues. It comprises mail-outs of letters, product lists, samples, and paper-based and digital catalogues on CD-ROM or DVD to a list or a known database of customers, or to a targeted group that the marketer wishes to convert to a database entry. A catalogue may be sent to a database of rural dwellers who have asked to receive a retailer’s catalogue, or with whom the retailer already has a relationship. The phrase ‘direct print and reproduction’ does not refer to the broadly aimed mailings sent to all post office box-holders that end up in waste bins outside the post office – the ubiquitous ‘scattergram’. Thus, direct print and reproduction marketing consists of direct mail sent both to those the company wishes to add as customers and to those who have already responded to previous offers. Some analysts predict a decline in the use of traditional forms of direct mail in the coming years as marketers switch to newer digital forms, such as email, online social media and mobile marketing. The newer digital direct-marketing approaches deliver messages at incredible speeds and lower costs compared to Australia Post’s and New Zealand Post’s ‘snail mail’.

Direct-response television and radio

Direct marketers often use direct-response television and radio whereby commercials are put to air that persuasively describe a product and then give a toll-free number for viewers to call and place an order. Direct-response television and radio are often used to build a database, as well as to make immediate sales. At one time or another, nearly all the tools of direct marketing are employed. Often, companies employ sales promotion coupled with telemarketing techniques. In some cases, television and radio are used along with other media as acquisition media to build a customer database. Home-shopping channels on FTA-TV (free-to-air television) and pay-TV (subscriber-TV) are also included in this direct and digital marketing category. Increasingly, viewers may use the remote control buttons to interact with these commercials and order samples and catalogues. Successful direct-response advertising campaigns can ring up big sales. For example, little-known infomercial maker, Guthy-Renker, has helped propel its Proactiv Solution acne treatment and other ‘transformational’ products into power brands that pull in US$1.8 billion in sales annually to five million active customers. (Compare that to only about US$150 million in annual chemist sales of acne products in the United States.) Guthy-Renker now combines direct-response television with social media campaigns using Facebook, Pinterest, Google+, Twitter and YouTube to create a powerful integrated direct marketing channel that builds consumer involvement and buying.3 As the lines continue to blur between television screens and other video screens, interactive ads and infomercials are appearing not just on television, but also on mobile, online and social media platforms, adding even more television-like interactive direct marketing venues.

Telemarketing

Telemarketing is where either viewers are invited to call a 1-800, 0055 or 1300 number and place their order – inbound telemarketing – or human telephone operators or computers with voice recognition

direct marketing

Companies tailor their offers and content to the needs and interests of narrowly defined segments or individual buyers using various methods, including direct print and reproduction, direct-response television and radio, telemarketing, telesales and kiosks and electronic dispensing.

direct print and reproduction

Mail-outs of letters, product lists, samples, and paper-based and digital catalogues on CD-ROM or DVD sent to a list or a known database of customers, or to a targeted group that the marketer wishes to convert to a database entry.

direct-response television and radio

Where commercials are put to air that persuasively describe a product and then give a toll-free number for viewers to call and place an order.

telemarketing

Where either viewers are invited to call a 1-800, 0055 or 1300 number and place their order – inbound telemarketing; or human telephone operators or computers with voice recognition capabilities ‘cold call’, seeking an order or perhaps a donation – outbound telemarketing.

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Part 3  Designing a customer-driven strategy and mix

capabilities ‘cold call’, seeking an order or perhaps a donation to an organisation such as CARE Australia or the Red Cross – outbound telemarketing. Telemarketing covers a broad range of activities, with differing objectives. At one end of the continuum, it is employed to generate new sales leads and build the database. At the other end lies full account management. In between the two are many other means of employing telemarketing. A major use of telemarketing relates to customer service. Motor vehicle manufacturers make regular follow-up calls to ensure that dealer service and car performance and satisfaction are all at a level that might ultimately result in a repeat purchase of the brand. Also see the discussion in Chapter 14 on the Do Not Call register, whereby individuals may register their landline and mobile phone numbers to reduce the number of unwanted telemarketing calls they receive.

Telesales telesales

Usually involves a permanent part-time bank of telephone operators who routinely call known customers, such as retailers, to take their orders.

This method is used by all types of marketing firms, not just by direct marketers. Telesales usually involves a permanent part-time bank of telephone operators who routinely call known customers to take their orders. The only feature differentiating this method from telemarketing is that, in telesales, the calls are routinely made to regular customers, such as retailers. On average, a field salesperson can make around five or six calls a day, depending on the industry – some 30 calls per week – whereas a telesales operator can make 30 to 40 calls a day and more. In other words, five field salespeople are needed for every telesales operator. As a result, the economics of telesales in such companies far outweigh those of a field force. Telesales operators are usually set up with a computer workstation linked to a minicomputer. They are therefore able to see on one screen the sales for this time last week, last month and last year. Any items on a cents-off promotion can be made to flash or give some other cue. Even the weather, which impacts on fast-food sales, can be displayed. The telesales operator is thus in a better position than the retailer’s personnel to know what should be ordered, and can prompt customers for more orders.

Kiosks and electronic dispensing kiosks

Machines used to provide information and take orders of such offerings as insurance policies.

electronic dispensing machines (EDMs) and card-reading telephones

Dispense and receive cash, as do the EFTPOS machines used by retailers.

As consumers become increasingly comfortable with digital and touch-screen technologies, many companies are placing information and ordering machines – called kiosks (like good old-fashioned vending machines, but offering so much more) – in stores, airports, hotels, university campuses and other locations. Kiosks are everywhere these days, from self-service hotel and airline check-in devices to in-store ordering devices that let you order merchandise not carried in the store. ‘Flashy and futuristic, souped-up machines are popping up everywhere,’ says one analyst. ‘They have touch screens instead of buttons, facades that glow and pulse . . . [they] bridge the gap between old-fashioned stores and online shopping.’4 Kiosks are something of an innovation in the arsenal of direct marketing weaponry. Kiosks often do not dispense anything, but simply allow orders to be placed or payments to be made. They also provide services such as printing pictures taken on digital cameras and stored on flash memory sticks. Electronic dispensing machines (EDMs) and card-reading telephones that dispense and receive cash are popular today, as are the EFTPOS machines used by retailers. They are now found in airports, banks, casinos, licensed clubs and hotels – in fact, anywhere there are high pedestrian densities.

Linking the concepts Let’s stop for a moment and reflect on the impact of direct and digital marketing on your life. ● When was last time you bought something via direct marketing? What did you buy, and why did you buy it direct? When was the last time you rejected a direct marketing offer? Why did you reject it? Based on these experiences, what advice would you give to direct marketers?

● For the next week, keep track of all the direct marketing offers that come your way via direct mail and catalogues, and others. Then analyse the offers by type, source and what you liked or disliked about each offer and the way it was delivered. Which offer best hit its target (you)? Which missed by the widest margin?

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Digital marketing (pp. 411–18) Most people think of the internet (net) and its graphical face, the World Wide Web (web), when they refer to ‘digital marketing’ or ‘online marketing’ as it is sometimes called. While the internet is a ‘cluster of related IT innovations’ and only one aspect of digital marketing, the devices used are still evolving in form and function.5 Consider that smartphones, tablets and newer touch-screen notebooks are microcomputers that run on a smartphone operating system and have enabled even more users to be interconnected with other users, businesses and government. In one way or another, most organisations now have a website and use digital media even if they only use email. Such companies are engaging in digital marketing, as they are marketing their offerings and building customer relationships over the internet and cellular networks. Using this method, companies and individuals add value through interaction with people and other businesses.

Interacting in digital marketing When companies interact online with consumers and other companies, they do so in any or all of the five ways shown in Figure 13.2: (1) by creating a search-engine optimised website; (2) by engaging in search engine marketing (SEM); (3) by using online advertising; (4) by setting up or participating in social media marketing; or (5) by using email.

internet/World Wide Web (net/ web)

A vast public web of computer networks that connects users of all types all around the world to each other and to an amazingly large ‘information repository’.

digital marketing Company efforts to market products and services and build customer relationships over the internet and cellular networks.

Search-engine optimised websites For most companies, the first step in adding value through online marketing is to create a website. However, beyond simply creating a website, marketers must design an attractive site and find ways to get consumers to visit the site, stay around and come back often.

Types of websites Websites vary greatly in purpose and content. The most basic type is a corporate and/or brand website. These sites are designed to build customer goodwill, collect customer feedback and supplement other sales channels, rather than to sell the company’s products directly. They typically offer a rich variety of information and other features in an effort to answer customer questions, build closer customer relationships and generate excitement about the company or brand. The main difficulty companies face in this regard is to include the company and/or brand name in the domain name. For example, cocacola.com

ertising e adv n i l On

e gin M) en (SE g

Website designed to build customer goodwill, collect customer feedback and supplement other sales channels, rather than to sell the company’s products directly.

Social m marke edia ting

ma Sear rke ch tin

Em ail

DIGITAL MARKETING

e r onlin Othe raction inte

Search optimise -engine d we bsit e

corporate and/or brand website

Figure 13.2  Forms of digital marketing

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marketing website

Website designed to engage consumers in an interaction that will move them closer to a direct purchase or other marketing outcome, or hold them as loyal customers.

is a registered top-level global domain name, while cocacola.com.au is a regional domain name. In this instance, both the company and brand name are the same, giving Coca-Cola a considerable advantage over brands where the company name is different. The advantage comes from the guessability of the domain name by users who can navigate directly to the website of such a brand. The brand is less reliant on search engines directing consumers to their website. At P&G’s non-transactional Old Spice brand site, , you can learn about the different Old Spice products, watch recent ads, enter the latest contest and post comments on the Old Spice blog. Arguably, to get to this site, consumers would need to be directed there via traditional media advertising or via a search engine, such as Google. Companies either create a marketing website and host it themselves or have a third-party service company build the website and then even host the site on an external web server. Regardless of how it is hosted and who created and maintains the website, it should be designed to engage consumers in an interaction that will move them closer to a direct purchase or other marketing outcome, or hold them as loyal customers. For example, visitors to SonyStyle.com.au can search through dozens of categories of Sony products, learn more about specific items and read expert product reviews. They can check out the latest hot deals and place orders online.

Designing effective websites Creating a website is one thing; getting people to visit the site is another. To attract visitors, companies aggressively promote their websites in offline print and broadcast advertising and through ads and links on other sites. But today’s web users are quick to abandon any website that does not measure up. The key is to create enough value and excitement to get consumers who come to the site to stick around and come back again. This means that companies must constantly update their sites to keep them current, fresh and useful. Of course, many firms – both large and small – set up eBay stores for the reason that the more popular ‘Buy Now’ method, with payment via PayPal, is a sure-fire online marketing approach. For some types of products, attracting visitors is easy. Consumers buying new cars, computers or financial services will be open to information and marketing initiatives from sellers. Marketers of lowerinvolvement products, however, may face a difficult challenge in attracting website visitors. If you are in the market for a computer and you see a pop-up ad that says, ‘The top 10 PCs under $800’, you will likely click on the banner. But for many other websites, there is little or no attraction. A key challenge is designing a website that is attractive on first view and interesting enough to encourage repeat visits. Many marketers create colourful, graphically sophisticated websites that combine text, sound and animation to capture and hold attention (e.g. see or ). Others, such as Moove Milk, have turned to Facebook – – rather than maintain a website. To attract new visitors and to encourage revisits, suggests one expert, online marketers should pay close attention to the seven Cs of effective website design:6 • Context: the site’s layout and design • Content: the text, pictures, sound and video that the website contains • Community: the ways in which the site enables user-to-user communication • Customisation: the site’s ability to tailor itself to different users or to allow users to personalise the site • Communication: the ways in which the site enables site-to-user, user-to-site or two-way communication • Connection: the degree to which the site is linked to other sites • Commerce: the site’s capabilities to enable commercial transactions. And to keep customers coming back to the site, companies need to embrace yet another ‘C’ – constant change. This latter point is important not just to appeal to visitors, but also to ensure that the ‘bots’ which index websites for search engines continue to update the information and help the site rise through the output of sites the search engine finds in response to a consumer search. The term googling has come into existence to describe such consumer search actions. Search engine optimisation has come to the fore as a task for those managing websites, and is part of the broader task of search engine marketing.

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Marketing in Action 13.1

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Search engine marketing: Three reasons why search engines exist

Why do search engines exist? First, web users want to find domain names

Googlebot-mobile for mobile phones, among other tools. We leave it to you to

associated with products and brands and use the web to search for information

read Brin and Page’s paper (see sources) on how large-scale search engines work

via all manner of devices. Second, there was, and still is, money to be made by

or other even more interesting reads on the subject.

supplying this information if presented on the basis of a quality ranking. And, so,

Here, our focus is on two aspects of search engines as they impact on

many bright young computer engineers set to work developing large-scale crawler

marketing: optimising a website’s organic and paid rankings, and making sense of

(aka robots, bots, spiders) and web-page indexing software algorithms to enable

search engine marketing metrics. Taking Google as our example, organic rankings

web searching. These software accomplishments were then used to attract venture

are different from paid rankings because the former are achieved by website

capital and have now been enhanced to the point where the companies behind

design and content quality as well as popularity of the site, while paid rankings

them are valued more highly than long-lived manufacturers such as General

also entail paying for keyword usage. Organic rankings appear on the left-hand

Motors. Third, websites want to be found. Why else display web pages via a global

side of Google’s search output web pages, whereas paid rankings appear at the

medium if you do not want people to find and view them? To this end, we might

top, right-hand side and bottom – if there are any associated with a particular

expect to find the following meta-tag instruction to search engine crawlers to

keyword. Since 70 per cent of site visits are generated by search engines, the

appear in the header of all web pages – . Strangely enough, we do not always find such meta-tag usage. We do

through to the website – or, better still, to click through and buy the product. After

find many flash-animated ‘splash pages’ that might make marketing people feel

all, transacting websites are interested in ARPU (average revenue per user).

warm and fuzzy, but which cannot be read by search engine bots. And so, from a search engine marketing viewpoint, many companies are wasting their money.

It is important to remember that the starting point for any direct and digital marketing campaign is a sound marketing strategy. This means setting goals and

The first search engine that comes to most people’s minds is Google, with

budgets before embarking on a particular search engine or any other marketing

over 80 per cent share of searches in Australia. (Apologies to Yahoo!7, Bing and

campaign. This also enables you to decide how much to spend on individual

the many hundreds of other search engines that exist.) Google co-founders Larry

keywords. With this in mind, we now turn to a discussion on optimising search

Page and Sergey Brin met while candidates in the doctoral program at Stanford

engine rankings and analysing results.

University. Their great search engine idea in 1998 has developed to the point where the company now has extensive computer farms that are estimated to run to more than 500 000 rack-mounted web servers and employs 10 000 people around the world. Google uses its web crawlers, Googlebot and Imagebot, and

Optimising organic rankings If a library does not list the book you want in its catalogue, you are unlikely to find that book by a physical search or by asking the librarian. Similarly, if a search engine has not indexed a particular site, you will not find it by using a keyword search of that search engine. Not all search engines index the same pages, even though the main rule they use in their ranking algorithms is the location and frequency of keywords. So, the astute marketer will ensure that his or her website has important keywords – such as ‘gardening’, ‘native plants’ and ‘water saving’ in the case of a gardening site – at the top of the page, in the meta titles and repeated in the meta-tags and meta descriptions. Of course, there are proprietary aspects to search engine algorithms, which means that we can never really know all the tricks of optimising organic rankings by way of web design. We do know that constantly changing the order of these keywords will not trick search engines into giving a higher organic ranking – or so we are led to believe. Certainly, keyword spamming, such as repeating keywords hundreds of times on a web page other than for spelling clarification reasons (how do

Search engine marketing: The first search engine that comes to most people’s minds is Google; however, many are available.

you spell ‘freebee’, ‘freebie’, etc.?), will see the site automatically removed from

© dpa picture alliance archive/Alamy

popularity. This is like saying that the most popular person in class is the one

search engine indexes. We can say with certainty that a key feature of any website is its link whose mobile phone number is in everyone else’s speed dialler. She or he is

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‘connected’ in every sense of the word because everyone wants her or him to

of mounting Adword and Adsense campaigns is relatively lengthy, we simply

be their friend. Can link popularity be manipulated in favour of the marketer?

point you to Google and suggest you start out by creating a gmail account and

The simple answer is ‘yes’, although this belies the complexity of doing so.

use this for the purpose of creating an ‘account’ with Google. Signing in provides

Google’s Conversion University provides sound information on Driving

access to ‘My Account’ but does not incur charges.

Traffic to sites and on how to use Google Analytics to assess organic ranking

Clicking on the Campaign Management tab is the starting point for setting

performance. One of Amazon’s methods of gaining in the organic rankings is to

up Adword campaigns based on your website’s keywords. The other two tabs

pay associates a commission for selling items they have listed on their individual

of interest are Reports and Analytics, which we examine later in this box. A key

websites and which have attracted people to click through to a purchase at

feature of the campaign management task, which Google assists with, lies in

Amazon that is associated with the seller’s code number. This is an example of a

generating keywords and variations on them. This is important, as it is vital to

double whammy in that many other sites are linked to Amazon and are therefore

separate keywords in themed Adgroups and to use two or three of these in each

directing traffic to Amazon – and because search engines also rank sites that

campaign. For example, it is better not to mix keywords concerning native plants

are attracting clicks more highly than those that are not, the Amazon associates’

with keywords about saving water in the same Adgroup. It is preferable to have

sites benefit, as does Amazon itself. This example provides a neat segue to the

a separate Adgroup for each, even if only from an analysis of results viewpoint.

matter of paid rankings.

Also, it is important to review, test and make changes to your campaigns before, and even after, going live. Using one large list of possibly mismatched keywords

Optimising paid rankings

in a single Adgroup in the one campaign is not the best way to proceed.

Merely placing links to popular sites and landing pages on your website is not

If location is important to your business, it is suggested that you separate your

enough to optimise your position in search engine rankings – even if these are

Adgroups by geography, based on the structure or offering, so you can create

popular YouTube streaming videos or links to your favourite wiki or perhaps to a

specific ad text and links to relevant landing pages. It is also wise to monitor

social networking site. Buying Google Adword or Adsense campaigns is one way

the search term report for negative keywords as this helps reduce spending on

to increase both organic and paid rankings. As the task of describing every detail

keywords that are not relevant to your business.

Also, read about and use negative keywords and then keep checking the results.

Figure 1  Google metrics: My Dashboard Source: Google and the Google logo are registered trademarks of Google Inc., used with permission. For more, see , accessed October 2016.

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Google search metrics

415

We suggest you spend time becoming familiar with the metrics Google provides by viewing Help Resources, provided in the View Reports and other

In the main body of this chapter, we suggest that marketing organisations might

areas at Google. We finish with the reminder that, if it cannot be measured,

employ strategies that involve using a combination of more traditional media and

then it is not marketing. In this context, Google Analytics is a boon to marketing.

direct and digital marketing tools and techniques, or using the latter on their own.

Sources: View the Google site, , for Help Resources to learn more about Adwords and Adsense use and the metrics behind search engine marketing. See also Sergey Brin & Larry Page, ‘The anatomy of a large-scale hypertextual web search engine’, Computer Science Department, Stanford University, , accessed October 2016. For an interesting background reading on Google, see Nicholas Carr, The Big Switch: Rewiring the World, from Edison to Google, WW Norton & Company: New York, 2009. Search engine shares quoted from Danny Sullivan, ‘Nielsen NetRatings search engine ratings’, Search Engine Watch, 22 August 2006. See also Danny Sullivan, ‘How search engines rank web pages’, Search Engine Watch, 15 March 2007; Albert-László Barabási & Réka Albert, ‘Emergence of scaling in random networks’, Science, 286(5439), 1999, pp. 509–12.

The commentary associated with Figure 1 clarifies the point that, while direct and digital marketers are vitally interested in ARPU, they also monitor performance on such intervening variables as brand awareness, knowledge, intentions to purchase and satisfaction levels, to name just a few metrics associated with marketing communication and post-purchase loyalty. The marketing organisation employing search engine marketing – Google Adwords specifically – as part of its direct and digital marketing communication strategy has analytical tools provided by Google available to it. After logging in to

Questions

your Google account (you set up ‘My Account’ when creating Adwords groups and

❶ What is search engine marketing, and why is it an important aspect of any

campaigns), you will see three components: Personal information, My services and Try something new. Here, we are interested in My services, specifically Analytics. On entering the ‘Analytics’ area, notice the ‘Website profiles’ section, which lists

direct and digital marketing campaign? ❷ Are there differences between organic and paid quality rankings achieved on the Google search engine? Why, or why not?

any websites we have set up in order to receive reports. This assumes that you have

❸ Is it necessary for marketers to know how search engines rank web pages?

already set up your website pages to contain the tracking code that Google uses to

❹ Why does Google provide website analytics? How important is this

report on traffic to your site. (See Figure 1 for sample Dashboard output.)

information to marketers?

Search engine marketing The main growth area for online advertising is search engine marketing – sometimes referred to as search marketing. Search marketing entails promoting a company’s brands through search engines as part of its integrated marketing communication strategy. As Marketing in action 13.1 explains, this marketing activity is designed to use search engine optimisation such that the company’s listing in keyword search output – both natural (or organic) and paid (pay-per-click and cost-per-thousand, CPM) – is optimised and matches web users’ information needs. Search engine marketing expenditure includes fees paid to internet companies to list and/or link their company site domain name to a specific search word or phrase (includes paid search revenues). Search categories include: • Paid listings: Text links appear at the top or side of search results for specific keywords. The more a marketer pays, the higher the position the linked text gets. Marketers pay only when a user clicks on the text link. • Contextual search: Text links appear in an article based on the context of the content, instead of a usersubmitted keyword. Payment occurs only when the link is clicked. • Paid inclusion: Guarantees that a marketer’s URL is indexed by a search engine. The listing is determined by the engine’s search algorithms. • Site optimisation: Website modifications made to ensure indexing by bots and spiders, and which help a site to be found in a keyword search and lift its rankings in search engine output.7 Google is the pre-eminent search engine throughout the world.8 Like its competitors, Google indexes websites using various elements of the marketers’ web pages, including images, videos and web-page meta-tags, such as the following found in the header section of an HTML (hypertext markup language) page and unseen unless one views the page’s source code:

search marketing Marketing effort to gain prominence for a website on search engine listings, with the aim of increasing website traffic by attracting visitors who search on keywords via their favourite search engine, portal or directory to this website.



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The Googlebot also indexes web pages based on the page title, or text associated with pictures on a web page, among other aspects. Search engine marketing also involves buying placement for ads on other hightraffic websites, a matter we discuss in the next section. At the very least, a website should be easy to use, professional looking and physically attractive. Ultimately, however, websites must also be useful. When it comes to web surfing and shopping, most people prefer substance over style and function over bling. Thus, effective websites contain deep and useful information, interactive tools that help buyers find and evaluate products of interest, links to other related sites, changing promotional offers, and entertaining features that lend relevant excitement. Maintaining a top website is a complex and ongoing task. Many organisations find willing contributors when creating a site, but find it difficult and expensive to maintain their site.

Online advertising online advertising

Advertising that appears while consumers are browsing the web, including display ads, search-related ads, online classifieds, video advertising and other forms.

As consumers spend more and more time on the internet, companies are shifting more of their marketing dollars to online advertising to build their brands or to attract visitors to their websites.

Forms of online advertising The main forms of online advertising are search-related ads, display ads and online classifieds. Online advertising has become a major medium, with Australia achieving its highest revenues of $6.82 billion for the full financial year ending 30 June 2016.9 Figure 13.3 provides a breakdown of online advertising expenditure in Australia for the year ending 30 June 2016. In New Zealand, online advertising rose to more than NZ$800 million in 2015.10 The strong growth is mainly attributed to increasing mobile advertising, and by advertising accompanying online video.11 We refer to the activity of placing online ads through search engines – for example, using Google’s Adwords and Adsense services – as search-related ads (or contextual advertising). In this form of online advertising, text-based ads and links appear alongside search engine results on sites such as Google and Yahoo!7. For example, search Google for ‘3D TVs’. At the top (in a pink box) and side of the resulting search list under the heading ‘Sponsored links’, you may see ads for advertisers, such as Samsung and perhaps others. In the organic lists will likely appear retailers ranging from Harvey Norman and JB Hi-Fi to price-comparison sites such as MyShopping.com.au.

General display $2 469 100

Search and directories $3 122 400

Classifieds $1 226 900

Figure 13.3  Online advertising expenditure in Australia, year ending 30 June 2016 Note: Mobile and video advertising are included in these totals: •  ‘General display’ total comprises 45% mobile advertising and 24% video advertising. •  ‘Search’ total includes an element of mobile advertising (43% of $1,961 million, or $843 million). Source: IAB Australia, ‘Executive Summary’, Online Advertising Expenditure Report – FY 2015–16, 22 August 2016, conducted by PricewaterhouseCoopers on behalf of IAB Australia.

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Nearly all of Google’s A$100 billion in global revenues comes from ad sales.12 An  advertiser buys search terms from the search site and pays only if consumers click through to its site. Search is an always-on kind of medium. And importantly in today’s tight economy, the results are easily measured. Thus, as in many parts of the world, searchrelated ads account for more than half of the total online advertising expenditure in Australasia, more than any other category of online advertising. The motor vehicle industry is often the highest spender in the ‘General display’ advertising  category, followed by finance, and computers and communications. Turning to the ‘Online classified’ advertising category, the real estate industry is usually the heaviest Online advertising: Flight Centre employs the web in marketing air travel, spender, followed by recruitment and then accommodation, holidays and packages, and more, on its website at . In recent years, search-related advertising Courtesy of Flight Centre has grown increasingly popular with all companies in nearly all industries. In companies such as Suncorp, whether we are referring to their insurance companies – AAMI, Bingle, GIO or JustCarInsurance – or perhaps to their banking operations, we see that the companies involved are heavily reliant on the web. So, too, are they heavily reliant on search marketing. Search ‘car insurance Australia’ using Google, Yahoo!7 or Bing, and you should see AAMI and youi as search output on your computer screen, along with such competitors as Allianz, RACV and Progressive, among others that now include retailers such as Woolworths. This is not a coincidence but, rather, part of an orchestrated campaign of bidding for key words and ensuring that the companies pay the search engines for any click-throughs to the company’s websites.

Email Home landline phone connections continue to fall, while mobile phone usage continues to rise. Nearly one-third of adult Australians do not have a landline at home and rely exclusively on their mobile phones, and 21 per cent access the internet using only their mobile phones.14 Younger people are more likely to fall into this category. Many of us have more than one mobile phone, or even a mobile phone with two SIM (subscriber identity module) cards – one for work and one for personal use – thereby accounting for the fact that the number of mobile phone subscriptions in Australia exceeds the size of the population.15 Moreover, we tend to update our mobile phones every 18–24 months, with companies such as Apple and Google leading the way in enticing us to adopt new phones with features like artificial intelligence (AI), virtual reality (VR) and ever-more-powerful cameras on top of the many built-in features we already cannot do without. Telstra, Australia’s largest telecommunications company, collects some 40 per cent of its revenue ($10.4 billion in 2015–16) from mobile.16 As more and more features are incorporated into mobile phones, marketing organisations are finding more novel ways to reach out to and hold customers. Marketers of all kinds – from Coca-Cola, Pepsi, Nike, McDonald’s and Toyota to the local bank, university or supermarket and even vending-machine

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spam

Unsolicited, unwanted commercial email messages.

makers – are now integrating mobile phones into their direct and digital marketing strategy.17 Mobile phone promotions include everything from ring-tone giveaways, mobile games, text messages in contests and ad-supported content, to retailer announcements of discounts, brand coupons, gift suggestions and shopper information apps.18 At one time, email was described as the ‘killer app’, and it is still the ‘king’ in comparison with other forms of digital marketing.19 According to the US Direct Marketing Association, marketers get a return of $42 on every $1 they spend on email.20 While most companies use email, and many use it for follow-up customer service, its main use is in business-to-business marketing. Much depends on the definition used when accounting for expenditure. Here, we employ the Interactive Advertising Bureau’s definition whereby email includes banner ads, links or advertiser sponsorships that appear in email newsletters, email marketing campaigns and other commercial email communications, whether text or HTML based. It is the dark side of email use that has reduced its usefulness in marketing. The explosion of spam – unsolicited, unwanted commercial email messages that clog up our email inboxes – has produced consumer irritation and frustration. Spam may now account for as much as 56 per cent of all email sent, with much more around the Christmas holiday period, having dropped from 71 per cent in 2014.21 To address these concerns, most legitimate marketers now practise permission-based, or opt-in, email marketing, sending email pitches only to customers who ‘opt in’. Others, such as Amazon.com, include long lists of opt-in boxes for different categories of marketing material. Amazon.com targets opt-in customers with a limited number of helpful ‘we thought you’d like to know’ messages based on their expressed preferences and previous purchases. Few customers object and many actually welcome such promotional messages. Given its targeting effectiveness and low costs, email can be an outstanding marketing investment when used correctly. Using email with opt-in customers as a relationship maintenance tool is beyond dispute. However, it is often used by the unscrupulous despite the enactment of the Australian Spam Act 2003 (Cth) and the Unsolicited Electronic Messages Act 2007 in New Zealand, which are designed to ensure that marketers maintain appropriate standards in the use of email.

Social media marketing (pp. 418–19) social media networks (web communities of interest)

Online social communities – blogs, social networking websites or even virtual worlds – where people socialise or exchange information and opinions.

As we have discussed since Chapter 1, the popularity of the internet has been spurred on by a rise in the number of social media networks and web communities of interest (also known as communities of practice). Using social media might be as simple as posting some messages and promotions on a brand’s Facebook or Twitter pages or creating brand buzz with videos or images on YouTube, Vine or Pinterest. However, most large companies are now designing full-scale social media efforts that blend with and support other elements of a brand’s marketing content strategy and tactics. More than making scattered efforts and chasing ‘Likes’ and tweets, companies that use social media successfully are integrating a broad range of diverse media to create brand-related social sharing, engagement and customer community. For example, a tour group or motoring enthusiasts visiting Europe for the Formula 1 at Monza in Italy, and GT3 car racing at the Nürburgring in Germany, might set up a closed (not open to the public at large) Facebook group for its members to share their experiences by way of comments and photos. When the tour is completed, the members may post positive comments on the Facebook pages of a company, such as the Latitude Group, that organised the overseas travel and the tour itself. Members may even go so far as to contribute reviews of attractions, accommodation and meals to Tripadvisor.com and similar social media sites. They may share their videos to YouTube and photos to Pinterest.

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Facebook also caters to business users with its Workplace service, which has a similar look and feel to the Facebook we are all more familiar with as it includes news feeds, group sharing, live chats, and features that include live videos and emoji reactions.22 This workplace service competes with Microsoft’s Skype for Business, and LinkedIn. Although the large online social networks, such as Facebook, YouTube and Twitter, have grabbed most of the headlines, a new breed of more-focused niche networks has recently emerged. These networks cater to the needs of smaller communities of like-minded people, making them ideal vehicles for marketers who want to target special-interest groups. For example, the largest global mobile-phone and tablet community of interest, with nearly five million members, is xdadevelopers.com; in Australia, many people subscribe to whirlpool.net.au for information and interaction on mobile phone plans and ICT generally. Integrating social media marketing: People often use TripAdvisor to review Car companies, such as BMW, rely on such attractions, hotels and meals when travelling and to seek the advice of other communities of interest as Bimmerpost.com, not travellers. only to pass information on new models to existing TripAdvisor owners, but also to follow the many interactions between members on tips, tricks and wanted features. Many other independent and commercial websites have arisen that give consumers online places to congregate, socialise and exchange views and information. These days, it seems, almost everyone wants to be your ‘friend’ on Facebook, wants your endorsement on LinkedIn, or wants you to check in with Twitter, tune into the day’s hottest videos at YouTube or check out photos on Flickr or Pinterest. And, of course, wherever consumers congregate, marketers will surely follow. More and more marketers are now riding the huge social networking wave. Nevertheless, participating successfully in existing online social networks presents challenges. First, online social networks are new and results are difficult to measure, and third-party metrics are increasingly needed.23 Second, such web communities are largely user controlled. The company’s goal is to make the brand a part of consumers’ conversations and their lives. However, marketers cannot simply muscle their way into consumers’ online interactions – they need to earn the right to be there. To avoid the mysteries and challenges of building a presence on existing online social networks, many companies are now launching their own targeted web communities. For example, consider ESPN’s website. You cannot buy anything at ESPN.com. Instead, the site creates a vast branded sports community.

Other forms of online interaction (pp. 419–20) Other forms of online interaction in marketing include online video, content sponsorships, alliances and affiliate programs, and pass-it-on marketing. Online video involves posting digital video content on brand websites or on social media sites, such as YouTube, Facebook, Vine and others. Some videos are made specifically for the web and social media. Such videos range from ‘how-to’ instructional videos and public relations (PR) pieces to brand promotions and brand-related entertainment. Other videos are ads that a company makes primarily for television and other media but posts online before or after an advertising campaign to extend the videos’ reach and impact.

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viral marketing (pass-it-on marketing)

The internet version of word-of-mouth marketing – websites, videos, email messages or other marketing events that are so infectious that customers will want to pass them along to friends.

Good online videos can engage consumers by the tens of millions. The online video audience is soaring, with much of the population now streaming video.24 Marketers hope that some of their videos will go viral. Viral marketing, or pass-it-on marketing, is the digital version of word-of-mouth marketing, and involves creating videos, ads and other marketing content that are so infectious that customers will seek them out or pass them along to their friends. Because customers find and pass along the message or promotion, viral marketing can be very inexpensive. And when a video or other information comes from a friend, the recipient is much more likely to view or read it. Using content sponsorships, companies gain name exposure on the internet by sponsoring special content on various websites, such as news or financial information or special-interest topics. Sponsorships are best placed in carefully targeted sites where they can offer relevant information or service to the audience. Internet companies can also develop alliances and affiliate programs, in which they work with other companies, online and offline, to ‘promote each other’. For example, through its Amazon Associates Program, Amazon.com has more than 900 000 affiliates who post Amazon.com banners on their websites.

Interactivity (pp. 420–21) In what we might regard as more traditional direct marketing, customers asked questions, ordered company offerings and provided feedback via post, landline telephone and fax. In the digital space we now live in, customers use the means that companies now provide. These range from website forms to email, and on to the social media already discussed. However, it must be noted that, firstly, customers interact with each other, and they interact with companies they deal with and even with their competitors. Next, we look at each of these modes of interactivity.

Customer-to-customer interaction

customerto-customer interaction

Interaction whereby customers can buy or exchange goods or information directly with one another. Such interaction may also involve interchanges of information through internet forums that appeal to specific special-interest groups.

blog

An online journal where people post their thoughts, usually on a narrowly defined topic.

Much customer-to-customer interaction occurs on the web between interested parties over a wide range of products and subjects. In some cases, the internet provides an excellent means by which consumers can buy or exchange goods or information directly with one another. For example, eBay and other auction sites offer popular marketspaces for displaying and selling almost anything – from art and antiques, coins and stamps, and jewellery, to computers and consumer electronics.25 eBay’s customer-to-customer online trading community is large and embraces more than 164 million active users worldwide.26 (That is more than the combined total populations of Australia, Britain, Egypt, New Zealand, South Korea and Turkey.) However, it is to be noted that the ‘Buy it now’ category outstrips auctions on eBay.27 In other cases, customers use communities of interest, and turn to these forums and blogs, where they post their thoughts, usually on a narrowly defined topic. Tripadvisor.com is a classic example, where travellers post their reviews of places they have visited – from attractions and events, to restaurants and hotels. Many marketers are now tapping into blogs as a medium for reaching carefully targeted consumers. When we consider that blogs can be created in a few minutes, and that the topics are so numerous, it is no wonder that companies seek to tap this form of customer-to-customer interaction.28 However, companies also set up their own blogs, and it is estimated there are 138 travel blogs alone in Australia and New Zealand.29 However, the commentaries are not usually as critical as we might find at ProductReview.com.au.30 As a marketing tool, blogs offer some advantages. They can provide a fresh, original, personal and cheap way to enter into consumer web conversations. However, the blogosphere is cluttered and difficult to control. Blog journals remain largely a customer-to-customer medium. Although companies can sometimes leverage blogs to engage in meaningful customer relationships, consumers remain largely in control. Whether or not they actively participate in the blogosphere, companies should show up, monitor and listen to them. It can soon be seen that ‘customer-to-customer’ means that online buyers do not just consume product information – increasingly, they create it. We might state that ‘word of web’ is joining ‘word of mouth’ as an important buying influence.

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Customer-to-company interaction

The final online marketing domain is customer-to-company interaction. The internet has enabled customers to have easier communication with companies. In the nature of true relationship management, we see that most companies now invite prospects and customers to send in suggestions and questions via text messages, email and company websites. Beyond this, rather than waiting for an invitation, consumers can search out sellers on the web, learn about their offers, initiate purchases and give feedback. Using the web, consumers can even drive transactions with businesses, rather than the other way around. For example, using Shopbot.com.au, would-be buyers can find the lowest price for all manner of products. Customers can also use websites to ask questions, offer suggestions, lodge complaints or deliver compliments to companies. On the one hand, mobile phone and broadband users can access whirlpool.net.au to tap into customer-to-customer interactions and to see company responses. Those who have complaints often turn to websites such as Not Good Enough at and Product Review to put forward their views and comment on the experiences of others. In short, customerto-customer interactions have changed the way marketers listen to their customers and act on their comments. Customer-to-customer interactions should never be ignored by marketing organisations.

Customer-to-company interaction: Notgoodenough.org allows consumers to put the blowtorch to poor-performing companies and is an example of customer-to-customer interaction affecting marketers. Supplied by BrandAide

Fulfilment response (pp. 421–22) In the days of traditional direct marketing, customers who purchased via a catalogue or other media may have been asked to wait up to 28 days for their purchase to arrive. With the advent of the internet, this wait period changed. For digital products, such as computer software and smartphone apps, the process became immediate on digital receipt of payment by the vendor. Certainly, eBay and PayPal changed many people’s expectations in this regard. Often, receipt is synchronous with payment. However, for goods that require international or local carrier delivery, the time delay still exists. For those now relying on Australia Post, the wait is often much longer than the time it takes the overseas carrier, such as Deutsche Post, to hand over the overseas order to Australia Post for local delivery. In one recent first-hand experience, this time delay was four times longer. Omni-channel retailing companies are having as much online success as their online-only competitors. Very few large retailers are online-only retailers as Amazon.com and Netflix are, for example. Most are omni-channel retailers, like Apple is.31 The many omni-channel retailers, such as Supercheap Auto, rely on the internet to distribute their catalogues in tandem with distribution of printed versions. Supercheap Auto also relies on the internet to allow the general public, its Club Plus members and Trade Direct members to order online, pay online using PayPal or credit/debit cards, and then pick up the goods from their closest store. Thus, we point to omni-channel consumers who check prices online, and may even order online, but who pick up direct from the retail store. While fulfilment response is thought of in terms of order processing and delivery by direct marketers, in reality fulfilment may involve purchasing the company offering, or it may involve information, or it may mean assurance of trust in a company or brand.

customerto-company interaction

Interaction whereby customers communicate with companies.

omni-channel retailing

Creating a seamless cross-channel buying experience that integrates in-store, online and mobile shopping.

fulfilment response

While fulfilment response is thought of in terms of order processing and delivery, in reality fulfilment may involve purchasing the company offering, or it may involve information, or it may mean assurance of trust in a company or brand.

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Linking the concepts Let’s take a break and think about how you, your friends and family interact with companies online and how this influences your brand preferences and buying behaviour. ● Do you use Facebook, Twitter, YouTube or other social media to initiate interaction with companies and/or not-for-profit organisations? ● If you use Facebook, and you are advised of posts concerning brands and preferences initiated by companies rather than by people you know, what is your reaction?

● When you want to watch a YouTube video of your choice, and you are forced to watch a video commercial – for at least 3 seconds – do you watch this ad? Do you think this is effective online marketing? Why, or why not?

Customer database use in direct and digital marketing (pp. 422–26) Effective direct and digital marketing relies on having a good customer database at the heart of marketing operations. We begin this section by defining customer databases, before examining their use.

Customer database defined

customer database

An organised collection of comprehensive data about individual customers or prospects, including geographic, demographic, psychographic and behavioural data.

list

Direct and digital marketing entails hiring lists containing names and contact details of qualified potential customers.

intranet

A secure web service for employees only or, in the case of a university, for staff only.

extranet

An online service provided to key customers using a secure information base or transacting website on the public internet.

A customer database is an organised collection of comprehensive data about individual customers or prospects, including geographic, demographic, psychographic and behavioural data. A good customer database can be a potent relationship-building tool. The database gives companies a 360-degree view of their customers and how they behave. A company is no better than what it knows about its customers. When using database technology, the intention is to engage in one-to-one dialogue and elicit a desired, measurable response in target groups and individuals. Note that a list and a database are not the same thing. A list is simply names, addresses and contact details, and can be hired for direct-mailing purposes. Those prospects who, on being contacted, interact, or agree to interact, with the marketing organisation become part of its database. Lists are often hired from specialist service organisations, such as AMPCoDirect, which provides medical and health-care data and marketing lists to reach over 70 000 doctors across Australia.32 Databases may take one of three forms: (1) hierarchical, (2) network or (3) relational. Hierarchical databases have been in use the longest; they permit access to customer transaction data using account numbers, but may not allow the easy extraction of data (data mining) relevant to market segmentation and the tailoring of offers. Network databases are similar to hierarchical databases, but with multiple access points to the data held. This makes them more flexible in use, but they are more expensive to maintain and more complex to use. Relational databases are now more commonly used in marketing, and the data are often entered via the web and accessed by marketing management via company intranets/extranets. Data are stored in two-dimensional tables of rows and columns, where each row represents the attribute data for each entity (customer) and columns represent the same attribute (first name, last name, address and so on) for all records. The tables are linked together by common keys, such as account numbers, and can be easily reconfigured. Most importantly, the tables are easily accessed and manipulated so as to link a single record in one table with another record in a second table, or to link many records in one table with many in a second table, or to link each record in a table with many in another table, and on and on in a daisy-chain fashion. Large firms tend to use third-party software modules from SAP and Oracle, medium-sized firms might be using Linux-based database applications such as PostgresSQL or MySQL, while small businesses are likely to be using Microsoft Access or another software package. A database contains attribute information in columns that may relate to individuals or organisations, set out under the fields grouped under ‘customer data’, ‘item data’ and ‘invoice data’ shown in Figure 13.4. These fields are a guideline only. The complexity of the databases used, and whether or not they are linked

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CUSTOMER DATA

ITEM DATA

INVOICE DATA

• Customer ID • Surname • First name(s) • Mailing address • Delivery-to address • Telephone number • ANZSIC number, if a business • Media habits • Local time zone • Source of inquiry or order • Date of inquiry or order

• Product code • Product cost • Product pricing

• Invoice number • Items ordered • etc.

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DATABASE MANAGEMENT REPORTS

Figure 13.4  Direct and digital marketing database fields

to external databases, depends on the nature of the product, service and industry. Most importantly, such relational databases should enable easy monitoring of the aggregated dollar purchases and profitability of individual customers, so that their customer lifetime value to the business can be monitored.33 It should be noted that privacy guidelines indicate that companies must disclose the purposes for which they are gathering customer information, and must be prepared and able to show individuals the information they hold on them.34 Moreover, marketing organisations must permit individuals to unsubscribe from such databases where they are used for emails.

Database use in direct and digital marketing While business-to-business marketers are heavy users of direct and digital marketing databases, consumer-products marketers also use these databases. This is particularly true of service organisations, such as airlines, financial services organisations (banks) and hotels; and other organisations, such as sporting organisations and theatre groups, that have a subscriber base. Fastmoving consumer goods (FMCG) marketers and their retailing intermediaries increasingly use customer databases for purposes such as loyalty programs. Most large consumer-products companies are currently using or building such databases. For example, Palace Cinemas maintains a database of club members who receive discounted tickets to all movies, with the proviso that ‘no free list’ movies are excluded. It uses the database to send birthday greetings and a free ticket gift to its database members just before their birthdays. American Express uses its database to tailor offers of different value to its various cardholders (blue, green, gold, platinum and black), given that the holders of each class of card represent a different value to the company. It is capable of linking cardholder spending with postcode data. If a new restaurant opens in a particular postcode zone, Amex can offer a special discount to those cardholders who live within walking distance of the restaurant or who eat out a lot. This is but one form of location-based marketing. Many marketing organisations deliver targeted marketing communication to customers in particular locations, through mobile devices such as smartphones and tablets, thereby taking advantage of the GPS features of such devices.35 These organisations recognise that Australasia’s smartphone users are using their phones while they shop, even if they only use QR (quick response) codes placed in shop windows to find out more about

privacy guidelines

Some countries, including Australia, have extended privacy legislation that applies to most profit and not-forprofit organisations.

location-based marketing

Delivering targeted marketing communication to customers in particular locations, through mobile devices such as smartphones and tablets, thereby taking advantage of the GPS features of such devices.

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data mining

Checking databases for patterns and trends that might exist, or to find new connections between data items.

the products involved. Smartphone and tablet users are checking prices and comparing product features, and some are even buying online using their phones.36 With reports of huge growth in the use of mobile devices by shoppers, businesses are beginning to explore how to use the location features of these devices to tailor their marketing communications even more closely to individual consumers. Marketing organisations use their databases in a number of ways: to identify prospects; to decide which customers should receive a particular offer; to deepen customer loyalty; to reactivate customers’ purchases; and for data mining. We examine each of these uses in turn. • Identifying prospects. Many companies generate sales leads by advertising their products or offers. Ads  generally have a response feature, such as a business reply card, toll-free phone number or web-form site. The database is built from these responses. The company sorts through the database to identify the best prospects, then reaches them by mail, phone or personal call in an attempt to convert them into customers or perhaps to get them to opt-in to receive further information. • Deciding which customers should receive a particular offer. Companies identify the profile of an ideal customer for an offer. They then search their databases for individuals most closely resembling the ideal type. By tracking individual responses, the company can improve its targeting precision over time. Following a sale, it can set up an automatic sequence of activities: one week later, send a thankyou note; five weeks later, send a new offer; 10 weeks later (if the customer has not responded), phone the customer and offer a special discount. • Deepening customer loyalty. Companies can build customers’ interest and enthusiasm by remembering their preferences and sending appropriate information, gifts or other materials. For example, Mars (Uncle Ben’s), a market leader in pet food as well as in chocolate confectionery, maintains an exhaustive pet database. In Germany, the company has collected the names of virtually every family that owns a cat. It obtained these names by offering the public a free booklet entitled How to Take Care of Your Cat. People who request the booklet fill out a questionnaire, providing their cat’s name, age, birthday and other information. Mars then sends a birthday card to each cat in Germany each year, along with a new cat-food sample and money-saving coupons for Mars brands. The result is a lasting relationship with the cat’s owner. • Reactivating customers’ purchases. The database can help a company to make attractive offers of product replacements, upgrades or complementary products just when customers might be ready to act. Appliance marketers usually maintain a customer database containing each customer’s demographic and psychographic characteristics along with an appliance purchase history. Using this database, the appliance marketer can assess how long customers have owned their current appliances and which past customers might be ready to purchase again. They can determine which customers need a new PVR, stereo receiver or something else to go with other recently purchased electronics products. Or they can identify the best past customers and send them gift certificates or other promotions to apply against their next purchase. A rich customer database allows the appliance marketer to build profitable new business by locating good prospects, anticipating customer needs, cross-selling products and services, and rewarding loyal customers. • Data mining. Companies maintain many databases in what today are large data warehouses. Data mining entails checking databases for patterns and trends that are hypothesised to exist, or to find new connections between data items. Modern software enables open-ended queries that involve systematic searches for relationships and patterns within and between databases. Four types of relationships might be searched for: (1) associations – for example, the association between sales of two product categories; (2) classes – for example, if males aged 25–39 buy beer and disposable nappies, examination of gender (as a class) might mean that the connection between data in different fields can be more easily made; (3) clusters – for example, the examination of demographics

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and supermarket location would be undertaken because this is a logical relationship; mining this data cluster would identify market segments, among other things; and (4) sequences – for example, in anticipation of finding patterns and trends, a supermarket might predict the incidence of cooked chicken being purchased based on purchases of snack foods.37 Databases are repositories for any type of data a computer can store – text, numeric data, images and sounds – and they can all be mined. There are many analytical tools, but their explanation is beyond our scope. Suffice it to say that the main analytical tools involve such familiar statistical techniques as regression, correlation and factor analysis, in addition to more elementary visual presentation and analysis of data using such tools as the Australian-designed Leximancer software. It should not be forgotten that marketing organisations use their customer databases to maintain customer intimacy, at times to cross-sell related products and, ultimately, to ensure a repeat purchase of the same brand of the major product. At all times, these organisations are intent on ensuring they are marketing to the most profitable customers rather than to all customers, many of whom they can neither satisfy nor make money from. Figure 13.5 is a graphical depiction of an attempt by a rugby league sporting magazine to gain new subscribers as well as have existing customers renew their subscription, using an integrated direct and digital marketing approach. The company is using interactive subscriber-TV – or pay-TV, as users call it – to communicate with potential and existing subscribers. Existing subscribers might be made a ‘relationship offer’ of a free subscription to a movie channel for one week if they take up a two-year subscription to the magazine ‘on the spot’ using the red button selector provided with their interactive television set. Potential subscribers might be approached with a different offer via interactive pay-TV to subscribe for a trial period at no cost, once again on the proviso that they act immediately. As the trial period comes to a close, the marketing organisation would make a further subscription offer to those who had not renewed, as well as approach those who trialled the magazine to take up a subscription. Those who did not renew or subscribe on the first offer might receive a second approach via direct selling. The key to success in direct and digital marketing is quite often the use of a mailing list in the first instance, or possibly a database developed from use of such a list. Many firms, such as American Express International, build up their own databases, but others simply hire a privacy guidelines-compliant list compiled by other firms. Executives can be sorted by industry, title, geographical location and other fields. Dun & Bradstreet, The List Group and other service firms hire out such lists.

Subscriber renewal Offer 1: EMAIL and WEBSITE Interactive pay-TV commercial

Interactive pay-TV/ inbound telemarketing

New subscriber movie channel ‘free subscription’ offer

Database maintenance and evaluation Subscriber renewal Offer 2: OUTBOUND TELEMARKETING

Figure 13.5  An integrated direct and digital marketing approach

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Linking the concepts At this point, let’s think about how online, social media and mobile marketing affect your brand-buying behaviour and preferences. ● How much of your product research, shopping and actual buying take place online? How much of that is conducted on a mobile device? How, and how much, do your digital and instore buying activities interact? ● How much and what kinds of online, social media and mobile marketing do you encounter? Do you benefit from such

marketing, or is it more of an unwelcome intrusion? In what ways? ● Do you engage directly with any brands or brand communities through online sites, social media or phone apps? Do your online, social media or mobile interactions influence your brand preferences and buying? Discuss.

Evaluating direct and digital marketing results (pp. 426–30) The statement, ‘If you can’t measure something, you can’t manage it’, is most often attributed to management consultant Peter Drucker. As with all marketing effort, the measurement of organisational performance outcomes in relation to input dollars is vital. In this section, we examine various methods of evaluating direct marketing. The most common assessment is to compare sales before, during and after a sales promotion, or other direct and digital marketing program or campaign. However, the profitability of such offers and return on marketing investment are even more important (see Analytic measure 8.4 in Appendix 3 for more on profitability). However, there are many issues in evaluating the performance of direct and digital marketing. Suppose a grocery marketer has a 6 per cent market share before a sales promotion starts; this jumps to 10 per cent during the promotion, falls to 5 per cent immediately after the offer concludes and then rises to 7 per cent some weeks later. The promotion seems to have attracted new triers and more buying from existing customers. After customers used up their stock of product bought on promotion, their purchases were reflected in the 7 per cent post-promotion market share. This indicates that the company has gained some new users. If the market share returns to the old 6 per cent level, then all that has happened is that sales increased during the promotion as normal sales were brought forward. Omnibus consumer research, or research using consumer panels, shows the kinds of people who respond to sales promotions if used with mass media advertising alone, and what they did after the promotion ended. Aided and unaided recall tests can also be used to establish the level of excitement created by a mass media sales promotion, and this can be linked with who took up the offer and why, and how it affected their later buying patterns. Such sales promotions can also be evaluated through experiments using controlled store tests. By varying the incentive value, qualifiers, the duration and communication method, optimal sales promotion methods can be determined over time. If sales promotions are used in database marketing, there is the opportunity for more detailed analysis on a campaign-by-campaign basis with identifiable customers.

Evaluating direct and digital marketing Direct and digital marketing organisations are usually interested in a variety of performance measures, both for individual programs and integrated campaigns. They set up their programs to allow later monitoring of such factors as: • sales lead generation • database generation • fulfilment response • product inquiries

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• • • •

sales response profitability return on the investment made in programs and campaigns lifetime customer value. In nearly every case, monitoring and reporting are easily permitted by the information technology used. Simply taking an order for a single product on a once-off basis is rarely profitable for any firm. We have already noted that fulfilment response is more than a purchase as it may involve information, or it may mean assurance of trust in a company or brand. Just as mass marketers using intermediaries to reach the end-consumer must think of customer service levels to ensure repeat sales, so too must direct marketers think in terms of delivery response times and accuracy of delivery, among other things. Similar but different logistics issues are involved for each type of marketer. In the digital space that marketing now occupies, the broader meaning of fulfilment must be acknowledged. Nevertheless, all marketers know that, depending on moderating influences such as convenience and competitive intensity, totally satisfied customers are more likely to repeat the buying experience and advocate the brand to others.38

Evaluating online marketing Separate discussion of the evaluation of online marketing is warranted, and it is to this aspect that we now direct our attention. You should also read Marketing in action 13.1 (earlier in the chapter), which discusses search engine marketing and performance measures, and Analytic measures 7.1 and 7.2 in Appendix 3. Here, we examine three important aspects of digital marketing: (1) digital marketing communication, (2) digital marketing channel performance and (3) online relationship management. We also discuss the evaluation of marketing databases.

Digital marketing communication performance Just as marketing organisations using mass media are concerned with target audience rating points (TARPS), which are a reflection of audience reach and frequency, those organisations using the internet in integrated marketing communication seek to measure both effectiveness (Did they reach the target market?) and efficiency (How cost-effectively did they reach the target market?). The only certain way to track individual behaviour at a website, thereby building a true picture of website usage and measuring return on web investment, is to allow only subscriber access to the site, whether from a personal computer or mobile phone. This approach works well in the case of extranet usage by business-to-business (B2B) and business-to-government (B2G) subscribers (customers and vendors). However, it would be unrealistic for every website to ask home users to subscribe to its particular site if they are only seeking information. Three categories of measurement are involved: web-centric measures, audience-centric measures and networkcentric measures.

Web-centric measures Evaluating the success of websites in marketing communication began with the use of web-centric measures, such as analysis of hits and computer log files (web server software such as AWstats, eLogic and Google Analytics that logs the IP address of each visitor, as well as setting out the time the user visits the website, the particular pages visited, the time the process was completed and the size of objects sent to the visitor) and analysis of page impressions. (Page impression indicates one person viewing one page.) These and other tools offer particularly powerful comparative web analytics that can be used to analyse campaigns involving natural and paid campaign visitors.39 (For more, see Marketing in action 13.1.) Audience-centric measures Audience-centric measures are now favoured by many organisations. Third-party research companies – such as Nielsen’s digital landscape analytics, , and Roy Morgan Research,

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cookies

Short identifier pieces of text deposited on a visitor’s computer by a website. On subsequent visits, the website software records the cookie response and thus measures repeat guest visits.

– provide these measures using web-user panels and other means. A quasi-solution to establishing web-use identity is the use of cookies (text file IP identifiers for each host site stored on the user’s computer).40 Cookies are easily generated by meta-tags used in the HTML header on the index page on the host site. Although not a guaranteed measure of an audience for many reasons – including the fact that many web users clear all cookies from their computers on a regular basis – cookies are used as an audience-centric measurement tool by many smaller online marketers.

Network-centric measures Many marketing organisations use the services of Connexity Hitwise, either to ascertain their performance in their own right or to establish on which navigation sites to buy banner ad space. Connexity Hitwise is one of the prominent online-audience analytics firms in Australasia. While analysis of a site’s log files provides information on how that individual site is performing, and extrapolations from panel data give some inkling of how people use the web, it takes an analysis of network traffic using aggregate data from internet service providers (ISPs) – network-centric measures – to gain the most accurate information. Using its existing shopping databases, along with those from previous online companies it had previously purchased – PriceGrabber.com, Become.com and Bizrate – ‘Connexity will now be matching up that data with traffic information from Hitwise, to provide not only better data to its own shopping portals, but also to produce more detailed segment analysis to product marketers.’41 Social media presents a particular issue for marketers following an overstating of the average time spent viewing online video clips on Facebook, as a late 2015 study conducted by the US Association of National Advertisers (ANA) found. The study found ‘that 97 percent of marketers believe that digital media owners should allow their inventory to be measured by a third party’.42

Digital marketing channel performance The web is a digital marketing channel, or it may be used on its own or to supplement traditional marketing channels. However, as Marketing in action 13.1 illustrates, the task of searching for product categories, brands, price comparisons and more is made easier in the digital world. As the commentary shows, Google Adwords and Adsense are a major boon to organisations that include the internet in their marketing strategy, because it is much easier to assess the performance outcomes from the expenditure involved. We see in Chapter 10 that marketing channels are not solely concerned with physical distribution but also with flows such as information and payment. For the publisher Penguin Books, online retailer Amazon.com is a one-member (Channel 2) marketing channel. The difference between the two is simply that Amazon.com does not have a physical presence at the retail level, whereas Angus & Robertson has both a physical presence and an online means of customer fulfilment. Service organisations, such as Federal Express and Australia Post, also use the internet as a means of customer fulfilment using information. A FedEx customer can track a client’s parcel over the internet, and Commonwealth Bank business and home users can track their savings or cheque account status using the internet. Moreover, as explained in Chapter 10, marketing channel members as well as their upstream and downstream suppliers and customers are connected by bi-directional flows of information, legal title to goods and services, and payments (or debt). Channel members are self-serving in the sense that they seek a profit from the value they add for other channel members. Their only reason for existence is value transformation for their customers. The use of an extranet plays a coordination role, particularly between those involved in conversion operations in manufacturing or the services sector, and suppliers. Additional coordination costs arise when outsourcing conversion and other operations. Increasingly, the coordination of value-adding tasks within organisations and between alliance partners involves the net in its intranet and extranet guises.43 As we have already noted, digital marketing channels are judged in much the same way that more traditional direct marketing is judged – that is, fulfilment response, in terms of customer interactions such as product inquiries, sales response and profitability.

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429

Relationship management performance and customer lifetime value One major attraction of database marketing – indeed, of all forms of direct and digital marketing – is that it is possible to calculate in advance what response rate will be required (say, 15 per cent) to break even, as well as other needed response rates such as average purchase levels. Many firms have developed methods of analysis for existing direct marketers and undertake feasibility studies for companies interested in the mathematics of direct marketing. There are various strategies that may be adopted.44 The ultimate aim of database marketing is to be able to open dialogue with the target accounts that make up the database and, over a period of time, to build a profile of the accounts on the basis of their geodemographics, psychographics and lifestyles, attitudes and purchase behaviour. In this way, marketing organisations can calculate and manage customer lifetime value, or the amount by which revenues from a customer over time exceed the company’s costs of attracting, selling and servicing that customer. Although this is the aim of all marketing, it should be obvious that mass marketing using television and print media alone does not provide as accurate a focus on consumers as marketers would like. ‘Dear Householder’ is often the only way one can address an FTA-TV and radio commercial or a magazine advertisement, in the hope that the message will be received by self-selecting members of the audience. In using databases, the aim is not only to be able to address the communication ‘Dear Ms Fraser’, but also to be able to go on to direct a sequence of offers that are related to Ms Fraser’s individual needs and lifestyle. That is, it is possible to manage the relationship with customers. And, lastly, it is then possible to compare the ‘lifetime value’ of Ms Fraser as a customer with other customers. Regardless of whether a business list, a household list or a specialised list (such as new parents) is used, there is a need to ensure that the list is up to date. There is no greater waste than to send a $100-per-unit mailing to senior executives, only to find later that 25 per cent of the mailings were not seen because the database was not current. Usually, business mail is not returned to the sender in such instances – it is put in the wastepaper basket! Another issue relates to lists that duplicate names and addresses. No matter how personal the mailing from American Express offering free issue of a Gold Card, it looks bad from the recipient’s viewpoint if he or she already has a Gold Card. The exclusivity of the Gold Card is demeaned in such an instance and any other offers contained in the mailing are ignored. Specialist firms can purge or ‘clean’ lists of duplicates held on mainframes, and they also try to ensure that the current mailing address is being used. In addition, relational database programs for the personal computer, such as Microsoft Access, are capable of purging databases of duplicates. Like many other marketing tools, database marketing requires a special investment. Marketing organisations must invest in computer hardware, database and data-mining software, analytical programs, communication links and skilled personnel.45 The database interface must be user-friendly and available to all marketing groups, including those in product and brand management, new-product development, marketing communications and trade promotion, direct marketing, telesales, field sales, order fulfilment and customer service. As many more marketing organisations move into direct and digital database marketing, the very nature of marketing is changing. While mass marketing and traditional retailing will continue long into the future, more and more customers in Australia and New Zealand are benefiting from this one-to-one approach.

Evaluating customer database performance Profitable use of a database requires customer relationship management and keeping track of sales so as to be able to predict future sales levels more accurately. Direct and digital marketing giants have identified the three criteria to use: recency of purchase, frequency of purchase and monetary value of purchase (RFM).46 Managing the use of RFM is an important task in direct and digital marketing. One way to use RFM criteria is to award points to each criterion and thereby build up a score for each record or account in the database. The idea is to get away from merely talking about such things as ‘average

customer lifetime value The amount by which revenues from a customer over time exceed the company’s costs of attracting, selling and servicing that customer. The value of the entire stream of purchases that the customer would make over a lifetime of patronage.

RFM

Direct and digital marketing giants manage customer databases employing three criteria: recency of purchase, frequency of purchase and monetary value of purchase.

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purchases’ and instead have meaningful discourse about individual accounts. If such a system is maintained, it is possible to approach only those accounts with high scores and which, therefore, have a high probability of purchasing from the next catalogue mailing or round of telemarketing. Here, we work through an example and build up points for a small number of accounts to see how this rating system works. First, taking recency of purchase, we might award points on the following basis: • 24 points – purchase made in current quarter • 12 points – purchase made in last 6 months • 6 points – purchase made in last 9 months • 3 points – purchase made in last 12 months. Looking next to frequency of purchase, we might say that this equates to number of purchases × 5 points. We would then award points based on the monetary value of purchases. These points could be based on 10 per cent of the dollar value of the purchases, with a ceiling of nine points to remove any distortion from overly large purchases. Thus, it is possible for a computer system that is maintaining a relational database to keep these records and to report weekly, monthly or on an as-needed basis, as shown in Table 13.1. Clearly, there is still some arbitrariness in the initial allocation of points to such criteria as recency of purchase. Over time, though, the marketer can do ‘what-if’ analyses in an endeavour to become more accurate in predicting purchase behaviour by account. Breakeven and profitability are determined by the relationship between contribution to selling cost, overhead and profit associated with an average order; the selling cost per thousand or per advertisement; and the response rate.

Table 13.1  Sample computer analysis of database accounts by recency, frequency and monetary value, July 2018  Account number

Month

Recency points

No. of purchases

Frequency points

Dollar purchases

Monetary points

Total points

Cumulative total points

25 209

4

6

2

10

39.95

3.22

19.22

39.00

25 101

10

24

1

5

59.95

6.00

35.00

77.00

25 252

1

3

3

15

69.00

6.90

24.90

67.00

Note: June = 1, July = 12. Source: Adapted from B Stone and R Jacobs, Successful Direct Marketing Methods, 8th edn, p. 31, © 2008 The McGraw-Hill Companies, Inc.

Public policy issues in direct and digital marketing (pp. 430–32) Direct and digital marketers and their customers usually enjoy mutually rewarding relationships. Occasionally, however, a darker side emerges. The aggressive and sometimes shady tactics of a few direct marketers can bother or harm consumers, thereby giving the entire industry a bad name. Abuses range from simple excesses that irritate consumers to instances of unfair practices or even outright deception and fraud. The direct marketing industry has also faced growing invasion-of-privacy concerns, and online marketers must deal with internet and mobile security issues.

Irritation, unfairness, deception and fraud Direct marketing excesses sometimes annoy or offend consumers. Most of us dislike direct-response television commercials that are too loud, too long, too repetitious and too insistent. Our letterboxes fill up with unwanted junk mail, our email inboxes bulge with unwanted spam, and our computer and mobile device screens flash with unwanted banner or pop-under ads.

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Beyond irritating consumers, some direct marketers have been accused of taking unfair advantage of impulsive or less-sophisticated buyers. Television shopping channels and program-long ‘infomercials’ targeting television-addicted shoppers seem to be the worst culprits. They feature smooth-talking hosts, elaborately staged demonstrations, claims of drastic price reductions, ‘while they last’ time limitations, and unequalled ease of purchase to inflame buyers who have low sales resistance. Fraudulent schemes, such as investment scams or phony collections for charity, have also multiplied in recent years.47 Internet fraud, including identity theft and financial scams, has become a serious problem. One common form of internet fraud is phishing, a type of identity theft that uses deceptive emails and fraudulent websites to fool users into divulging their personal data. For example, consumers may receive an email, supposedly from their bank or credit card company, saying that their account’s security has been compromised. The sender asks them to log on to a provided web address and confirm their account number, password and maybe other information. If the consumer follows the instructions, they are actually turning this sensitive information over to scam artists. Although many consumers are now aware of such schemes, phishing can be extremely costly to those caught in the net. It also damages the brand identities of legitimate online marketers who have worked to build user confidence in web and email transactions. Many consumers also worry about online security. They rightly fear that unscrupulous snoopers will eavesdrop on their online transactions, picking up personal information or intercepting credit and debit card numbers. Although online shopping has grown rapidly, most participants still do not like giving out personal or credit card information while online. Internet shoppers are also concerned about contracting annoying or harmful viruses, spyware and other ‘malware’ (malicious software). Another internet marketing concern is that of access by vulnerable or unauthorised groups. Although Facebook allows no children under the age of 13 years to have a profile, it has an estimated 5.6 million underage accounts. It has already removed some 800 000 underage accounts. But the issue extends beyond Facebook. Young users are logging onto social media such as Formspring, tweeting their locations to the web, and making friends with strangers on Disney and other game sites. Concerned state and national lawmakers are currently debating Bills that would help better protect children online. Unfortunately, this requires the development of technology solutions and, as Facebook puts it, ‘That’s not so easy.’48

Privacy

A major direct and digital marketing issue in most countries is privacy.49 The issue of cross-referencing of data on individuals concerning things such as health status, work attendance levels and relationships is a matter of concern for the Privacy Commission in Australia. For instance, a poor credit rating obtained as a teenager may trouble a person for years unless some action is taken to have the person’s name removed by the initiating bank or agency. This information, as well as other personal information, can be obtained in many instances from the company or government agency concerned, often legally and sometimes illegally. More public information on its citizens is available in the United States than in Australia at present, but the concerns are the same in both countries and in Europe. In the United States, the equivalent of local governments freely make available not just land title information but also information about mortgages, including the principal and the mortgagee.

431

internet fraud

Fraudulent activity including identity theft and financial scams. These activities extend to phishing, snooping on online transactions, picking up personal information, or intercepting credit and debit card numbers. They can also include the release of harmful viruses, spyware and other ‘malware’ (malicious software).

cross-referencing of data

A privacy issue arises when an individual’s personal information, such as health status or work attendance level, is interconnected and used without permission.

Unwanted post mail and email The receipt of mailings by post and email by those who do not want to receive them is another privacy concern. For the marketer, the best solution to the problem of unwanted post mail is to ask people which product categories, if any, they would like to receive information about. For legal reasons, this is the approach taken by many marketers in their digital marketing communications, remembering that different countries have different legal requirements. (See Chapter 14 for Australian requirements.) Spamming still threatens the internet’s usefulness in digital marketing research that uses email, as well as threatening to

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clog the IP system as more and more internet servers are withdrawn because of attacks by the unscrupulous. This is despite the introduction of the Australian Spam Act 2003 (Cth) and the Unsolicited Electronic Messages Act 2007 in New Zealand, and similar initiatives in other countries. The European Society for Opinion and Marketing Research (ESOMAR) has gone so far as to publish guidelines for internet research for its 96 member countries.50

Linking the concepts Let’s finish this chapter by thinking about how marketing organisations evaluate their online marketing effort, and considering some of the public policy issues involved in this form of marketing: ● Have you been involved with any of the three methods of evaluating website design and performance? Which method(s), and how were you involved?

● Have you or your friends experienced an online scam firsthand? Elaborate on what happened. ● If you have experienced unwanted telephone or SMS text messages, let the class know what they were and what you did about them. ● Are you or anyone you know concerned about loss of privacy? Explain which aspect(s) concern you.

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Student Learning Centre

433

item to a person at a specific address. Fast-growing forms of ‘mail delivery’ have become popular, such as email and mobile marketing. Some marketers rely on catalogue marketing – selling through catalogues mailed to a select list of customers, made available in stores or accessed on the web. Telephone marketing consists of using the telephone to sell directly to consumers. Direct-response television marketing has two forms: direct-response advertising (or infomercials)

Reviewing the learning objectives Let us revisit this chapter’s key concepts. This chapter is the last of three chapters covering the final marketing mix element – promotion. The previous chapters dealt with advertising, publicity, personal selling and sales promotion. This chapter investigates the burgeoning field of direct and online marketing, and its connection with response fulfilment (discussed in Chapter 10).

Learning Objective 1. Define direct and digital marketing, and discuss its benefits for consumers and marketing organisations. (pp. 406–8)

and home-shopping channels. Kiosks are information and ordering machines that direct marketers place in stores, airports and other locations. Online marketing involves online channels that digitally link sellers with consumers.

Learning Objective 3. Explain how companies use customer databases in direct and digital marketing. (pp. 422–26) A customer database is an organised collection of comprehensive data about individual customers or prospects, including geographic, demographic, psychographic and behavioural data. Marketing organisations use their databases in a number of ways: identifying prospects; deciding which customers should

Direct and digital marketing consists of direct connections, mostly in real-time,

receive a particular offer; deepening customer loyalty; reactivating customers’

with carefully targeted individual consumers to both obtain an immediate

purchases; and data mining.

response and cultivate lasting customer relationships. Using detailed databases,

Many companies generate sales leads by advertising their products or

direct marketers tailor their offers and communications to the needs of narrowly

offers. Ads generally have a response feature, such as a business reply card,

defined segments or even individual buyers.

toll-free phone number or web-form site. The database is built from these

For buyers, direct marketing is convenient, easy to use and private. It gives

responses. Companies identify the profile of an ideal customer for an offer. They

buyers ready access to a wealth of products and information, at home and

then search their databases for individuals most closely resembling the ideal

around the globe. Direct marketing is also immediate and interactive, allowing

type. By tracking individual responses, the company can improve its targeting

buyers to create exactly the configuration of information, products or services

precision over time.

they desire and then order them on the spot.

Companies can build customers’ interest and enthusiasm by remembering

For sellers, direct marketing is a powerful tool for building customer

their preferences and sending appropriate information, gifts or other materials.

relationships. Using database marketing, today’s marketers can target small

Customer database use can help a company to make attractive offers of product

groups or individual consumers, tailor offers to individual needs and promote

replacements, upgrades or complementary products just when customers might

these offers through personalised communications. It also offers them a low-cost,

be ready to act. A rich customer database allows the marketer to build profitable

efficient alternative for reaching their markets. As a result of these advantages to

new business by locating good prospects, anticipating customer needs, cross-

both buyers and sellers, direct marketing has become the fastest-growing form

selling products and services, and rewarding loyal customers.

of marketing.

Learning Objective 2. Examine and discuss direct and digital marketing, interactivity and fulfilment. (pp. 409–22) The main forms of direct marketing include direct print and reproduction; direct-response television and radio; telemarketing; telesales; and kiosks and electronic dispensing. We discussed direct selling in Chapter 12. We examine

Organisations maintain many databases in what today are large data warehouses. Data mining entails checking databases for patterns and trends that are hypothesised to exist, or to find new connections between data items. Modern software enables open-ended queries that involve systematic searches for relationships and patterns within and between databases. The database also lies at the heart of digital marketing in that personalised websites are built for visitors who have subscribed to a company’s services.

social media marketing; and email and other forms online interaction, such as

Learning Objective 4. Describe how marketing organisations evaluate direct and digital database marketing. (pp. 426–30)

blogs and videos.

Direct marketing organisations are usually interested in a variety of performance

digital marketing separately and see that the main forms include using a searchengine optimised website; search engine marketing (SEM); online advertising;

Internet and mobile marketing are growth areas in marketing expenditure.

measures, both for individual programs and for integrated campaigns. They set up

They permit sellers to communicate with buyers – and to deliver many offerings –

their programs to allow later monitoring of such factors as: sales lead generation;

in real-time, and to more effectively coordinate response fulfilment through more

database generation; fulfilment response; product inquiries; sales response

traditional channels. Direct print and reproduction includes direct-mail marketing,

profitability; return on the investment made in programs and campaigns; and

and consists of the company sending an offer, announcement, reminder or other

lifetime customer value.

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When evaluating the digital marketing communication aspect of their

about our marketing effort?’ Do you agree or disagree with the opening

programs, they employ web-centric measures such as monitoring web server

statement? Justify your answer, considering the reframed question, and

log files to count page impressions, among other measures. Audience-centric

commence with definitions of each of the terms in the statement. (Learning

measures are favoured by many organisations. Third-party research companies

Objectives 1, 2, 3 and 5) (AACSB: Communication; Use of IT; Analytical

Nielsen and Roy Morgan Research provide these measures using web-user

Thinking)

panels and other means. Marketers use network-centric measures to gain what

❸ Evaluating website performance. It seems that many digital marketing

is arguably the most accurate information, such as Connexity Hitwise’s analysis

organisations use ‘hits’ as a measure when evaluating their website

of network traffic to and from websites.

performance. Three groups of measures are mentioned in this chapter,

Digital marketing channels are judged in the same way that more

and hits are only one measure within one grouping. Why might online

traditional direct marketing is judged. A major attraction of direct and digital

marketers use hits as a performance measure? Should they be using other

database marketing – indeed, of all forms of direct and digital marketing – is

measures? Why, or why not? (Learning Objectives 1, 2, 3 and 5) (AACSB:

that it is possible to calculate in advance what response rate will be required

Communication; Use of IT; Analytical Thinking)

to break even, as well as other needed response rates, such as average

❹ Adding value through customer interaction. Do you agree or disagree

purchase levels. Many firms have developed methods of analysis for existing

that Australasian marketing organisations seem to be less willing than

direct marketers and undertake feasibility studies for companies interested

their overseas counterparts to interact with customers on an online one-

in the mathematics of direct marketing. In particular, they monitor customer

to-one basis? What evidence are you using to support your contentions?

lifetime value.

(Learning Objectives 4 and 5) (AACSB: Communication; Use of IT; Diverse and Multicultural Environments; Analytical Thinking)

Learning Objective 5. Gain an overview of the public policy and ethical issues presented by direct and digital marketing. (pp. 430–32)

❺ Online purchasing resistance? North Americans and many Asians – South

Direct marketers and their customers usually enjoy mutually rewarding

mentioned and indicate whether your research supports this statement. If the

relationships. Sometimes, however, direct marketing presents a darker side. The aggressive and sometimes shady tactics of a few direct marketers can bother or harm consumers, tainting the entire industry. Abuses range from simple excesses that irritate consumers, to instances of unfair practices or even outright deception and fraud. The direct marketing industry has also faced growing concerns about invasion-of-privacy and internet security issues. Such concerns call for strong action by marketers and public policymakers to curb direct marketing abuses. In the end, most direct marketers want the same things that consumers want: honest and well-designed marketing offers targeted only

Koreans, for example – conduct transactions online more frequently than do Australians and New Zealanders. Google the buying data for the countries statement is supported, why might this be the case? (Learning Objectives 3 and 4) (AACSB: Communication; Use of IT; Diverse and Multicultural Environments; Analytical Thinking) ❻ Search engine marketing and search engine optimisation. Reflect on Marketing in action 13.1. Not all marketing organisations use Google Adword and Adsense campaigns. Oddly, they also ignore attempts to rise in the natural listings (as opposed to paid listings) on search engines. How might we assess this latter claim? (Learning Objectives 1, 2, 3, 4 and 5) (AACSB: Communication; Use of IT; Analytical Thinking)

towards consumers who will appreciate and respond to them.

Discussion questions

Critical thinking exercises ❶ In a small group, design and deliver a direct-response television commercial

❶ Direct and digital marketing adoption in Australia and New Zealand. Have

for a national brand not normally associated with this type of promotion.

Australasian retailers been slower than their overseas counterparts to

Use a product of your own choice. (Learning Objectives 1, 2 and 3) (AACSB:

adopt and use the internet and web to their full potential in omni-retailing?

Communication; Analytical Thinking; Reflective Thinking)

Examine a selection of global .com domain websites and compare them with

❷ Review the Australian government’s Web Content Accessibility Guidelines

websites in the same retailing categories in regional .com.au and .co.nz

(WCAG), . Write

domains. (Learning Objectives 1, 2 and 3) (AACSB: Communication; Use of

a report explaining why these guidelines are necessary. Are such guidelines

IT; Diverse and Multicultural Environments; Analytical Thinking)

used in the commercial sector? (Learning Objectives 1, 2, 3, 4 and 5)

❷ ‘If all companies use direct and digital marketing databases, there is no

(AACSB: Communication; Use of IT; Analytical Thinking)

need for traditional marketing research!’ This statement was made by a

❸ Source news articles about two data-security breaches. How did the

postgraduate marketing student attending an Australasian university.

breaches occur, and who is potentially affected by them? What effect do

The statement may be reframed as a question: ‘Why is marketing research

such breaches have on consumer attitudes? (Learning Objective 6) (AACSB:

undertaken, and does data mining tell us everything we need to know

Communication; Use of IT; Analytical Thinking)

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Navigating the key terms Learning Objective 1 direct and digital marketing  (p. 406)

direct marketing (p. 409) direct print and reproduction  (p. 409) direct-response television and

Learning Objective 2 blog  (p. 420)

radio  (p. 409) electronic dispensing machines

corporate and/or brand website  

(EDMs) and card-reading

(p. 411) customer-to-company interaction  (p. 421)

telephones  (p. 410) fulfilment response  (p. 421) internet/World Wide Web

customer-to-customer interaction  (p. 420) digital marketing   (p. 411)

(net/web)   (p. 411)

omni-channel retailing  (p. 421)

intranet  (p. 422)

online advertising  (p. 416)

list  (p. 422)

search marketing  (p. 415)

location-based marketing  (p. 423)

social media networks (web

privacy guidelines  (p. 423)

communities of interest)   (p. 418) spam  (p. 418) telemarketing  (p. 409) telesales  (p. 410) viral marketing (pass-it-on marketing)   (p. 420)

Learning Objective 3 customer database  (p. 422)

kiosks  (p. 410)

data mining  (p. 424)

marketing website  (p. 412)

extranet  (p. 422)

Learning Objective 4 cookies  (p. 428) customer lifetime value  (p. 429) RFM  (p. 429)

Learning Objective 5 cross-referencing of data  (p. 431) internet fraud  (p. 431)

Mini cases 13.1  Location-based marketing Is mobility the key? Nicholas Negroponte, founder and chairman of the One Laptop per Child

At one time, the ‘all-in-one’ device might have been thought of as

non-profit association, co-founder and chairman emeritus of MIT’s Media

a personal computer bolted to a household appliance such as a fridge

Lab, former IT adviser to world leaders, and author of the bestseller Being

or television – a concept we now encapsulate in the term the internet

Digital, points out that, due to the ‘combined forces of convenience,

of things. However, such an ‘all-in-one’ device would not have been an

imperative and deregulation’, all manner of media are becoming ‘digitally

internet-connected ‘smart hub’ 3D television set, due to the latter’s lack of

driven’. It is true that once a newspaper article is typed into a word

mobility. Today, we are more likely to regard this device as a data-enabled

processor its form is bits rather than atoms and it can be transmitted and

smartphone with broadband access to the web, or perhaps a similarly

reproduced in many ways – some of which the intellectual property holder

enabled tablet PC. Mobility is increasingly the key to successful direct and

might never have imagined. This technological feat applies to photographs,

digital marketing. It is also the key for many marketing organisations, which

film, video, voice, data – virtually anything except the human holding the

can harness the GPS features of smartphones and tablets and attract mobile

camera or composing the words. The fictional USS Enterprise crews of Star

customers to their wares.51

Trek fame (‘Beam me up, Scottie’), Dr Who and his Tardis time machine,

❶ Do you have pay-TV connected? Is it high-definition? Are you able to

Captain Jack Harkness of Torchwood and author Douglas Adams’s equally

record your favourite shows and movies? List the features you believe you

fictional characters in The Hitchhiker’s Guide to the Galaxy are thus far the

‘couldn’t live without’ and those that are ‘not value for money’. (Learning

exception to the rule in terms of animate objects becoming bits and then

Objective 2) (AACSB: Communication; Use of IT; Reflective Thinking)

being reconstructed again and again.

❷ Do you think the availability of greater bandwidth via fibre-optic

A potted history of communications is very telling of how far humanity has

cable to the home and office will lead to more people and companies

come. Humanity developed language in around 10 000 BC. Advertisements

interacting and transacting? Or does it simply lead to more video

first appeared in about 3000 BC, with the first textbooks appearing in Egypt

streaming? Argue your case one way or the other. (Learning Objective 2)

in 2800 BC. Then came the Chinese printing press in AD 2 and the German

(AACSB:  Communication; Use of IT; Analytical Thinking; Reflective

Gutenberg press very much later, in 1455. We experienced 200 years of

Thinking)

‘industrial revolution’ from about 1750 to the present wherein all manner of

❸ Do you think that MOOCs (Massive Open Online Courses) are the

communications devices were developed, ranging from the first typewriter

hit with students that they are with some educationists? See a list

(1798) through to the first telephone (1877), the first computer (ENIAC,

of such courses at . (Learning Objective 2) (AACSB:

1946) and on to what we might think of as the ‘all-in-one’ device.

Communication; Use of IT; Reflective Thinking)

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13.2  Direct and digital marketing Marketing à go go! Web streaming of video-on-demand, music-on-demand, streamed movies,

locking your door, starting your car or motorbike, turning on the stove or

sports and television mini-series, as well as voice- and data-on-demand are

dishwasher, paying for purchases or even simply paying your friend the $20

available in nearly every home and office, and even when people are out and

you owe him or her. Mobile technologies already allow us to do almost

about on the go. This is why telecommunications companies (telcos) such

anything remotely, right down to monitoring our health.

as Australia’s Telstra and Optus want to remain in the business of pay-TV

Moreover, smartphones and tablets allow marketers to target services

and the US giant AT&T want to be involved in content production, and why

and promotions directly to us based on our location (see Mini case 13.1

media keiretsus such as News Corp’s News Ltd want to be more involved in

on location-based marketing). You may have noticed that Qantas and

communications, including social media.52

Jetstar customers can simply wave their smartphones under a scanner – no

There are many other such convergences between telecommunications,

ticket, wallet, cash or card required – as they purchased their flight online

media and TCP/IP (transmission control protocol/internet protocol) devices.

and had their boarding pass emailed to them. Some customers may have

So much so that most users now want multiplicity of use from the devices they

received discount offers that lured them to a café or restaurant because their

buy, and they want it all in mobile devices, such as smartphones and tablets.

smartphone tipped the marketer off that they were nearby.

Once the mobile broadband infrastructure is in place, being a marketing

❶ What mobile applications currently exist and what is on the horizon?

organisation will indeed mean being digital. Such a marketspace will then

How many of these applications do you or someone you know use?

see a global market accessible to even the smallest online firm that seeks to

(Learning Objective 1) (AACSB: Communication; Use of IT; Reflective

fill the gaps in the market. However, ‘having access to’ and ‘gaining’ people as customers are two different things, as every marketer knows. Your smartphone has already become indispensable. And, in the future, it will be even more so. Soon, it will be the only thing you will need for

Thinking) ❷ Are there barriers to adoption of mobile applications? If so, what are they? (Learning Objective 2) (AACSB: Communication; Use of IT; Reflective Thinking)

13.3  Marketing analytics at work Evaluating direct and digital marketing ‘Like’ if you agree! Marketers know that Facebook is a force to be reckoned with, but until

of target audience reached via media is interesting, it ignores all of

now they have not been able to easily measure that force and compare it

the more in-depth engagement metrics which allow us to assess digital

to traditional media. Whereas traditional media have established metrics,

performance in a far richer and more meaningful way. The desire to carve

such as ratings, to measure what marketers are getting for their money, an

out more TV budget should not create a dumbed down measurement

entirely new set of metrics – such as click-through rates (CTRs), cost per

framework – this will only limit knowledge and hold brands back.

view (CPV) and page impressions – has evolved for online media. (Also

❶ Research marketing expenditure trends in social media marketing

see Marketing in action 13.1 and Appendix 3’s Analytic measures 7.1 and

as well as in other forms of online advertising. Compare these

7.2, for more on these metrics.) Unfortunately, the traditional and the new

trends with traditional advertising media expenditures. Develop a

metrics are not directly comparable.

presentation illustrating those trends. (Learning Objective 4) (AACSB:

ComScore and Nielsen are two companies attempting to rectify that

Communication; Analytical Thinking; Reflective Thinking)

situation by developing a rating system based on gross rating points (GRPs)

❷ Visit and to learn more about

to show the power of Facebook as a marketing tool. However, Becca

the measures these companies have developed for measuring the

Braithwaite, DigitasLBi director, did not see longevity in the use of this

marketing exposure of brands on Facebook. How do these metrics

familiar term with digital media, and commented as follows:53

differ from those that have been used with regard to measuring online

While GRPs may be a useful part of assessing media performance they

advertising impact? (Learning Objective 4) (AACSB: Communication;

are by no means the be-all-and-end-all. While looking at the percentage

Use of IT; Reflective Thinking)

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437

13.4 Ethical reflection Are there spam/do not call/privacy issues? You are marketing manager of a company that markets products purchased

list has been obtained from a dubious source associated with a regional

by mothers on the birth of their first child. These products are often unfamiliar

government office. You know that such a list can form your database for

to young mothers; previously, they had no need for such items as cloth or

many years to come. You will be able to send birthday cards to the babies as

disposable nappies, singlets or bibs. You find that, for a price, you can obtain

they grow and thus maintain the relationship formed at birth.

a list of births that gives the names of babies, their parents’ names, postal address, email address, and fixed and mobile phone numbers. You think the

References

1 Australian Bureau of Statistics, Internet Activity, Australia, June 2016, Cat. No. 8153.0, 5 October 2016, , accessed October 2016; and ‘New Zealand internet users’, InternetLiveStats, , accessed October 2016. Also see: ‘Sensis social media report May 2015’, Sensis, , accessed October 2016; ‘Internet retailer: Top 500 guide’, , accessed September 2016; ‘Amazon’s online sales dwarf the competition’, statista, 7 May 2014, . Also see the latest Digital Landscape information by Nielsen and IAB Australia, . 2 See ‘Number of monthly active Facebook users worldwide as of 3rd quarter 2016 (in millions’, statista, , accessed September 2016; and Patrick Durkin, ‘Facebook infiltrates the office’, Australian Financial Review, 11 October 2016, p. 14. 3 See Rachel Brown, ‘Perry, Fischer, Lavigne tapped for proactiv’, WWD, 13 January 2010, p. 3; Rahul Parikh, ‘Proactiv’s celebrity shell game’, Salon.com, 28 February 2011, ; ‘Guthy-Renker honored with nine era moxie awards for year’s best direct marketing campaigns’, Marketing Weekly News, 19 October 2013, p. 145; and , accessed September 2015. 4 Stephanie Rosenbloom, ‘The new touch-face of vending machines’, New York Times, 25 May 2010. 5 See ‘How is the internet evolving?’, Internet Society, , accessed October 2016. 6 Jill Novak, ‘7Cs website design elements that drive customer traffic’, Marketing Teacher, , accessed October 2016. 7 The definition of search engine marketing is adapted from the definition contained in Internet Advertising Bureau, IAB Internet Advertising Revenue Report: An Industry Survey Conducted by PwC and Sponsored by the Interactive Advertising Bureau (IAB), , accessed 7 January 2013. 8 See Alexa, , accessed October 2016. 9 ‘Online advertising expenditure report – quarter ended June 2016 (FY 15–16), iab Australia, 22 August 2016, , accessed October 2016. 10 Chelsea Armitage, ‘Online ad revenue passes $800m in 2015’, NBR, 4 March 2016, , accessed October 2016. 11 Max Mason, ‘Australian advertising market to hit $13.5 billion in 2016’, Sydney Morning Herald, 4 January 2016, , accessed October 2016. 12 Estimate in Australian dollars calculated using exchange rate, A$0.75 : US$1.00, from ‘Google’s revenue worldwide from 2002 to 2015’, statista, , accessed October 2016. 13 Internet Advertising Bureau, IAB Internet Advertising Revenue Report, June 2012.

Should you use such a list? What do you think are the reasons for and against using a list of this kind?

14 See ‘Australians get mobile’, ACMA, 9 June 2015, , accessed October 2016. 15 See ‘Communications report 2014–15’, ACMA, , accessed October 2016. 16 Max Mason, ‘Telstra looks to 5G future 10 years after NextG launch’, Australian Financial Review, 11 October 2016, p. 20. 17 See ‘Smartphone-linked vending machines rise as drink makers thirst for sales’, The Japan Times, 8 August 2016, , accessed October 2016. 18 See Lauren Johnson, ‘McDonald’s beefs up advertising strategy with mobile game’, Mobile Marketer, 28 March 2013, ; and Rimma Kats, ‘McDonald’s beefs up mobile efforts via targeted campaign’, Mobile Marketing, 16 August 2013, , accessed October 2016. 19 ‘Social media is the hot new thing, but email is still the king’, Advertising Age, 30 September 2013, p. 18. 20 See Greg Sterling, ‘Report: 66 percent of email opens on mobile, mostly iOS devices’, Marketing Land, 19 November 2014, ; Nora Aufreiter, Julien Boudet & Vivian Weng, ‘Why marketers should keep sending you emails’, McKinsey & Company, January 2014, ; Suzanne Vranica, ‘You’ve got mail and more is coming’, Wall Street Journal, 14 November 2014, , and ‘5 ways to optimize email marketing ROI’, CMO Essentials, 10 March 2015, . 21 ‘Global spam volume as a percentage of total email traffic from January 2014 to June 2016, by month’, statista, , accessed October 2016. 22 See Patrick Durkin, ‘Facebook infiltrates the office’, Australian Financial Review, 11 October 2016, p. 14. 23 See Kay Peters, Yubo Chen, Andreas M Kaplan, Bojörn Ognibeni & Koen Pauwels, ‘Social media metrics – A framework and guidelines for managing social media’, Journal of Interactive Marketing, 27(4), 2013, pp. 281–98. 24 Linda Moses, ‘Online video ads have higher impact than TV ads’, Adweek, 1 May 2013, ; and ‘comScore releases December 2013 U.S. online video rankings’, 10 January 2014, . 25 The term marketspace was coined by J Rayport & J Sviokla, ‘Managing in marketspace’, Harvard Business Review, 72(6), 1994, pp. 141–50. 26 ‘Number of eBay’s active users from 1st quarter 2010 to 2nd quarter 2016’, statista, , accessed October 2016.

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Part 3  Designing a customer-driven strategy and mix

27 Kyle Stock, ‘An auction? Most eBay users don’t have time for that’, 27 May 2013, Bloomberg, , accessed October 2016. 28 See ‘Blogging trends and predictions’, Building A Framework, , accessed October 2016. 29 ‘Top Australian and New Zealand travel blogs for 2016’, Pretraveller, , accessed October 2016. 30 See , accessed October 2016. 31 See ‘Internet retailer: Top 500 guide’, , accessed June 2015; and ‘Amazon’s online sales dwarf the competition,’ statista, 7 May 2014, . 32 See AMPCo, Australasian Medical Publishing Company, , accessed October 2016. 33 See Ken Magill, ‘E-mail ROI still stunning, still slipping: DMA,’ Direct Magazine, 20 October 2009; ‘E-mail’, Advertising Age’s digital ­marketing facts 2010 section, 22 February 2010; and ‘Think e-mail ­marketing is dying? Think again,’ PR Newswire, 3 May 2011. 34 See the Office of the Australian Information Commissioner’s website, , accessed October 2016. 35 Michael Jones, ‘3 ways location-based marketing is shaping retail in 2016’, Forbes, 3 March 2016, , accessed October 2016. 36 ‘5 genius examples of QR codes in marketing’, Kissmetrics Blog, , accessed October 2016. 37 For more on the application of data mining in marketing, see Michael J Shaw, Chandrasekar Subramaniam, Gek Woo Tan & Michael E Welge, ‘Knowledge management and data mining for marketing’, Knowledge Management Support of Decision Making, 31(1), 2001, pp. 127–37. 38 See Kathleen Seiders, Glenn B Voss, Dhruv Grewal & Andrea L Godfrey, ‘Do satisfied customers buy more? Examining moderating influences in a retailing context’, Journal of Marketing, 69(4), October 2005, pp. 26–43. 39 For more on web analytic tools, see Rick Tansun, ‘10 web analytic tools for tracking your visitors’, sitepoint, , accessed October 2016. 40 See ‘Meta tags that Google understands’, Google, , accessed October 2016. 41 Ingrid Lunden, ‘Experian sells Hitwise to Connexity, Simmons to Connexity owner Symphony for up to $52m’, TC, 14 December 2015, , accessed October 2016. 42 Lindsay Stein, ‘ANA calls for Facebook metrics to be audited and accredited’, Advertising Age, 29 September 2016, , accessed October 2016. Also see Nielsen, ‘Digital landscape’, , accessed October 2016. 43 See Charles Steinfeld, Robert Kraut & Alice Plummer, ‘The impact of interorganizational networks on buyer–seller relationships’, Journal of Computer-Mediated Communication, 1(3), 1997, , accessed December 2016. 44 See ‘6 database marketing strategies’, fusionb2b, , accessed October 2016. 45 For details of such software, see the following: IBM Cognos, ; Oracle, ; SAP, ; and Enterprise Miner, . 46 For more details of RFM modelling, see ‘Statistical concepts explained’, , accessed October 2016. 47 For details of the latest scam alerts, and to report scams, see the Australian Competition and Consumer Commission’s Scamwatch, . 48 See Susan Dominus, ‘Underage on Facebook’, MSN Living, 15 March 2012, ; Josh Wolford, ‘Facebook still has a big problem with underage users, and they know it’, WebProNews, 24 January 2013, ; and Samuel Gibbs, ‘Facebook patent reveals plan for children to join the social network’, The Guardian, 3 June 2014, . 49 See Michael Edwards, ‘Identity theft: More than 770 000 Australian victims in past year’, ABC, 14 April 2015, , accessed October 2016. 50 See the European Society for Opinion and Marketing Research (ESOMAR) guidelines for internet research, , accessed October 2016. 51 See Nicholas Negroponte, Being Digital, Hodder & Stoughton: London, 1995, p. 13. 52 See Greg Roumeliotis & Jessica Toonkel, ‘AT&T to buy Tie Warner in $11.2b tie-up’, Australian Financial Review, 24 October 2016, p. 9. 53 Lara O’Reilly, ‘Facebook has caved to advertisers and is finally letting them buy video the way they used to in the 1950s’, Business Insider Australia, 29 July 2015, , accessed October 2016.

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4

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Extending marketing 14 Sustainable marketing: Social responsibility, ethics and legal compliance

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Chapter

14

Sustainable marketing: Social responsibility, ethics and legal compliance In this chapter, we examine the concepts of sustainable marketing, meeting the needs of consumers, businesses and society – now and in the future – through socially and environmentally responsible marketing actions. We start by defining sustainable marketing and then look at some common criticisms of marketing as it affects individual consumers, and at public actions that promote sustainable marketing. Finally, we see how companies themselves can benefit from proactively pursuing sustainable marketing practices that bring value, not only to the individual consumers and businesses that we refer to as customers, but to society as a whole. Sustainable marketing actions are more than just the right thing to do; they are also good for business. For a visual representation of the chapter, please see the concept map on the following page.

Learning

Objectives

Learning Objective 1 Define sustainable marketing and discuss its importance. Sustainable marketing  pp. 442–43 Learning Objective 2 Identify the main social criticisms of marketing. Social criticisms of marketing  pp. 443–49 Learning Objective 3 Define consumerism and environmentalism, and explain how these concepts are linked to marketing strategies. Consumer actions to promote sustainable marketing  pp. 449–53 Learning Objective 4 Describe the principles of sustainable marketing. Business actions towards sustainable marketing  pp. 453–57 Learning Objective 5 Explain the role of ethics in marketing. The role of ethics in marketing  pp. 457–60 Learning Objective 6 Discuss the need for and value of a legal compliance program in marketing. Legal compliance in marketing  pp. 460–66

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Chapter 14  Sustainable marketing: Social responsibility, ethics and legal compliance

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Discuss the need for and value of a legal compliance program in marketing. (pp. 460–66)

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Part 4  Extending marketing

Sustainable marketing (pp. 442–43)

sustainable marketing

NEEDS OF CONSUMERS

Socially and environmentally responsible marketing that meets the present needs of consumers and businesses while also preserving or enhancing the ability of future generations to meet their needs.

Sustainable marketing calls for socially and environmentally responsible actions that meet the present needs of customers while also preserving or enhancing the ability of future generations to meet their needs. Figure 14.1 compares the sustainable marketing concept with other marketing concepts we studied in earlier chapters. The marketing concept recognises that organisations thrive by determining the current needs and wants of target group customers and fulfilling those needs and wants more effectively and efficiently than competitors do. It focuses on meeting the company’s short-term sales, growth and profit needs by giving customers what they want now. However, satisfying consumers’ immediate needs and desires does not always serve the future best interests of either customers or the business. For example, early decisions by McDonald’s to market tasty but fat- and salt-laden fast foods created immediate satisfaction for customers, and sales and profits for the company. However, critics assert that McDonald’s and other fast-food chains have contributed to a longer-term national obesity epidemic, damaging consumer health and burdening the national health system. In turn, many consumers have begun looking for healthier eating options, causing a slump in fast-food industry sales and profits. Beyond issues of ethical behaviour and social welfare, McDonald’s was also criticised for the sizeable environmental footprint of its vast global operations, everything from wasteful packaging and solidwaste creation to inefficient energy use in its stores. Thus, the strategy employed by McDonald’s was not sustainable in terms of either consumer or company benefit. Whereas the societal marketing concept identified in Figure 14.1 considers the future welfare of consumers, and the strategic planning concept considers future company needs, the sustainable marketing concept considers both. Sustainable marketing calls for socially and environmentally responsible actions that meet both the immediate and future needs of customers and the company. For example, making wine is not generally considered to be the most environmentally sustainable of businesses; the process makes heavy demands on water for irrigation, and electricity and fuel in production, and there is also a great deal of waste from the winemaking processes. The packaging has a big impact on the environment, as does the transport required to move the wine to customers. Wirra Wirra is one of Australia’s iconic wine brands, and it has made sustainability central to its business success. The company values have, at their heart, ‘play’. But do not be fooled – the values mean ‘play safe’, ‘play together’, ‘play bold’, ‘play hard’ and ‘play fair’, and the company is concerned about what these mean in practice. Wirra Wirra is very serious about playing fair with the environment. The vineyard is managed biodynamically – based on principles of ecological self-sufficiency – with no chemicals or pesticides. The vineyard is located in a region where the rainfall is often sufficient but, when it is not, Wirra Wirra use drip irrigation systems to minimise water loss. Since 1994, the company has worked hard to reduce waste, reduce energy consumption and reduce carbon emissions. They have planted over 4700 native trees since 2011. In 2016, the company’s

Now

Marketing concept

Strategic planning concept

Future

Societal marketing concept

Sustainable marketing concept

Now

Future

NEEDS OF BUSINESS Figure 14.1  Sustainable marketing

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sustainability efforts were recognised by EPA South Australia as being good for the environment and good for business.1 Truly sustainable marketing requires a smooth-functioning marketing system in which consumers, companies, public policymakers and others work together to ensure socially and environmentally responsible marketing actions. Unfortunately, however, the marketing system does not always work smoothly. The following sections examine several sustainability questions: What are the most frequent social criticisms of marketing? What steps have private citizens taken to curb marketing ills? What steps have legislators and government agencies taken to promote sustainable marketing? What steps have enlightened companies taken to carry out socially responsible and ethical marketing that creates sustainable value for both individual customers and society as a whole?

Sustainable marketing: Wirra Wirra sustainability practices offer value for customers and position the company for a profitable future. Environment Protection Authority (SA); Grapes, moiraff/iStock/Getty Images;  Vineyard, halans/iStock/Getty Images

Social criticisms of marketing (pp. 443–49) Marketing receives much criticism. Some of this criticism is justified; much is not. Social critics claim that certain marketing practices hurt individual consumers, society as a whole and other business firms.

Marketing’s impact on individual customers People have many concerns about how well the marketing system serves their interests. Surveys usually show that consumers hold mixed, or even slightly unfavourable, attitudes towards marketing practices. Consumer advocates, government agencies and other critics have accused marketing of harming consumers through high prices, deceptive practices, high-pressure selling, shoddy or unsafe products, planned obsolescence and poor service to disadvantaged consumers. Such questionable marketing practices are not sustainable in terms of long-term consumer or business welfare.

High prices Many critics charge that the marketing system causes prices to be higher than they would be under more ‘sensible’ systems. Such high prices are difficult to accept, especially when the economy takes a downturn. Critics point to three factors: (1) high costs of distribution, (2) high advertising and promotion costs and (3) excessive markups.

High costs of distribution A longstanding charge is that greedy marketing channel intermediaries mark up prices beyond the value of their services. As a result, distribution costs too much, and consumers pay for these excessive costs in the form of higher prices. Resellers respond that intermediaries do work that would otherwise have to be done by manufacturers or consumers. Their prices reflect services that consumers themselves want – more convenience, larger stores and assortments, more service, longer store hours, return privileges and others. In fact, they argue, retail competition is so intense that margins are actually quite low. Low-price stores, such as ALDI, Costco and other discounters, pressure their competitors to operate efficiently and keep their prices down. High advertising and promotion costs Modern marketing is also accused of pushing up prices to finance unneeded advertising, sales promotion and packaging. For example, a heavily promoted national brand sells for much more than a virtually identical store-branded product. Critics charge that much of the packaging and promotion adds only

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psychological value to the product, rather than functional value. Marketers respond that although advertising adds to product costs, it also adds value by informing potential buyers of the availability and merits of a brand. Brand-name products may cost more, but branding assures buyers of consistent quality. Moreover, consumers can usually buy functional versions of products at lower prices. However, they want and are willing to pay more for products that also provide psychological benefits – that make them feel wealthy, attractive or special.

Excessive markups Critics also charge that some companies mark up goods excessively. They point to the pharmaceutical industry, where Social criticisms of marketing: A heavily promoted brand-name a pill costing five cents to make may cost the consumer $2 to medicine sells for much more than a virtually identical non-branded buy, and to the high charges for car repairs, funerals and other generic product does. Critics charge that promotion adds only services. Marketers respond that most businesses try to deal psychological value to the product rather than functional value. fairly with consumers because they want to build customer Pharmaceutical companies counter that the costs of research and development need to be recovered. relationships and repeat business. Also, they assert, consumers © Dmitry Kalinovsky/Shutterstock.com often do not understand the reasons for high markups. For example, pharmaceutical markups must cover the costs of purchasing, promoting and distributing existing medicines, plus the high research and development costs of formulating and testing new medicines. As pharmaceuticals company, GlaxoSmithKline, has stated in its North American ads, ‘Today’s medicines finance tomorrow’s miracles.’2

Deceptive practices

Sale of Goods Act The Act sets out consumer rights and remedies when purchasing from all manner of vendors.

Competition and Consumer Act 2010 The Act and regulations are designed to protect consumers by focusing on preventing restrictive practices of corporations.

Marketers are sometimes accused of deceptive practices that lead consumers to believe they will get more value than they actually do. Deceptive practices fall into three groups: pricing, promotion and packaging. Deceptive pricing includes such practices as falsely advertising ‘factory’ or ‘wholesale’ prices, or advertising a large price reduction from a phony high retail-price list. Deceptive promotion includes practices such as misrepresenting the product’s features or performance, or luring customers to the store for a bargain that is out of stock. Deceptive packaging includes exaggerating package contents through subtle design, using misleading labelling or describing size in misleading terms. Deceptive practices have led to legislation and other consumer protection actions. For example, in Australia, the laws governing the sale of goods and services come from a three-tiered scheme that includes common law (reported decisions of courts), state legislation (such as the Sale of Goods Act and Fair Trading Act in each state) and Commonwealth legislation (most notably, the Competition and Consumer Act 2010 (Cth)).3 In brief, the Sale of Goods Act sets out consumer rights and remedies when purchasing from all manner of vendors, while the Competition and Consumer Act 2010 and regulations are designed to protect consumers by focusing on preventing restrictive practices of corporations. The Australian Competition and Consumer Commission (ACCC), which administers the Commonwealth’s competition, fair-trading and consumer protection laws, publishes many guidelines listing deceptive practices. Despite the regulations, some critics argue that deceptive claims are still prevalent. The toughest problem is defining what is ‘deceptive’. For instance, an advertiser’s claim that its chewing gum will ‘rock your world’ is not intended to be taken literally. Instead, the advertiser might claim, it is ‘puffery’ – innocent exaggeration for effect. However, others claim that puffery and alluring imagery can harm consumers in subtle ways. Think about the popular and long-running MasterCard Priceless commercials that once painted pictures of consumers fulfilling their priceless dreams despite the costs. The ads suggested that your credit card could make it happen. But critics maintain that such imagery by credit card companies encouraged a spend-now-pay-later attitude that caused many consumers to overuse their cards.

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Marketers argue that most companies avoid deceptive practices. Because such practices harm a company’s business in the long run, they simply are not sustainable. Profitable customer relationships are built upon a foundation of value and trust. If consumers do not get what they expect, they will switch to more reliable products. In addition, consumers usually protect themselves from deception. Most consumers recognise a marketer’s selling intent and are careful when they buy, sometimes even to the point of not believing completely true product claims.

High-pressure selling Salespeople are sometimes accused of high-pressure selling that persuades people to buy goods they had not thought of buying. It is often said that insurance, real estate and used cars are sold, not bought. Salespeople are trained to deliver smooth, canned talks to entice purchase. They sell hard because sales contests promise big prizes to those who sell the most. Television infomercials hit their mark because they use ‘yell and sell’ presentations that create a sense of consumer urgency which only those with strong willpower can resist. However, in most cases, marketers have little to gain from high-pressure selling. Such tactics may work in one-time selling situations for short-term gain. In the main, selling involves building long-term relationships with valued customers. High-pressure or deceptive selling can do serious damage to such relationships. For example, imagine a Procter & Gamble key account manager trying to pressure a Coles or Woolworths buyer, or a Hewlett-Packard key account manager trying to browbeat a Wesfarmers information technology manager. It simply would not work.

Shoddy, harmful or unsafe products Another criticism concerns poor product quality or function. One complaint is that, too often, products are not made well and services are not performed well. A second complaint is that many products deliver little benefit, or that they might even be harmful. For example, think about the soft-drink industry. Many critics blame the plentiful supply of sugarladen, high-calorie soft drinks for the nation’s rapidly growing obesity epidemic. Studies show that nearly two in three adult Australians are now overweight or obese. This weight increase comes despite repeated medical studies showing that excess weight brings increased risks for heart disease, diabetes and other maladies, even cancer.4 The critics are quick to fault what they see as greedy beverage marketers cashing in on vulnerable consumers. Is the soft-drink industry being socially irresponsible by aggressively promoting overindulgence to ill-informed or unwary consumers? Or are they simply serving the wants of customers by offering products that jolt their taste buds while letting consumers make their own eating choices? Whereas some analysts criticise the industry, others suggest that responsibility lies with consumers. ‘Soft drinks have unfairly become the whipping boy of most anti-obesity campaigns,’ suggests one business reporter. As in many matters of social responsibility, what is right and wrong may be a matter of opinion.5 A third complaint concerns product safety. Product safety has been a problem for several reasons, including company indifference, increased product complexity and poor quality control. For years, Choice – the non-profit testing and Harmful products: Soft drinks have often been charged with information organisation that publishes Consumer Reports responsibility for the growing obesity epidemic in Australia and magazine and website – has reported various hazards in tested New Zealand; others argue that responsibility for consumption lies with the consumer. products: electrical dangers in appliances, carbon monoxide © Charlie Edwards/Shutterstock.com poisoning from room heaters, injury risks from lawn mowers,

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and faulty motor vehicle design, among many others. The organisation’s testing and other activities have helped consumers make better buying decisions and encouraged businesses to eliminate product flaws.6 However, most manufacturers want to produce quality goods. The way a company deals with product quality and safety problems can damage or help its reputation. Companies selling poor-quality or unsafe products risk damaging conflicts with consumer groups and regulators. Unsafe products can result in product liability suits and large awards for damages. More fundamentally, consumers who are unhappy with a firm’s products may avoid future purchases and talk other consumers into doing the same. In today’s social media and online review environment, word of poor quality can spread like wildfire. Thus, quality missteps are inconsistent with sustainable marketing. Today’s marketers know that good quality results in customer value and satisfaction, which, in turn, creates sustainable customer relationships.

Planned obsolescence Critics have charged that some companies practise planned obsolescence, causing their products to become obsolete before they actually should need replacement. They accuse some producers of using materials and components that will break, wear, rust or rot sooner than they should. And, if the products themselves do not wear out fast enough, other companies are charged with perceived obsolescence – continually changing consumer concepts of acceptable styles to encourage more and earlier buying. An obvious example is constantly changing clothing fashions. Still others are accused of introducing planned streams of new products that make older models obsolete. Critics claim that this occurs in the consumer electronics and computer industries. If you are like most people, you probably have a drawerful of yesterday’s hottest technological gadgets – from mobile phones and cameras to iPods and flash drives – now reduced to the status of fossils. It seems that anything more than a year or two old is hopelessly out of date. Marketers respond that consumers like style changes; they get tired of the old goods and want a new look in fashion. Or they want the latest high-tech innovations, even if older models still work. No one has to buy the new product and if too few people like it, it will simply fail. Finally, most companies do not design their products to break down earlier because they do not want to lose customers to other brands. Instead, they seek constant improvement to ensure that products will consistently meet or exceed customer expectations. Much of the so-called planned obsolescence is the working of the competitive and technological forces in a free society – forces that lead to ever-improving goods and services.

Poor service to disadvantaged consumers Finally, the marketing system has been accused of poorly serving disadvantaged consumers. For example, critics claim that rural and regional Australia, with disproportionately more low-income families, has the highest rate of service exclusion – ‘particularly in relation to medical and dental services, child care and financial services’. Moreover, in these regional communities, the cost of goods and services is higher. For example, one study found that food costs 10–20 per cent more in regional Australia than it does in cities, and petrol was 10 per cent more expensive. In other research, investigations revealed that the concentration of bottle shops was six times higher in poorer neighbourhoods than in those of the typical well-off Australian.7 Clearly, better marketing systems must be built to service disadvantaged consumers. In fact, many marketers profitably target such consumers with legitimate goods and services that create real value. In cases in which marketers do not step in to fill the void, the government likely will. For example, the ACCC and state consumer protection agencies can and do take action against sellers that advertise false values, wrongfully deny services or charge disadvantaged customers too much.

Marketing’s impact on society as a whole The marketing system has been accused of adding to several ‘evils’ in society at large, such as creating too much materialism, too few social goods and a glut of cultural pollution.

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False wants and too much materialism Critics have charged that the marketing system urges too much interest in material possessions, and that the Western world’s love affair with worldly possessions is not sustainable. Too often, people are judged by what they own, rather than by who they are. The critics do not view this interest in material things as a natural state of mind, but rather as a matter of false wants created by marketing. Marketers, they claim, stimulate people’s desires for goods and create materialistic models of the good life. Thus, marketers have seemingly created an endless cycle of mass consumption – creating false wants that benefit industry more than they benefit consumers. Marketers respond that such criticisms overstate the power of business to create needs. People have strong defences against advertising and other marketing tools. Marketers are most effective when they appeal to existing wants, rather than when they attempt to create new ones. Furthermore, people seek information when making important purchases and often do not rely on single sources. Even minor purchases that may be affected by advertising messages lead to repeat purchases only if the product delivers the promised customer value. Finally, the high failure rate of new products shows that companies are not able to control demand. On a deeper level, our wants and values are influenced not only by marketers but also by family, peer groups, religion, cultural background and education. If Australians and New Zealanders are highly materialistic, these values arose out of basic socialisation processes that go much deeper than business and mass media could produce alone. Moreover, consumption patterns and attitudes are also subject to larger forces, such as the global economy (as discussed in Chapter 3).

Too few social goods Business has been accused of overselling private goods at the expense of public goods. As private goods increase, they require more public services that are usually not forthcoming. For example, an increase in motor vehicle ownership (private good) requires more highways, traffic control, parking spaces and police services (public goods). The overselling of private goods results in ‘social costs’. For cars, some of the social costs include traffic congestion, petrol shortages and air pollution, which often occur simply by cars sitting in traffic jams on overcrowded public roads. A way must be found to restore a balance between private goods and public goods. One option is to make producers bear the full social costs of their operations. For example, the government is requiring motor vehicle manufacturers to build cars with more-efficient engines and better pollution-control systems, and encouraging the manufacture of cars that use alternative energy sources, such as hybrid electric vehicles. Car makers will then raise their prices to cover the extra costs. If buyers find the price of some cars too high, however, the producers of these cars will disappear. Demand will then move to those producers that can support the sum of the private and social costs. A second option is to make consumers pay the social costs. For example, many cities around the world are now charging ‘congestion tolls’ in an effort to reduce traffic congestion. Time-of-day tolling was introduced on the Sydney Harbour Bridge to encourage motorists to drive outside of peak times. In the morning and afternoon peaks, the southbound charges are $4 a trip but after 7 pm until the next morning, the fee is only $2.50. The toll is lower on weekends, too. And, in cities all around Australia and New Zealand, congestion tolls similar to those levied by the City of London, where motorists pay to drive in downtown London, are being considered. These types of charges reduce traffic congestion and promote alternative transport use: people walk, cycle and take public transport.8

Social costs: All around Australia and in New Zealand, congestion tolls similar to those levied for driving at peak times on the Sydney Harbour bridges are being considered to help reduce the costs of a congested city. © Blaine Harrington/imagefolk

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Cultural pollution Critics charge the marketing system with creating cultural pollution. They believe our senses are being constantly assaulted by marketing and advertising. Commercials interrupt serious programs; pages of ads obscure magazine articles; billboards mar beautiful scenery; spam fills our email inboxes. What’s more, the critics claim, these interruptions continually pollute people’s minds with messages of materialism, sex, power or status. Some critics are calling for sweeping changes. Marketers answer the charges of ‘commercial noise’ with the following arguments. First, they hope that their ads reach primarily the target audience. But because of mass-communication channels, some ads are bound to reach people who have no interest in the product and are therefore bored or annoyed. People who buy magazines they like or who opt-in to email, social media or mobile marketing programs rarely complain about the ads because they involve products and services of interest. Second, because of ads, many television, radio and online sites are free to users. Ads also help keep down the costs of magazines and newspapers. Many people think commercials are a small price to pay for these benefits. In addition, consumers find many television commercials entertaining and seek them out. Finally, today’s consumers have alternatives. For example, they can skip over television commercials on recorded programs or avoid them altogether on many subscription television and paid online channels. In response, to hold consumer attention, advertisers are making their ads more entertaining and informative.

Marketing’s impact on other businesses Critics also charge that a company’s marketing practices can harm other companies and reduce competition. Three problems are involved: acquisitions of competitors, marketing practices that create barriers to entry, and unfair competitive marketing practices. Critics claim that firms are harmed and competition is reduced when companies expand by acquiring competitors rather than by developing their own new products. The large number of acquisitions and the rapid pace of industry consolidation over the past several decades have caused concern that vigorous young competitors will be absorbed and competition will be reduced. For example, Coles recently restructured a planned purchase of nine supermarkets from supaBARN because the ACCC expressed concerns about reduced competition from the acquisition. In the restructured acquisition, the sale was reduced to five supermarkets across the Australian Capital Territory and New South Wales.9 In virtually every major industry – retailing, entertainment, financial services, utilities, transportation, motor vehicles, telecommunications, health care – the number of major competitors is shrinking. Acquisition is a complex subject. In some cases, acquisitions can be good for society. The acquiring company may gain economies of scale that lead to lower costs and lower prices. A well-managed company may take over a poorly managed company and improve its efficiency. An industry that was not very competitive might become more competitive after the acquisition. But acquisitions can also be harmful and, therefore, are closely regulated by the government. Critics have charged that marketing practices bar new companies from entering an industry. Large marketing companies can use patents and heavy promotion spending, or can bind suppliers or dealers to keep out or drive out Impact on other businesses: Coles recently restructured a planned purchase of nine supermarkets from supaBARN because the competitors. Those concerned with antitrust regulation ACCC expressed concerns about reduced competition from the recognise that some barriers are the natural result of the acquisition. economic advantages of doing business on a large scale.

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Other barriers could be challenged by existing and new laws. For example, some critics have proposed a progressive tax on advertising spending to reduce the role of selling costs as a major barrier to market entry. Finally, some firms have, in fact, used unfair competitive marketing practices with the intention of hurting or destroying other firms. They may set their prices below costs, threaten to cut off business with suppliers or discourage the buying of a competitor’s products. Although various laws work to prevent such predatory competition, it is often difficult to prove that the intent or action was actually predatory. In recent years, large retailers have been accused of using predatory pricing in selected market areas to drive smaller, independent retailers out of business. However, whereas critics charge that the large retailers’ actions are predatory, others assert that its actions are just the healthy competition of a more efficient company against less efficient ones. Nevertheless, the Competition and Consumer Act 2010 and the powers of the ACCC seem to moderate the power of retailers and allegations of retailer margin squeezing made by suppliers.10

Linking the concepts Few marketers want to abuse or anger consumers – it is simply not good business. Still, some marketing abuses do occur. ● Think back over the past three months or so and list any instances in which you have suffered a marketing abuse such as those just discussed. Analyse your list: What kinds of companies were involved? Were the abuses intentional? What did the situations have in common?

● Pick one of the instances of marketing abuses you listed above and describe it in detail. How might you go about righting this wrong? Write an action plan and then do something to remedy the abuse. If we all took such actions when wronged, there would be far fewer wrongs to right!

Consumer actions to promote sustainable marketing (pp. 449–53) Sustainable marketing calls for more responsible actions by both businesses and consumers. Because some people view business as the cause of many economic and social ills, grassroots movements have arisen from time to time to keep business in line. The two main movements have been consumerism and environmentalism.

Consumerism

Consumerism is an organised movement of citizens and government agencies to improve the rights and power of buyers in relation to sellers. Traditional sellers’ rights include the following: • the right to introduce any product in any size and style, provided it is not hazardous to personal health or safety; or, if it is, to include proper warnings and controls • the right to charge any price for the product, provided no discrimination exists among similar kinds of buyers • the right to spend any amount to promote the product, provided it is not defined as unfair competition • the right to use any product message, provided it is not misleading or dishonest in content or execution • the right to use any buying incentive programs, provided they are not unfair or misleading. Traditional buyers’ rights include: • the right not to buy a product that is offered for sale • the right to expect the product to be safe • the right to expect the product to perform as claimed.

consumerism

An organised movement of citizens and government agencies whose aim is to improve the rights and power of buyers in relation to sellers.

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Comparing these rights, many believe that the balance of power lies on the seller’s side. True, the buyer can refuse to buy. But critics believe that the buyer has too little information, education and protection to make wise decisions when facing sophisticated sellers. Consumer advocates call for the following additional consumer rights: • the right to be well informed about important aspects of the product • the right to be protected against questionable products and marketing practices • the right to influence products and marketing practices in ways that will improve the ‘quality of life’ • the right to consume now in a way that will preserve the world for future generations of consumers. Each proposed right has led to more specific proposals by consumerists. The right to be informed includes the right to know the true interest on a loan (truth in lending), the true cost per unit of a brand (unit pricing), the ingredients in a product (ingredient labelling), the nutritional value of foods (nutritional labelling), product freshness (open dating) and the true benefits of a product (truth in advertising).

Consumerism: The ACCC provides information about unit pricing to help consumers make more informed decisions. In this example, the higher-priced laundry detergent has the lower unit price.

Proposals related to consumer protection include strengthening consumer rights in cases of business fraud, requiring greater product safety, ensuring information privacy and giving more power to government agencies. Proposals relating to quality of life include controlling the ingredients that go into certain products and packaging, and reducing the level of advertising ‘noise’. Proposals for preserving the world for future consumption include promoting the use of sustainable ingredients, recycling and reducing solid wastes, and managing energy consumption. Sustainable marketing is up to consumers as well as to businesses and governments. Consumers have not only the right, but also the responsibility, to protect themselves instead of leaving this function to someone else. Consumers who believe they got a bad deal have several remedies available, including contacting the company or the media; contacting federal, state or local agencies; and taking the complaint to small-claims court. Consumers should also make good consumption choices, rewarding companies that act responsibly while punishing those that do not.

Environmentalism environmentalism

An organised movement of concerned citizens and government agencies that aims to protect and improve people’s current and future living environment.

Whereas consumerists consider whether the marketing system is efficiently serving consumer wants, environmentalists are concerned with marketing’s effects on the environment and with the environmental costs of serving consumer needs and wants. Environmentalism is an organised movement of concerned citizens, businesses and government agencies that aims to protect and improve people’s current and future living environment. Environmentalists are not against marketing and consumption; they simply want people and organisations to operate with more care for the environment. They call for doing away with what sustainability advocate and Unilever CEO Paul Polman calls ‘mindless consumption’. According to Polman, ‘The road to well-being doesn’t go via reduced consumption. It has to be done via more responsible consumption.’11 The marketing system’s goal, the environmentalists assert, should not be to maximise consumption, consumer choice or consumer satisfaction, but rather to maximise life quality. Life quality means not only the quantity and quality of consumer goods and services, but also the quality of the environment.

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Environmentalism is concerned with damage to the ecosystem caused by global warming, resource depletion, toxic and solid wastes, litter, reduced availability of fresh water and other problems. Other issues include the loss of recreational areas and the increase in health problems caused by poor air quality, polluted water and chemically treated food. Over the past several decades, such concerns have resulted in laws and regulations governing industrial commercial practices that affect the environment. Some companies have strongly resented and resisted such environmental regulations, claiming they are too costly and have made their industries less competitive. These companies responded to consumer environmental concerns by doing only what was required to avert new regulations or to keep environmentalists quiet. In recent years, however, most companies have accepted responsibility for doing no harm to the environment. They have shifted from protest to prevention, and from regulation to responsibility. More and more companies are adopting policies of environmental sustainability. Today’s enlightened companies are taking action, not because someone is forcing them to or to reap short-run profits but because it is the right thing to do – because it is for their customers’ wellbeing, the company’s wellbeing and the planet’s environmental future. For example, consumer-products giant, Unilever, has successfully built its core mission around environmental sustainability – its aim is to ‘make sustainable living commonplace’.12 Figure 14.2 shows a grid that companies can use to gauge their progress towards environmental sustainability. It includes both internal and external ‘greening’ activities that will pay off for the firm and environment in the short run, and ‘beyond greening’ activities that will pay off in the longer term. At the most basic level, a company can practise pollution prevention. This involves more than pollution control – that is, cleaning up waste after it has been created. Pollution prevention means eliminating or minimising waste before it is created. Companies emphasising pollution prevention have responded with internal ‘green marketing’ programs – designing and developing ecologically safer products, recyclable and biodegradable packaging, better pollution controls and more energy-efficient operations. For example, Nike makes shoes out of ‘environmentally preferred materials’, recycles old sneakers and educates young people about conservation, reuse and recycling. Its revolutionary woven Flyknit shoes are lightweight, comfortable and durable but produce 66 per cent less material waste in production – the material wasted in making each pair of Flyknits weighs only as much as a sheet of paper.13 At the next level, companies can practise product stewardship – minimising not just pollution from production and product design but all environmental impacts throughout the full product life cycle, and all the while reducing costs. Many companies are adopting design for environment (DFE) and cradle-to-cradle practices. These involve thinking ahead and designing products that are easier to recover, reuse, recycle

TODAY: GREENING

TOMORROW: BEYOND GREENING

Pollution prevention

New clean technology

INTERNAL

Eliminating or reducing waste before it is created

Developing new sets of environmental skills and capabilities

Product stewardship

Sustainability vision

EXTERNAL

Minimising environmental impact throughout the entire product life cycle

Creating a strategic framework for future sustainability

environmental sustainability

451

A management approach that involves developing strategies that both sustain the environment and produce profits for the company.

Figure 14.2  The environmental sustainability portfolio Source: Adapted from Stuart L Hart, ‘Beyond greening: Strategies for a sustainable world’, Harvard Business Review, January 1997.

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or safely return to nature after usage, becoming part of the ecological cycle. DFE and cradle-to-cradle practices not only help to sustain the environment; they can also be highly profitable for the company. For example, more than a decade ago, IBM started a business – IBM Global Asset Recovery Services – designed to reuse and recycle parts from returned mainframe computers and other equipment. In 2014, IBM processed more than 34 400 tonnes of end-of-life products and product waste worldwide, stripping down old equipment to recover chips and valuable metals. It finds uses for more than 99 per cent of what it takes in, sending less than 1 per cent to landfills and incineration facilities. What started out as an environmental effort has now grown into a multi-billion-dollar IBM business that profitably recycles electronic equipment at 22 sites worldwide.14 Today’s ‘greening’ activities focus on improving what companies already do to protect the environment. The ‘beyond greening’ activities identified in Figure 14.2 look to the future. First, internally, companies can plan for new clean technology. Many organisations that have made good sustainability headway are still limited by existing technologies. To create fully sustainable strategies, they will need to develop innovative new technologies. Further, companies can develop a sustainability vision, which serves as a guide to the future. It shows how the company’s products and services, processes and policies must evolve, and what new technologies must be developed to get there. This vision of sustainability provides a framework for pollution control, product stewardship and new environmental technology for the company and others to follow. Today, most companies focus on activities associated with the upper-left quadrant of the grid in Figure 14.2, investing most heavily in pollution prevention. Some forward-looking companies practise product stewardship and are developing new environmental technologies. Few companies have welldefined sustainability visions. However, emphasising only one or a few quadrants in the environmental sustainability grid can be short-sighted. Investing only in the activities in the left half of the grid puts a company in a good position today but leaves it vulnerable in the future. In contrast, a heavy emphasis on the activities in the right half of the grid suggests that a company has good environmental vision but lacks the skills needed to implement it. Thus, companies should work at developing all four dimensions of environmental sustainability. Environmentalism creates some special challenges for global marketers. As international trade barriers come down and global markets expand, environmental issues are having an ever-greater impact on international trade. Countries in many regions are generating strict environmental standards. However, environmental policies still vary widely from country to country. Countries such as Australia, Denmark, Germany, Japan, New Zealand and the United States have fully developed environmental policies and high public expectations. But major countries such as China, India, Brazil and Russia are in only the early stages of developing such policies. Moreover, environmental factors that motivate consumers in one country may have no impact on consumers in another. For example, PET soft-drink bottles cannot be used in San Francisco. However, they are preferred in France, which has an extensive recycling process for them.15 Thus, international companies have found it difficult to develop standard environmental practices that work around Environmentalism: Attitudes to PET soft-drink bottles vary from the world. Instead, they are creating general policies and then country to country, making it difficult for marketers to develop standard environmental practices. translating these policies into tailored programs that meet © alterfalter/Shutterstock local regulations and expectations.

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Public actions to regulate marketing Public concerns about marketing practices usually lead to public attention and legislative proposals. New Bills are then debated – many are defeated, others are modified and a few become workable laws. Many of the laws that affect marketing were identified in Chapter 3. The task is to translate these laws into the language that marketing executives understand as they make decisions about competitive relations, products, price, promotion and channels of distribution. Figure 14.3 summarises the main legal issues facing marketing management.

SELLING DECISIONS Bribing? Stealing trade secrets? Disparaging customers? Misrepresenting? Disclosure of customer rights? Unfair discrimination?

PRODUCT DECISIONS Product additions and deletions? Patent protection? Product quality and safety? Product warranty?

PACKAGING DECISIONS Fair packaging and labelling? Excessive cost? Scarce resources? Pollution?

ADVERTISING DECISIONS False advertising? Deceptive advertising? Bait-and-switch advertising? Promotional allowances and services? CHANNEL DECISIONS Exclusive dealing? Exclusive territorial distributorship? Tying agreements? Dealer’s rights?

COMPETITIVE RELATIONS DECISIONS Anti-competitive acquisition? Barriers to entry? Predatory competition?

PRICE DECISIONS Price fixing? Predatory pricing? Price discrimination? Minimum pricing? Price increases? Deceptive pricing?

Figure 14.3  Major legal issues facing marketing management 123RF/Iurii Sokolov

Business actions towards sustainable marketing (pp. 453–57) At first, many companies opposed consumerism, environmentalism and other elements of sustainable marketing. They thought the criticisms were either unfair or unimportant. But by now, most companies have grown to embrace sustainability marketing principles as a way to create both immediate and future customer value and strengthen customer relationships.

Sustainable marketing principles Under the sustainable marketing concept, a company’s marketing should support the best long-run performance of the marketing system. It should be guided by five sustainable marketing principles: (1) consumer-oriented marketing, (2) customer-value marketing, (3) innovative marketing, (4) sense-of-mission marketing and (5) societal marketing.

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Consumer-oriented marketing consumeroriented marketing

The philosophy of sustainable marketing which holds that the company should consider and organise its marketing activities from the consumer’s point of view.

customer-value marketing

A principle of sustainable marketing which holds that a company should put most of its resources into customer-valuebuilding marketing investments.

innovative marketing

A principle of sustainable marketing which requires that a company seek real product and marketing improvements.

Consumer-oriented marketing means that the company should consider and organise its marketing activities from the consumer’s point of view. It should work hard to sense, serve and satisfy the needs of a defined group of customers, both now and in the future. All of the good marketing companies that we discuss in this book have this in common: an all-consuming passion for delivering superior value to carefully chosen customers. Only by seeing the world through its customers’ eyes can the company build lasting and profitable customer relationships.

Customer-value marketing According to the principle of customer-value marketing, the company should put most of its resources into customer-value-building marketing investments. Many things marketers do – one-shot sales promotions, cosmetic packaging changes, direct-response advertising – may raise sales in the short run but add less value than would actual improvements in the product’s quality, features or convenience. Enlightened marketing calls for building long-run consumer loyalty and relationships by continually improving the value consumers receive from the firm’s market offering. By creating value for consumers, the company can capture value from consumers in return.

Innovative marketing The principle of innovative marketing requires that the company continuously seek real product and marketing improvements. The company that overlooks new and better ways to do things will eventually lose customers to another company that has found a better way. For nearly 50 years, through innovative marketing, Nike has built the ever-present swoosh into one of the world’s best-known brand symbols. When sales languished in the late 1990s and new competitors made gains, Nike knew it had to reinvent itself via product and marketing innovation. Over the past few years, Nike has unleashed a number of highly successful new products. For example, with the relatively recent launch of the Nike Flyknit Racer, Nike reinvented the very way that shoes are manufactured. Top off Nike’s new products with a heavy investment in social media content and Nike remains the world’s largest sports-apparel company, 44 per cent larger than its closest rival, adidas. Both Forbes and Fast Company recently anointed Nike as the world’s numberone most innovative company.16

Sense-of-mission marketing sense-of-mission marketing

A principle of sustainable marketing which holds that a company should define its mission in broad social terms, rather than in narrow product terms.

Sense-of-mission marketing means that the company should define its mission in broad social terms, rather than in narrow product terms. When a company defines a social mission, employees feel better about their work and have a clearer sense of direction. Brands linked with broader missions can serve the best long-run interests of both the brand and consumers. For example, defined in narrow product terms, the mission of outdoor gear and apparel maker Patagonia might be ‘to sell clothes and outdoor equipment’. However, Patagonia states its mission more broadly, as one of producing the highest-quality products while doing the least harm to the environment. From the start, Patagonia has pursued a passionately held social responsibility mission. Each year since 1985, the company donates its time, services and at least 1 per cent of sales or 10 per cent of pre-tax profits to hundreds of grassroots environmental groups all over the world that are working to help reverse the environmental tide (see the Patagonia case study in Appendix 1).17 However, having a ‘double bottom line’ of values and profits is no easy proposition. Over the years, companies such as Patagonia and The Body Shop – known and respected for putting ‘principles before profits’ while focusing on making the world a better place – have, at times, struggled with lessthan-stellar financial returns. In recent years, however, a new generation of social entrepreneurs has

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emerged, well-trained business managers who know that to do good, they must first do well in terms of profitable business operations. For example, ASRC Catering provides catering events throughout the Melbourne area while at the same time providing training and careers in hospitality for people seeking asylum. The company was recognised in the Social Enterprise Awards 2016 for their contribution to social and economic empowerment for asylum seekers. The business has experienced phenomenal success and this has enabled them to invest over $750 000 in support programs for asylum seekers over the last five years.18 Moreover, today, socially responsible business is no longer the sole province of small, socially conscious entrepreneurs. Many large, established companies and brands – from IKEA and Nike to BHP Billiton and Coca-Cola – have adopted substantial social and environmental responsibility missions.

Societal marketing Following the principle of societal marketing, a company makes marketing decisions by considering consumers’ wants and interests, the company’s requirements and society’s long-run interests. The company is aware that neglecting consumer and societal long-run interests is a disservice to consumers and society. Alert companies view societal problems as opportunities (see Marketing in action 14.1). Sustainable marketing calls for products that are not only pleasing but also beneficial. The difference is shown in Figure 14.4. Products can be classified according to their degree of immediate consumer satisfaction and long-run consumer benefit. Deficient products, such as bad-tasting and ineffective medicine, have neither immediate appeal nor long-run benefits. Pleasing products give high immediate satisfaction but may hurt consumers in the long run. Examples include cigarettes and junk food. Salutary products have low immediate appeal but may benefit consumers in the long run; for instance, bicycle helmets or some insurance products. Desirable products give both high immediate satisfaction and high long-run benefits, such as a tasty and nutritious breakfast food. Examples of desirable products abound. The ranges of compact fluorescent and LED light bulbs by companies such as Nelson and Mirabella provide good lighting at the same time as they give long bulb life and energy savings. Both GMH’s hybrid Volt and Toyota’s hybrid Prius give a quiet ride and fuel efficiency. Companies should try to turn all their products into desirable products. The challenge posed by pleasing products is that they sell very well but may end up hurting the consumer. The product opportunity, therefore, is to add long-run benefits without reducing the product’s pleasing qualities. The challenge posed by salutary products is to add some pleasing qualities so that they will become more desirable in consumers’ minds.

societal marketing

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

LONG-RUN CONSUMER BENEFIT

IMMEDIATE SATISFACTION Low

High

High

Salutary products

Desirable products

Low

Deficient products

Pleasing products

Figure 14.4  Societal classification of products

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Marketing in Action 14.1

Peoples Coffee: Making a difference, one cup at a time

In 2015, the 193 member states of the United Nations adopted an agenda for

signatories to the Global Compact believe it is possible to do this in a way that

sustainable development to end poverty, fight inequality and tackle climate

also contributes to the wider communities in which the businesses operate.

change. The 17 sustainable development goals cover everything from zero hunger

However, there is a new type of business emerging that flips this perspective

and gender equality to decent work and economic growth. The goals provide an

entirely on its head. Social enterprises are ‘businesses that trade intentionally to

important framework for governments to transform our world. But the goals go

tackle social problems’. In Australia and New Zealand, there is no legal definition

much further. They ask individuals and business to consider how they can make

of a social enterprise but they are usually businesses that have a social mission,

a contribution. For individuals, it can be small actions that collectively make big

that make most of their money by trading and that use most of their profit to

differences, such as reporting bullies, recycling and reusing, and shopping smart.

advance their social objectives.

And, for businesses, the call is to play a larger role in advancing sustainable

One such business is Wellington-based Peoples Coffee. They make coffee – roasting beans – selling it direct to coffee lovers and to cafés. The business believes

development. Over 9000 companies and 3000 other organisations have signed up to

they can change the world, one cup of coffee at a time. These fair-trade-focused

the United Nations Global Compact, committed to universal sustainability

coffee makers want to use ‘trade as a mechanism for change in the coffee industry’.

principles and supporting United Nations goals. Companies that have signed up

Their philosophy is simple: ‘Buy Coffee. Get Change.’ The social enterprise’s blog

to the Global Compact include both small businesses, such as South Australian

explains that coffee production has a long history of exploitation, which left many

packaging manufacturers Streamline Cartons Pty Ltd, and large companies,

of the small farmers who produce the coffee beans receiving very little for their

such as Air New Zealand and Telstra. Non-government organisations such as

efforts. This is because these small farmers need to use middlemen (and often

The Ethics Centre, and local governments such as the Rotorua Lakes Council

many) to access profitable export markets.

and Maribyrnong City Council, are also participants. For 118 Australian and

To make sure these small-lot farmers get more in their pockets when they

New Zealand signatories to the Global Compact, sustainability ‘begins with a

sell their produce, Peoples Coffee buys their beans from Trade Aid Importers (a

principled approach to doing business’.

broker that buys only from farmer co-operatives). A co-operative is a business

Each of the managers, leaders and owners that are signatories to the

or organisation that is owned and run by the people who work there or use

Global Compact believe it is possible for businesses to make a difference to the

its services – in this case, the farmers. Peoples Coffee also checks to make sure

world by the way they operate. Business goals are usually to make a profit but

their coffee beans come from those farmer co-operatives that ensure sustainable

Sustainable marketing: T   he 10 principles of the United Nations Global Compact shape the way participants do business Human rights Principle 1:

Businesses should support and respect the protection of internationally proclaimed human rights; and

Principle 2:

make sure that they are not complicit in human rights abuses.

Labour Principle 3:

Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;

Principle 4:

the elimination of all forms of forced and compulsory labour;

Principle 5:

the effective abolition of child labour; and

Principle 6:

the elimination of discrimination in respect of employment and occupation.

Environment Principle 7:

Businesses should support a precautionary approach to environmental challenges;

Principle 8:

undertake initiatives to promote greater environmental responsibility; and

Principle 9:

encourage the development and diffusion of environmentally friendly technologies.

Anti-corruption Principle 10:

Businesses should work against corruption in all its forms, including extortion and bribery.

Source: The Ten Principles of the UN Global Compact, .

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production and real benefits for the farmers and their communities. They do this

the female inmates and also a sense of accomplishment. As one inmate explained,

by visiting the small farmers at harvest time, together with their broker, Trade

‘my gran and my mum are really proud of me’. Projects like this and others mean

Aid Importers.

that Peoples Coffee really are ‘People for the common great’! In their own small

Another reason Peoples Coffee uses Trade Aid Importers is that they deal

way, the business is contributing to the United Nations sustainable development

directly with the farmer co-operative about the prices that will be paid for the

goals to eliminate poverty, to create opportunities for decent work and economic

coffee beans. Usually, global coffee prices are set by the New York Coffee Futures

development, and to ensure sustainable patterns of consumption and production.

market (the stock exchange where traders agree to buy and sell a stock certificate

Sources: ‘Sustainable development goals: 17 goals to transform our world’, ; and United Nations Global Compact ; accessed December 2016. Deidre Mussen, ‘Behind bars barista training a boost for Arohata Women’s Prison inmates’, 10 July 2015, , accessed December 2016; and also Peoples Coffee website, , and blog, , accessed December 2016. For a definition of social enterprise, see ‘Social enterprise definition’, , accessed December 2016.

for a set price on a particulate future date). In dealing directly with the farmers’ co-operative (via Trade Aid Importers), Peoples Coffee ensures that prices are fair for the farmers and that they themselves remain competitive. Peoples Coffee also want to make a difference locally, so they invest their profits in ways that help New Zealanders. For example, the social enterprise provides barista training for women in Arohata Prison. The program offers transferable job skills for

Questions ❶ Take a look at the United Nations sustainability development goals. Then, working in a small group, search online for social enterprises and businesses that have a mission to make a difference, with a focus on one of the UN sustainability development goals. What evidence is there that the businesses are having an impact? ❷ Research the Peoples Coffee website, , and blog, . Write a blog post that explains how the business’s sustainable business and marketing practices address some of the common criticisms of marketing. ❸ One commentator has argued that social businesses need metrics of

Social change: Peoples Coffee aim to change the world one cup of coffee at time by buying fair, trading fair and investing in social initiatives such as the Arohata project. Peoples Coffee

performance, just as businesses-for-profit do. For a business with a profitfocused mission the metric is often profitability. Identify performance metrics that could be used to evaluate the performance of Peoples Coffee. Make sure you consider all aspects of the business’s social mission.

The role of ethics in marketing (pp. 457–60) Good ethics are a cornerstone of sustainable marketing. In the long run, unethical marketing harms customers and society as a whole. Further, it eventually damages a company’s reputation and effectiveness, jeopardising its very survival. Thus, the sustainable marketing goals of long-term consumer and business welfare can be achieved only through ethical marketing conduct.

Marketing ethics Conscientious marketers face many moral dilemmas. The best thing to do is often unclear. Because not all managers have fine moral sensitivity, companies and professional associations need to develop corporate marketing ethics policies – broad guidelines that everyone in the profession and organisation must follow. These policies should cover distributor relations, advertising standards, customer service, pricing, product development and general ethical standards. The finest guidelines cannot resolve all the difficult ethical situations the marketer faces. Table 14.1 lists some difficult ethical issues marketers could face during their careers. If marketers choose immediate

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Table 14.1  Some morally difficult situations in marketing 1. Your R&D department has slightly changed one of your company’s products. It is not really ‘new and improved’, but you know that putting this statement on the package and in advertising will increase sales. What would you do? 2. You have been asked to add a stripped-down model to your line of laser printers, which could be advertised to pull customers into stores. The product will not be very good, but salespeople will be able to switch buyers up to higher-priced units. You are asked to give the green light for the stripped-down version. What would you do? 3. You are thinking of hiring a product manager who has just left a competitor’s company. The potential employee would be more than happy to tell you all the competitor’s plans for the coming year. What would you do? 4. One of your top dealers in an important territory recently has had family troubles, and his sales have slipped. It looks like it will take him a while to straighten out his family situation. Meanwhile, you are losing many sales. Legally, on performance grounds, you can terminate the dealer’s franchise and replace him. What would you do? 5. You have a chance to win a big retail account that will mean a lot to you and your company. The retail buyer hints that a ‘gift’ would influence the decision. Your assistant recommends sending a large-screen television to the buyer’s home, as the company forbids its buyers to accept gifts from suppliers. What would you do? 6. You have heard that a competitor has a new product feature that will make a big difference in sales. The competitor will demonstrate the feature in a private dealer meeting at the annual trade show. You can easily send a snooper to this meeting to learn about the new feature. What would you do? 7. You have to choose between three ad campaigns outlined by your digital advertising agency. The first (a) is a soft-sell, honest, straight-information campaign. The second (b) uses sex-loaded emotional appeals and exaggerates the product’s benefits. The third (c) involves a noisy, somewhat irritating commercial that is sure to gain audience attention. Pre-tests show that the campaigns are effective in the following order: c, b and a. What would you do? 8. You are interviewing a capable female applicant for a job as salesperson. She is better qualified than the male applicants who have been interviewed. Nevertheless, you know that in your industry some important customers prefer dealing with male salespeople, and you will lose some sales if you hire her. What would you do?

ethical marketing An approach to marketing whereby organisations recognise that the task of marketing is to be enlightened to society’s views, and ethical towards society as a whole as well as to customers.

sales-producing actions in all these cases, their marketing behaviour might well be described as immoral or even amoral. If they refuse to go along with any of the actions, they might be ineffective as marketing managers and unhappy because of the constant moral tension. Managers need a set of principles that will help them determine the moral importance of each situation and decide how far they can go in good conscience. But what principle should guide companies and marketing managers on issues of ethics and social responsibility? One philosophy is that such issues are decided by the free market and legal system. Under this principle, companies and their managers are not responsible for making moral judgments. Companies can in good conscience do whatever the market and legal systems allow. However, history provides an endless list of examples of company actions that were legal but highly irresponsible. A second philosophy puts responsibility not on the system but in the hands of individual companies and managers. This more-enlightened philosophy suggests that a company should have a ‘social conscience’. Companies and managers should apply high standards of ethics and morality when making corporate decisions, regardless of ‘what the system allows’. Each company and marketing manager must work out a philosophy of socially responsible and ethical behaviour. Under the societal marketing concept, each manager must look beyond what is legal and allowed and develop standards based on personal integrity, corporate conscience and long-run consumer welfare. Dealing with issues of ethics and social responsibility in an open and forthright way helps to build strong customer relationships based on honesty and trust. In fact, many companies now routinely include consumers in the social responsibility process. As with environmentalism, the issue of ethics and ethical marketing conduct presents special challenges for international marketers. Business standards and practices vary a great deal from one country to the next. For example, bribes and kickbacks are illegal for Australian and New Zealand firms. Yet these are still standard business practices in many countries. The World Bank estimates that more than US$1 trillion per year’s worth of bribes are paid out worldwide. One study showed that the most flagrant

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bribe-paying firms were from Indonesia, Mexico, China and Russia. Other countries where corruption is common include Sierra Leone, Kenya and Yemen. The least corrupt were companies from the Netherlands, Switzerland, Belgium and Japan.19 The question arises as to whether a company must lower its ethical standards to compete effectively in countries with lower standards. The answer is ‘no’. Companies should make a commitment to a common set of shared standards worldwide. Many industrial and professional associations have suggested codes of ethics, and many companies are now adopting their own codes. For example, the Australian Marketing Institute, an association of marketing practitioners and scientists, developed the code of professional conduct shown in Figure 14.5. Other codes that are of particular relevance to marketers and consumers alike include the Australian Market and Social Research Society Code of Professional Behaviour discussed in Chapter 4 and the Australian Direct Marketing Association (ADMA) Code of Practice.20 The ACCC regards these voluntary codes as helpful measures to deliver increased consumer protection. However, for a code to work effectively, the ACCC reminds that a code of practice needs to be carefully managed and monitored for effectiveness, and there need to be specific consequences for non-compliance. For example, the ADMA provides a protocol for consumers to make complaints about members and for those complaints to be investigated. Companies are also developing programs to teach managers about important ethical issues and to help them find the proper responses. They hold ethics workshops and seminars and create ethics committees. Furthermore, many companies have appointed high-level ethics officers to champion ethical issues and help resolve ethics problems and concerns facing employees. Most companies have established their own codes of ethical conduct. Still, written codes and ethics programs do not ensure ethical behaviour. Ethics and social responsibility require a total corporate commitment. They must be a component of the overall corporate culture.

1 Members shall conduct their professional activities with respect for the public interest. 2 Members shall at all times act with integrity in dealing with clients or employers, past and present, with their fellow members and with the general public. 3 Members shall not intentionally disseminate false or misleading information, whether written, spoken or implied, or conceal any relevant fact. They have a duty to maintain truth, accuracy and good taste in advertising, sales promotion and all other aspects of marketing. 4 Members shall not represent conflicting or competing interests except with the express consent of those concerned given only after full disclosure of the facts to all interested parties. 5 Members, in performing services for a client or employer, shall not accept fees, commissions or any other valuable consideration in connection with those services from any one other than their client or employer except with the consent (express or implied) of both. 6 Members shall refrain from knowingly associating with any enterprise which uses improper or illegal methods in obtaining business. 7 Members shall not intentionally injure the professional reputation or practice of another member. 8 If a member has evidence that another member has been guilty of unethical practices it shall be their duty to inform the Institute. 9 Members have a responsibility to continue the acquisition of professional skills in marketing and to encourage the development of these skills in those who are desirous of entry into, or continuing in, the profession of marketing management. 10 Members shall help to improve the body of knowledge of the profession by exchanging information and experience with fellow members and by applying their special skill and training for the benefit of others. 11 Members shall refrain from using their relationship with Institute in such manner as to state or imply an offical accerditation or approval beyond the scope of membership of the Institute and its aims, rules and policies. 12 The use of the Institute’s distinguishing letters must be confined to Institute activities, or the statement of name and business address on a card, letterhead and published articles. 13 Members shall cooperate with fellow members in upholding and enforcing this Code.

Figure 14.5  Australian Marketing Institute Code of Professional Conduct Source: Available at , accessed 30 December 2016. Courtesy of the Australian Marketing Institute.

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The sustainable company At the foundation of marketing is the belief that companies that fulfil the needs and wants of customers will thrive. Companies that fail to meet customer needs or that intentionally or unintentionally harm customers, others in society or future generations, will decline. Sustainable companies are those that create value for customers through socially, environmentally and ethically responsible actions. Sustainable marketing goes beyond caring for the needs and wants of today’s customers. It means having concern for tomorrow’s customers in assuring the survival and success of the business, shareholders, employees and the broader world in which they all live. Sustainable marketing provides the context in which companies can build profitable customer relationships by creating value for customers in order to capture value from customers in return, now and in the future.

Legal compliance in marketing (pp. 460–66)

legal compliance program A system designed to identify, manage and reduce the risk of breaking the law.

Many examples of unethical marketing also violate the law. In the most serious cases, the breaches have resulted in criminal sanctions and heavy penalties that have caused the entire business to fail. Today’s marketers must be ‘legally literate’. They must realise that almost every decision made in marketing has some legal significance. Whether hiring salespeople, commissioning advertising materials, introducing a new product, designing labels or putting warnings on packages, there are legal ramifications. Some of these are obvious; some are not. One of the best ways to ensure an organisation acts ethically and legally is to have a culture of good ethical practice and a legal compliance program. A legal compliance program is a system designed to identify, manage and reduce the risk of breaking the law. More than that, a compliance program can also be a strategic asset that provides a business with a competitive advantage in the marketplace by ensuring ethical practice, high-quality performance and the positives created by such behaviour. Such a culture can be fostered only by top management commitment and implemented by way of continuing education. A senior manager should be placed in charge of such a program, probably at a level reporting to the CEO.21

Putting a compliance program in place Australian Standards guide business in many ways. Australian Standard AS3806 and its successor, the recently released ISO 19600, are useful in guiding the implementation of a compliance program in marketing. A well-designed executive compliance management system enables a marketing manager to ensure the business is fulfilling all its obligations under the laws and regulations that impact the business, as well as addressing the commitments the company has made regarding its operations to its staff, customers and the various other actors in its microenvironment. Australian Standard AS3806 was used as the basis for the new international standard ISO 19600, which retains the focus on key aspects of compliance, including: commitment, implementation, monitoring and measuring and continual improvement. The new international standard brings a stronger emphasis on a risk-based approach to compliance. Figure 14.6 shows the elements of a compliance management system. Guided by the principles of good governance, the company must establish a compliance management system and policy. A compliance management system requires the business to consider the scope of the system, and the issues, people and interests to be covered. The system is based on a continuous process that involves identifying obligations, evaluating risks and then developing plans to address compliance risks. Plans to ensure compliance are implemented and then evaluated, and outcomes are shared with various stakeholders. The business must also manage non-compliance and identify areas for improvement. Finally, the loop is closed by identifying new compliance issues and risk, and the process begins again. The process is generic and can be used to assist both public and private organisations with developing, implementing and maintaining effective compliance management systems.

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Determining the scope and establishing the compliance management system

Identification of interested parties’ requirements

Good governance principles

ESTABLISH

Identification of external and internal issues

Establishing compliance policy

Identification of compliance obligations and evaluating compliance risks Maintain

Managing non-compliances and continual improvement

Develop Leadership commitment, Independent compliance function, Responsibilities at all levels, Support functions

IMPROVE

Evaluate

Performance evaluation and compliance reporting

Planning to address compliance risks and to achieve objectives

Implement

Operational planning and control of compliance risks

Figure 14.6  Compliance management system Source: Adapted from AS_ISO:2014, Australian Standards Figure 1

While Australian and International Standards are not legally binding, they can prevent a breach of the law. The ACCC has indicated that it regards AS3806 as the ‘benchmark’ for compliance programs and commentators expect that the new international standard will also be well regarded.22

Legal education All marketers need to learn about legal compliance. At various times, the courts have ordered a compliance program to be implemented and have commented adversely where firms have avoided their responsibilities in this regard. For example, in addition to corrective advertising following a misrepresentation of the country of origin of certain products, the ACCC required Bunnings to institute a compliance program in accordance with AS3806 and to audit the program for three years.23 The courts have also pointed out that, where a compliance program exists, it must be updated. Compliance programs are designed to ensure employees not only comply with the law, but also that they know when to seek legal advice. This serves to reduce the likelihood of expensive litigation, both in terms of

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fees and fines. It also reduces the probability of loss of corporate reputation among shareholders, customers and the broader community. Legal education programs tend to cover four sets of relationships that need to be monitored in a legal compliance program: 1 Relationships with competitors – to avoid market rigging, group boycotts, price fixing and other uncompetitive practices. 2 Relationships with suppliers – to avoid resale price maintenance and such vertical restraints as may serve to reduce competition. 3 Relationships with other parties, such as patent licensees – to avoid infringing intellectual property rights, and patents and licence arrangements generally. 4 The relationship with the industry itself – to avoid using trade associations or groupings of firms that might violate sections of the legislation prohibiting arrangements or understandings that substantially lessen competition.

Coverage of a legal compliance program The following commentary concerning legal compliance in marketing has been adapted from a coverage suggested by Professor Eugene Clark.24 It is not intended to be all-encompassing, but seeks to give marketers a guide to key areas that should form part of a legal compliance program. Marketers who do not have at least a basic understanding of these issues may be living dangerously and putting both themselves and their company at serious risk.

Competition law Most developed countries have made provision in their legislation for the prohibition of various forms of anti-competitive conduct. Examples of such activities include contracts, arrangements or understandings that substantially lessen competition; price fixing among competitors; the misuse of market power; vertical price maintenance; resale price maintenance; mergers and acquisitions; or exclusive dealing arrangements that have a substantially lessening effect on competition within a particular marketplace. The main source of Australian competition law is Part IV of the Competition and Consumer Act 2010 and case decisions interpreting this legislation.25

Contract and consumer law Laws governing the sale of goods and services deal with the matter differently in different countries although the intent of the legislation is much the same. In Australia, a three-tiered system of laws governs the sale of goods and services, comprising common law (reported decisions of courts), state legislation (such as the Sale of Goods Act and Fair Trading Act in each state) and Commonwealth legislation (in particular, the Competition and Consumer Act 2010). The following are some of the more important developments in this area: • Unconscionability –guidelines covering consumer as well as business-to-business activities that are deemed to be unconscionable (Competition and Consumer Act 2010, Part IVA). • Estoppel – preventing a person from departing from a representation or promise he or she has made, before or during a contract, in unconscionable circumstances and where detriment is caused to a person who has acted in reliance on that representation. The aim is to ensure that business people act in good faith and honour the legitimate expectations of those with whom they deal. • Consumer protection – enhanced remedies for enforcement of consumer laws; increased financial penalties for offences against consumer protection legislation; and ‘post-sale’ protection for subsequent owners of goods. • Complaints handling – more assistance to help companies identify and remedy weaknesses in their present schemes; for example, access to justice reports, Standards Australia, and Australian Standard ‘Complaints Handling’ (AS4269).26

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• Tendering, outsourcing and partnering – legal reforms governing tendering and outsourcing. • Electronic commerce – reforms to cover electronic contracting, electronic funds transfer (EFT and EFTPOS); use of ‘smart’ card technology; privacy in internet (and digital derivatives) commerce; and cybercrime such as hacking and identity theft.

Standards There continues to be a proliferation of standards at both global and national levels, within regions and at local level within nation-states. The movement to standardise legal requirements between countries (e.g. the World Trade Organization, or WTO) and trading partners also continues (e.g. the China–Australia Free Trade Agreement).

Product liability All marketing organisations know of the importance of quality control, yet somehow this does not always translate into error-free design, error-free manufacture, durable finished goods and accurate labelling. Class actions are endemic in the United States. In Australia and New Zealand, there has been a steady growth in class actions. This is because legislation introduced in Australia during 1992 liberalised the ability of plaintiffs to engage in representative or class actions.27

Marketing communication As we saw in Chapters 11 to 13, marketing communication takes many forms, any and all of which can be misinterpreted by customers. For example, a sales representative might stretch the truth when a lack of product knowledge means that a sale might be lost. This is usually the result of inadequate training. Misinterpretation is one thing but when communications are seen as harmful or unfair to consumers there may be significant consequences. Marketing organisations need to consider the legal implications of their choice of promotional tools and the information they provide customers. Where mistakes are discovered, businesses must move swiftly to remedy the errors. We are likely to see continuing legal attention paid to such areas as advertising of products claiming to be ‘organically grown’, ‘low-fat’ or ‘low GI’; non-disclosure of genetically modified foods; country-of-origin labelling; and privacy issues surrounding advertising on the web. Consumers frequently complain about unwanted messages and telephone calls and the legislation and regulations provide specific protections for consumers from businesses and organisations creating these unwanted communications.

Unwanted messages The Spam Act 2003 (Cth) is designed to ensure that those sending commercial electronic messages, such as email and text messages, are doing so only when the recipient has ‘opted-in’ to receive the message and, having done so, has the opportunity to be removed from such lists. That is, the sending of unsolicited commercial electronic messages – singly or in bulk – is prohibited under the Act. The Act also requires that the message clearly state who is sending the message and provide information for the recipient about how to be removed from the list. Today, spam that people receive is more than likely to originate overseas, and prosecutions are therefore much more difficult to effect. However, the Australian Communications and Media Authority (ACMA) makes provisions for consumers to report and complain about spam and undertakes to investigate consumer concerns.28 Unwanted calls The Do Not Call Register Act 2006 (Cth) aims to reduce the number of fixed-line and mobile telephone calls people receive from those trying to sell products or services or conduct research. The Act enabled a register to be set up in May 2007 so that individuals who did not want to receive telemarketing calls can register their landline and mobile phone numbers. Telemarketing organisations are required to check their telephone lists against the register to ensure they are not unwittingly breaching the legislation.

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Registration does not mean that all unwanted telephone calls stop. There are exemptions from the prohibition: charities, registered political parties, independent MPs and candidates, religious organisations, educational institutions (calling students and alumnae), government bodies and certain types of service calls. For example, when a business needs to recall a product, it is permitted to make calls to numbers on the register.29 ACMA has also established the Telemarketing and Research Industry Standard 2007 to govern telemarketing and research calls. The Standard applies to all types of businesses and organisations, including exempt organisations. The Standard covers such matters as permitted calling hours, minimum information requirements, calling line identification and when calls must be ended. For example, marketing research is allowed, but it is time-controlled – telephone research is not allowed on a Sunday after 5 pm. Telemarketing is not allowed at all on Sundays.30

Sales and after-sales finance When considering the matter of sales and after-sales finance, the first question marketing organisations must answer is whether or not credit will be extended to customers, and then what will be the nature of those credit facilities. It is sometimes said that second-hand car buyers do not buy cars; rather, they buy finance. By this is meant that car dealers differentiate their offerings by way of the financial terms offered to buyers, many of whom are low-income earners. The details of any credit policy must be spelled out: basic trading terms, settlement terms, rebate policy, collection procedures and use of credit referencing, among others. Once again, this is an area where employee education is vital. Employees involved in credit negotiations in Australia need to know such aspects of the law as the Consumer Credit Code, contract law, bills of sale, privacy legislation, commercial law, small claims procedures, bankruptcy provisions and, if a corporation, the Competition and Consumer Act 2010.

Franchising Franchises are one of the most popular and fastest-growing forms of business. Franchising is an area where specialised legal knowledge is required because of the exclusive rights and obligations granted under a franchise agreement. Such rights might relate to exclusive distribution rights in a particular geographic area, or the obligation to run a business in a particular manner and to pay management or other fees to the franchisor. Franchise agreements associated with image fast-food chains extend as far as giving the franchisor the right to decide who the business may be sold to and under what circumstances the agreement might or might not be renewed. A new Franchising Code of Conduct came into effect in 2015 and is a mandatory code under section 51AE of the Competition and Consumer Act 2010. It applies to all franchise agreements formed after 1 October 1998, with some provisions applying only to agreements made after 1 January 2015. The Code requires a comprehensive set of disclosures and provides a dispute-resolution procedure for franchise disputes. The main aim of the Code is to assist franchisees in making an informed decision prior to signing a franchising agreement. The Code is enforced by the ACCC.31 In addition to the Code and amendment regulations, many other laws apply to franchising, including the consumer protection provisions of the Competition and Consumer Act 2010, contract law, tort law, and intellectual property issues such as passing off.

Intellectual property Most marketers are aware of the need to be careful about making claims in relation to products and services, but many do not know as much about areas such as intellectual property (IP). IP involves such issues as copyright, trademarks, patents, designs, trade secrets and domain names. Yet, in an information age, intellectual property is rapidly becoming our most important asset. For example, the McDonald’s trademark is worth billions of dollars and ‘Big M’ is very diligent in protecting it. IP is to be distinguished from other

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forms of property, such as real property (e.g. land) or tangible personal property (e.g. a mobile phone). IP is a specialised area, requiring input from a number of professionals, starting with accountants and lawyers. Training in this area of legal compliance is needed on a national basis, as well as at the corporation level. Often driven by international developments, such as free trade agreements, intellectual property (IP) laws are constantly changing and marketers must be vigilant to ensure they are up-to-date about laws that affect them. The main areas covered by intellectual property laws include the following. Copyright protects individual ideas as expressed in various permanent forms, such as original literary, dramatic, musical or artistic works, sound recordings, films and broadcasts.32 A website featuring the opening of the Olympic Games may, for example, involve several elements of copyright. The opening score for the Olympic Anthem is a musical work. The lyrics constitute a literary work, and the broadcast of the event is itself protected. Likewise, photographs of sportspeople and sports events are copyright-protected as artistic works. Works of architecture, such as Melbourne’s Etihad Stadium, also enjoy copyright protection and may not be copied without authorisation. In fact, we each own the IP in our own photographic images.33 Design refers to the overall appearance of the product resulting from one or more of its visual features. Good examples of the marketability of design are seen in products such as Apple’s iPhones and iPads.34 Trademarks can be any sign capable of being represented graphically to distinguish goods or services. A trademark may consist of words, including personal names, designs, letters, numerals or the shape of goods or their packaging. Even sounds (the Harley sound) or smells (e.g. scented yarn) and distinctive combinations of colours may be capable of trademark protection. The Australian Football League has registered the sound of a football siren for football and associated services. Marques such as ‘MercedesBenz’ can be worth billions of dollars.35 Patent protection is given to an invention of a device, substance, method or process that is considered useful. A new drug, a new app, a new method of doing electronic business, a new tool or a new engine are all examples of possible patents. Standard patents can take a long time to process and be very expensive. For this reason, Australia recently developed the ‘innovation patent’ process to protect smaller inventions (e.g. a gadget). The filing procedures and level of inventiveness required of an innovation patent are less onerous.36 The Circuit Layouts Act 1989 protects the owners of computer-chip circuitry for 20 years. Such layout design is especially important in computer game simulations.37 Some IP (e.g. trade secrets) can be protected only if it is treated as confidential information. For example, Coca-Cola’s secret formula, a secret recipe or a hot new marketing concept may be given legal protection as long as it is kept in commercial confidence. Employees who access such trade secrets on a confidential basis have a legal duty to keep the information confidential and to use it only for the purposes agreed upon. The Competition and Consumer Act 2010 often comes into play in IP marketing cases. For example, using Ian Thorpe’s image and likeness, without permission, to sell your swimming pools would be a breach of the Act because you would be giving the impression there was a connection or relationship between you and Ian Thorpe that you do not have. The same conduct may also violate other laws, such as the tort of ‘passing off’. Marketing management people are likely to be under contract and therefore are protected by common law to the extent that, if their common law rights are breached, they can sue their employer for breach of contract. Or, they may make use of other applicable statute law provisions, such as that for misleading and deceptive conduct under the Competition and Consumer Act 2010 (e.g. Steve Targett’s lawsuit against the ANZ Banking Group) or discrimination under the Equal Opportunity Act (e.g. former PricewaterhouseCoopers partner Christina Rich’s case, alleging discriminatory behaviour by her employer). Courts may be more likely to look at ‘implied terms’, such as obligations of trust and confidence, or the incorporation of terms derived from company policy documents, and generally be prepared to ensure there is fair play by

465

intellectual property (IP) law Law involving such areas as copyright, trademarks, patents, designs, trade secrets and domain names.

copyright

Protects individual ideas as expressed in permanent forms such as original literary, dramatic, musical or artistic works, sound recordings, films and broadcasts.

design

Overall appearance of a product, resulting from one or more of its visual features.

trademark

Any sign capable of being represented graphically, distinguishing a good or service.

patent

A means of legal protection given to the invention of a device, substance, method or process that is considered useful.

Circuit Layouts Act 1989

Legislation protecting the ownership of computer-chip circuitry for 20 years.

confidential information

Intellectual property that can be protected only by keeping it confidential (e.g. trade secrets).

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Part 4  Extending marketing

employers. On the other side of the coin, employees need to ensure they are not seen to be ‘unemployable’ based on their willingness to litigate.38 There are many other legal developments that the marketer should be aware of, but this brief outline gives you the basic idea. Importantly, legal compliance is not a once-off affair. A legal compliance program must be constantly reviewed, audited and updated to keep abreast of important changes in the legal and ethical environment of business.

Linking the concepts Consumers and businesses alike take actions to promote sustainable marketing. Let us pause for a moment and consider the benefits of working together. ● Search online for examples of consumerism or environmentalism. Look at the responses of different businesses to this issue, and identify businesses where

responses are consistent with sustainable marketing principles and businesses that have behaved less favourably. ● From your online search, choose one instance where the company has not promoted sustainable marketing and identify the risks, obligations and legislation that might impact the company.

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Chapter 14  Sustainable marketing: Social responsibility, ethics and legal compliance

Student Learning Centre Reviewing the learning objectives

467

doing no environmental harm. They are adopting policies of environmental sustainability – developing strategies that both sustain the environment and produce profits for the company. Both consumerism and environmentalism are important components of sustainable marketing.

Learning Objective 4. Describe the principles of sustainable marketing. (pp. 453–57) Many companies originally opposed these social movements and laws, but most

In this chapter, we discussed many important sustainable marketing concepts

of them now recognise a need for positive consumer information, education and

related to marketing’s sweeping impact on individual consumers, other businesses

protection. Under the sustainable marketing concept, a company’s marketing

and society as a whole. You learned that sustainable marketing requires socially,

should support the best long-run performance of the marketing system. It should

environmentally and ethically responsible actions that bring value not just to

be guided by five sustainable marketing principles: consumer-oriented marketing,

present-day consumers and businesses, but also to future generations and

customer-value marketing, innovative marketing, sense-of-mission marketing

to society as a whole. Sustainable companies are those that act responsibly

and societal marketing.

to create value for customers in order to capture value from customers in return, now and in the future.

Learning Objective 5. Explain the role of ethics in marketing. (pp. 457–60)

Learning Objective 1. Define sustainable marketing and discuss its importance. (pp. 442–43)

Increasingly, companies are responding to the need to provide company policies

Sustainable marketing calls for meeting the present needs of consumers and

Of course, even the best guidelines cannot resolve all the difficult ethical

businesses while still preserving or enhancing the ability of future generations

decisions that individuals and firms must make. But there are some principles

to meet their needs. Whereas the marketing concept recognises that companies

that marketers can choose among. One principle states that such issues should

thrive by fulfilling the day-to-day needs of customers, sustainable marketing

be decided by the free market and legal system. A second, and more enlightened,

calls for socially and environmentally responsible actions that meet both the

principle puts responsibility not on the system but in the hands of individual

immediate and future needs of customers and the company. Truly sustainable

companies and managers. Each firm and marketing manager must work out a

marketing requires a smooth-functioning marketing system in which consumers,

philosophy of socially responsible and ethical behaviour. Under the sustainable

companies, public policy makers and others work together to ensure responsible

marketing concept, managers must look beyond what is legal and allowable and

marketing actions.

develop standards based on personal integrity, corporate conscience and long-

Learning Objective 2. Identify the main social criticisms of marketing. (pp. 443–49)

and guidelines to help their managers deal with questions of marketing ethics.

term consumer welfare.

its high prices, deceptive practices, high-pressure selling, shoddy or unsafe

Learning Objective 6. Discuss the need for and value of a legal compliance program in marketing. (pp. 460–66)

products, planned obsolescence and poor service to disadvantaged consumers.

Marketing organisations should adopt a legal compliance program in an

Marketing’s impact on society has been criticised for creating false wants and

endeavour to prevent legal problems. Such a program should uncover any

too much materialism, too few social goods and cultural pollution. Critics have

business practices that might expose the company to criticism or legal action.

also criticised marketing’s impact on other businesses for harming competitors

On a broader scale, such a program enables an organisation to meet the claims of

and reducing competition through acquisitions, practices that create barriers to

being an ethical marketer that it makes in its mission statement or its statement

market entry, and unfair competitive marketing practices. Some of these concerns

of values. The programs require continuous employee education and may, in

are justified; some are not.

some instances, be a defence in the event of employee malfeasance.

Learning Objective 3. Define consumerism and environmentalism, and explain how these concepts are linked to marketing strategies. (pp. 449–53)

Discussion questions

Marketing’s impact on individual consumer welfare has been criticised for

❶ What is sustainable marketing? Explain how the sustainable marketing concept differs from the marketing concept and the societal marketing

Concerns about the marketing system have led to citizen action movements.

concept. (Learning Objectives 1 and 4) (AACSB: Communication; Reflective

Consumerism is an organised social movement intended to strengthen the

Thinking)

rights and power of consumers relative to sellers. Alert marketers view it as an

❷ Social criticisms of marketing. Critics have charged that some businesses

opportunity to serve consumers better by providing more consumer information,

and marketing contribute to planned obsolescence. What evidence

education and protection. Environmentalism is an organised social movement

do you see supporting such a criticism? Discuss the bases for this claim

seeking to minimise the harm done to the environment and quality of life by

and how marketers refute them. (Learning Objectives 1 and 2) (AACSB:

marketing practices. Most companies are now accepting responsibility for

Communication; Reflective Thinking)

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Part 4  Extending marketing

❸ Marketing’s impact on other businesses and society. How can marketers respond to the criticism that marketing creates false wants and encourages materialism? (Learning Objectives 1 and 2) (AACSB: Communication; Reflective Thinking) ❹ Promoting sustainable marketing. Can an organisation focus on both consumerism and environmentalism at the same time? Explain. (Learning Objectives 3 and 4) (AACSB: Communication; Reflective Thinking) ❺ Legal compliance. What are the key features of a compliance system? What are the benefits for a marketer of developing and managing such a system? (Learning Objective 6) (AACSB: Communication; Reflective Thinking)

Critical thinking exercises ❶ Watch The Story of Stuff video at , or choose

❸ In a small group, discuss each of the morally difficult situations in marketing presented in Table 14.1. What legal and ethical guidance is applicable to each? Make a decision about each situation; clarify the costs and benefits of your decision, as well as the risks that apply in each context. (Learning Objectives 5 and 6) (AACSB: Communication; Reflective Thinking)

Navigating the key terms Learning Objective 1

sense-of-mission marketing  (p. 454)

sustainable marketing  (p. 442)

societal marketing  (p. 455)

Learning Objective 2

Learning Objective 5

Competition and Consumer Act

ethical marketing  (p. 458)

2010  (p. 444)

Learning Objective 6

one of these videos: The Story of Bottled Water, The Story of Electronics or

Sale of Goods Act  (p. 444)

The Story of Cosmetics. In a small group, critique the message in the video

Learning Objective 3

confidential information  (p. 465)

consumerism  (p. 449)

copyright  (p. 465)

and develop an argument to counter this point of view. (Learning Objectives 2 and 3) (AACSB: Communication; Teamwork; Reflective Thinking) ❷ Do a Google search on environment or sustainability awards to learn about the various awards programs recognising environmental consciousness

environmental sustainability  (p. 451)

design  (p. 465)

environmentalism  (p. 450)

intellectual property (IP) law  (p. 465)

and sustainable practices, including those in Australasia. Select one that

Learning Objective 4

recognised a business for a sustainable marketing practice and develop

consumer-oriented marketing 

a brief presentation explaining why the company received the award.

Circuit Layouts Act 1989  (p. 465)

(p. 454)

(Learning Objectives 1, 2, 3 and 4) (AACSB: Communication; Use of IT;

customer-value marketing  (p. 454)

Reflective Thinking)

innovative marketing  (p. 454)

legal compliance program  (p. 460) patent  (p. 465) trademark  (p. 465)

Mini cases 14.1 Consumerism Teenagers and social media Facebook changed its policy and now allows teenagers’ posts to become

to teenagers wanting the ability to post publicly, primarily for fundraising

public. Before the change, Facebook would allow 13- to 17-year-old

and promoting extracurricular activities, such as sports and other school

users’ posts to be seen only by their ‘friends’ and ‘friends of friends’. Now,

and student organisations. Facebook has added precautions, such as a pop-

however, their posts can be seen by anyone on the network if the teenagers

up warning before teenagers can post publicly and making ‘seen only by

choose to make their posts ‘public’. Twitter, another social medium gaining

friends’ as the default that must be changed if the teenager desires posts

popularity with teenagers, has always let users, including teenagers, share

to be public.

tweets publicly. But because of Facebook’s vast reach, privacy advocates

❶ What social criticism might be levelled at Facebook? Is Facebook

are very concerned about this latest development, particularly when it

acting responsibly or merely trying to monetise children, as critics

comes to children’s safety. Online predators and bullying are real safety

claim? (Learning Objective 2) (AACSB: Communication; Ethical

issues facing youth. Other criticisms of Facebook’s decision boil down to

Reasoning)

money – some argue that the change was just about monetising children.

❷ Develop some creative strategies for marketers to reach this

Facebook can offer a younger demographic to advertisers wanting to reach

demographic on Facebook without alienating parents. (Learning

them. Facebook defended its actions, saying the change in policy is due

Objective 4) (AACSB: Communication; Reflective Thinking)

14.2  Role of ethics in marketing Ethisphere’s most ethical Each year, Ethisphere honours businesses all over the world for their

businesses also often financially out-perform other similar businesses.

ethical business standards and practices. They point out that these

In 2016, the list included 131 companies from 21 countries and many

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Chapter 14  Sustainable marketing: Social responsibility, ethics and legal compliance

varied industries – everything from automotive to telecommunications. You

❶ Choose a business with which you are familiar (it could be your bank).

might be surprised to know – given the number of complaints made each

Review the business’s website and, using Ethisphere’s five ethical

year by customers of banks (the Financial Ombudsman Service receives

dimensions, evaluate the marketing practices of the business. What are

thousands of disputes, many about banks – that a number of Australian

the best and worst aspects of the marketing activities of the business

banks have been recognised among the most ethical businesses in the

you are reviewing? (Learning Objective 5) (AACSB: Use of IT; Ethical

world. How can a banker be ethical? Ethisphere’s approach to evaluating

Reasoning)

businesses’ ethical practices considers five ethical dimensions: (1) ethics

❷ What particular codes of practice and standards should marketers

and compliance programs, (2) corporate citizenship and responsibility,

in the business be aware of and how can these codes and

(3) culture of ethics, (4) governance and leadership, and (5) innovation and

standards assist in improving the ethical practice of the business

reputation (see ‘World’s most ethical companies® honorees’ at ).

Knowledge)

14.3  Marketing analytics at work The costs of sustainability Today, almost every supermarket has lines of organic and natural foods.

amount. Further assume that the organic farmer’s variable costs of

If you have priced organic foods, you know they are more expensive.

$0.80 per unit (100 grams) are twice as much as a conventional farmer’s

For example, a dozen conventionally farmed eggs at one supermarket cost

variable costs. Refer to Appendix 3 ‘Marketing analytics spotlights’ to

$4.79 (unit price $0.80 per 100 grams) whereas organic eggs from the

answer the following questions.

same producer are priced at $5.49 for half a dozen (unit price $1.83 per

❶ Most large egg producers sell eggs directly to retailers. Using the

100 grams). One study found that the average price of organic foods is

prices above, what is the farmer’s price per dozen to the retailer for

about 80 per cent more than that of conventional foods. However, if prices

conventional and organic eggs if the margin is 20 per cent, based on

get too high, consumers will not purchase the organic options. Organic

its retail price? (AACSB: Communication; Analytical Reasoning)

farming often costs much more than conventional farming, and those

❷ How many dozen eggs does a conventional farmer need to sell to break

higher costs are passed on to consumers. Suppose that a conventional egg

even? How many does an organic farmer need to sell to break even?

farmer’s average fixed costs per year for conventionally farmed eggs are

(AACSB: Communication; Analytical Reasoning)

$1 million, but an organic egg farmer’s fixed costs are three times that

14.4  Ethical reflection Rent to buy For some consumers, rent-to-buy plans might be the only way they could

report, the Australian Securities and Investments Commission (ASIC) found

ever afford to purchase some expensive home appliances. Take a look at

that customers are sometimes paying nearly 50 times more interest on a

and you will see stories of a family with a

rent-to-buy purchase than they would on an outstanding balance on a

poor credit rating urgently needing a new refrigerator being thankful for the

typical credit card. And, worse still, consumers receiving benefits were often

option to rent to buy. One happy customer explains that the rent-to-buy

charged much higher prices than those advertised. In short, there seem to

option offered the assurance of a manageable payment, a good quality item,

be enormous ethical challenges with rent-to-buy services.39

a good price (often such businesses have great buying power), insurance

❶ Suppose you were a marketing manager for a rent-to-buy service.

and support for replacements. Customers pay more overall when they rent

What sustainable marketing practices would you implement to protect

to buy but they can buy items they would never otherwise be able to afford.

vulnerable consumers? (Learning Objective 4) (AACSB: Application of

However, for every good review there is a multitude of bad reviews, raising

Knowledge; Ethical Reasoning)

concerns with everything from problems with direct debits, harassment, poor

❷ A compliance management system requires that a business have a

communication and no statements, to massive cancellation fees and more.

thorough understanding of the ethical and legal issues and people

The Money Smart website, , offers consumers

impacted by the business’s operations. What legal and ethical issues

advice to avoid the pitfalls of rent-to-buy schemes. However, each year, many

and which groups of people should be considered by a rent-to-buy

vulnerable consumers seem to be caught unprepared, paying exorbitant

service provider when developing a compliance management system?

prices and undergoing a very poor customer-service experience. In a recent

(Learning Objective 6) (AACSB: Application of Knowledge)

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Part 4  Extending marketing

References

1 See Wirra Wirra company website, ; as well as ‘Good for environment, good for business’, EPA South Australia, ; both accessed December 2016. 2 See Textart.ru database of slogans for GlaxoSmithKline taglines, , accessed January 2017. 3 For more on the Competition and Consumer Act 2010, see the 1 January 2011 compilation at ComLaw, , accessed December 2016. Also see the ‘Consumers’ page on the Australian Competition and Consumer Commission (ACCC) website, , accessed December 2016. 4 ‘Overweight and obesity’, Australian Institute of Health and Welfare, , accessed December 2016. 5 Elena Ferretti, ‘Soft drinks are the whipping boy of anti-obesity campaigns’, Fox News, 1 June 2012, , accessed December 2016; and see also ‘Obesity: Sugar-sweetened beverages, obesity and health’, Australian National Preventative Health Agency, 2014. 6 See the Choice website for reports, , accessed December 2016. 7 See, for example, ‘A snapshot of poverty in rural and regional Australia’, National Rural Health Alliance Inc., 14 October 2013, ; and also, ‘Bottle shops concentrated in low income Victoria’, Turning Point, 14 December 2011, ; accessed December 2016. 8 See Sydney Harbour Bridge and Harbour Tunnel toll charges at ; and also Jim O’Rourke, ‘Toll war revs up: Sydney drivers face congestion tax or road user-pay system’, The Daily Telegraph, 12 July 2015, ; and Maria Slade, ‘Tolling will be needed on Auckland’s motorways to combat congestion: Report’, Stuff, 21 June 2016; all accessed December 2016. 9 ‘Coles’ takeover approved by ACCC’, Inside Retail, 10 March 2016, , accessed December 2016. 10 See for example, Mal Gill, ‘Cheap mil and contracts on ACCC radar’, Farm Weekly, 9 November 2016, , accessed December 2016. 11 See Philip Kotler, ‘Reinventing marketing to manage the environmental imperative’, Journal of Marketing, July 2011, pp. 132–5; and Kai Ryssdal, ‘Unilever CEO: For sustainable business, go against “mindless consumption”’, Marketplace, 11 June 2013, , accessed December 2016. 12 See Unilever’s Australia website, , accessed December 2016. 13 Matthew Townsend, ‘Is Nike’s Flyknit the swoosh of the future?’, Bloomberg, 15 March 2012, , accessed December 2016. 14 See Alan S Brown, ‘The many shades of green’, Mechanical Engineering, January 2009, p. 22; and also IBM Global Asset Recovery Australia website, , accessed December 2016. 15 ‘San Francisco becomes the first city to ban sale of plastic bottles’, Second Nexus, 13 March 2015, , accessed December 2016. 16 See Haydn Shaughnessy, ‘The world’s most innovative companies, a new view’, 13 January 2013, ; and also, ‘The most innovative companies of 2013’, Fast Company, ; accessed December 2016. 17 See ‘Inside Patagonia’, , accessed December 2016. 18 See ASRC Catering, ; and also ‘ASRC Catering: Catering for a cause’, Social Enterprise Awards 2016, , accessed December 2016. 19 See Transparency International, ‘Bribe payers index’, ; and ‘Global corruption barometer 2013’, ; both accessed December 2016. 20 See the Australian Direct Marketing Association Code of Practice at ; and the Australian Market and Social Research Society Code of Professional Behaviour, ; both accessed December 2016. 21 This section on legal compliance in marketing relies on an initial report by Eugene Clark, Professor of Law, Griffith University. For more on Australian Standard AS3806

and its applicability to legal compliance programs, see , accessed December 2016. 22 See ‘ISO 19600:2014’, ; and also Standards Australia, ; both accessed December 2016. Other information from CompliSpace, ‘A new global standard for compliance: ISO 19600’, 15 September 2014, ; Ernst & Young, ‘ISO 19600 International standard for compliance management’, 2015,; and Governance Institute of Australia, ‘New compliance standard: AS/ISO 19600:2015’, 11 August 2015, ; all accessed December 2016. 23 Australian Competition and Consumer Commission, ‘Bunnings Building Supplies Pty Ltd’, , accessed December 2016. 24 Eugene Clark is co-author, with G Cho and A Hoyle, of Marketers and the Law, Law Book Company: Sydney, 2000. 25 For more on the Competition and Consumer Act 2010, see the 12 November 2016 compilation at Australian Government, Federal Register of Legislation, , accessed January 2017. 26 ‘The essential elements of complaint handling: A discussion of the Australian Standard on complaints handling (AS4269)’, ; and see also SAI Global Limited, ISO 10002:2004 Customer satisfaction – Guidelines for complaints handling in organizations, ; both accessed December 2016. 27 Referred to as ‘representative proceedings’ in state legislation; for example, Supreme Court Act 1986 (Vic). See N Francey, ‘High Court clears the way for class actions’, Australian Lawyer, 27 May 1995, on Carnie v Esanda Finance Corporation Ltd, in which the High Court took a broad view of such legislation and thus cleared the way for more representative actions to be utilised at the state level as well as at federal level. 28 For a good consolidation of the Spam Act 2003, visit Commonwealth Consolidated Acts at , accessed December 2016. See also NOIE, ‘Spam Act 2003: An overview for business’, Australian Communications Authority, , accessed December 2016. 29 To see more on the Do Not Call Register Act 2006 and/or to register your telephone numbers, visit the Australian Communications and Media Authority, , accessed December 2016. 30 The Telemarketing and Research Industry Standard 2007 is due to be updated. For current information about the standard, see the ACMA website, , accessed December 2016. 31 For more information about the Franchising Code of Conduct, see the Australian Competition and Consumer Commission website, ; and also the Federal Register of Legislation for the Competition and Consumer (Industry Codes—Franchising) Regulation 2014, and Competition and Consumer Act 2010 and amendments, ; all accessed December 2016. 32 The Copyright Act 1968 and amendments are available on the Federal Register of Legislation, , accessed December 2016. 33 See Privacy Law and Policy Reporter, , accessed December 2016. 34 Designs Act 2003 and amendments, , accessed December 2016. 35 Trade Marks Act 1995 and amendments, and also Trade Marks Regulations 1995, , accessed December 2016. 36 Patents Act 1960 and amendments, and also Patents Regulation 1991, ; and also IP Australia website, ; all accessed December 2016. 37 Circuit Layouts Act 1989 and amendments, and Circuit Layouts Regulations 1990, , accessed December 2016. 38 Tracy Ong & Marsha Jacobs, ‘Workers choose new ways to sue’, Australian Financial Review, 7 September 2007, pp. 10–11. 39 See Australian Securities and Investments Commission, ‘ASIC finds the cost of consumer leases can be as high as 884%’, 11 September 2015, ; and also Money Smart website, ; both accessed December 2016.

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Appendix

1

email [email protected]

Case studies

Marketing is much more than the sum of its parts. The case studies in this appendix

Realestate.com.au explores the journey of two Australian entrepreneurs who

show how the various marketing activities come together to shape businesses’

grew their online property business from its start in their garage to a publicly listed

direction and performance. A brief overview of each case study is presented here,

Australian company with an annual turnover of $500 million, in less than 20 years.

along with a table showing how these case studies are linked to and integrated

The entrepreneurs leveraged an understanding of changes in the technological

with the chapters in the book.

environment, together with insights into how to create value for their real-estate

Patagonia designs and sells high-quality outdoor clothing, with stores in

business customers – the website does not sell property but, instead, provides a space

Queensland, New South Wales and Victoria as well as throughout the United

for their customers to market that property. Launching this business when the internet

States. The case study shows how Patagonia is able to create and capture value

was relatively new, Google was just starting and YouTube did not exist, presented a

in the incredibly competitive outdoor-clothing market by understanding its target

massive challenge. The case explores the challenges of new product adoption, and

market and their needs. The case takes you on a journey through the company’s

highlights how future success will come from continued engagement with property

mission and marketing strategy, segmentation and differentiation of this successful

buyers.

business. The company has strong corporate social-responsibility goals and the

The final case takes you to Tasmania and an eco-walking business.

case illustrates how having such goals can be a differentiating and value-creating

The business offers unique holiday experiences for their customers in Tasmania’s

marketing feature – and not just something good to do.

World Heritage-listed national park. The case shows the importance of

The case study ‘Supermarket Wars’ takes you into the challenging marketing

understanding the target market, positioning and socially responsible product

battleground of fast-moving consumer goods. The case explores how Woolworths

decisions to create and capture customer value. Insights about the customer allow

and Coles have responded to changes in the marketing environment, with not the

the company owners to develop a digital and direct integrated communication

least of these changes being increased competition – both from new entrants,

strategy that reaches out to customers and which enables the business to enrich

such as ALDI, and from older competitors, such as IGA (Independent Grocers of

the customer experience from before they arrive for their holiday to well after

Australia). The case highlights the importance of marketing information to shape

they return home. The following table outlines how these four case studies link with the content

company responses as well as the responses themselves, from product assortment,

Tasmanian Walking Company

Realestate. com.au

Supermarket wars

of the chapters.

Chapter title

Patagonia

to pricing, sales promotion and distribution.

1

Marketing: Creating and capturing customer value

✓

2

Company and marketing strategy: Partnering to build customer engagement, value and relationships

✓

3

The marketplace and customers: Analysing the environment

4

Marketing analytics: Gaining customer insights

5

Buyer behaviour: Understanding consumer and business buyers

✓

6

Customer-driven marketing strategy: Creating value for target customers

✓

✓

✓

7

Products, services and brands: Offering customer value

✓

✓

✓

8

New products: Developing and managing innovation

✓

✓

9

Pricing: Capturing customer value

Chapter number

10

Placement: Customer value fulfilment

11

Communicating customer value: Advertising and public relations

12

Personal selling and sales promotion: Creating value in relationships

13

Direct and digital marketing: Interactivity and fulfilment

14

Sustainable marketing: Social responsibility, ethics and legal compliance

✓ ✓

✓

✓

✓

✓

✓ ✓

✓ ✓ ✓

✓

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✓ ✓

472

Appendix 1  Case studies

Patagonia: Hiking a value trail of marketing responsibility

and you might be asking yourself, ‘What makes Patagonia different from other

David Fleischman, PhD University of the Sunshine Coast, Australia

discusses how Patagonia uses its non-traditional marketing approach to craft

outdoor-adventure apparel and equipment companies?’ In fact, Patagonia prides itself on being anything but a traditional company. Accordingly, this case study authentic value-creation opportunities. It also examines how Patagonia builds relationships with consumers, and communicates and integrates its corporate social-responsibility initiatives with its products, to create long-term value for all of its stakeholders.

Marketing approach and value creation The marketing success of any company’s products centres on creating value with consumers. While many companies overlook the notion that consumption and, indeed, value creation comprise a process, Patagonia excels at creating value with consumers across the entire consumption experience. From the materials, manufacturing processes, transport and logistics, promotional communication, purchase and disposal of its products, Patagonia provides opportunities for consumers to be involved in the value-creation process. Patagonia’s application of value creation in the consumption process stems from a genuine understanding of its target consumers, and crafting a value proposition that appeals to their needs and wants. Patagonia understands that much of its consumer base has a desire to know how its products are sourced and produced, along with maintaining a premium quality standard. For example, before a consumer purchases a Patagonia product, he or she can explore what materials the product is made from, how it is made, how it is transported and ultimately made available for him or her to purchase. Patagonia provides consumers with opportunities to gain product knowledge and interact via its website and communication campaigns. Providing this information offers a pathway to create value via educating and sharing knowledge with consumers in the pre-consumption phase. Once a consumer purchases a product, Patagonia’s main goal is to deliver a premium quality product for the consumer to experience. Maintaining a level of premium quality allows Patagonia to achieve a high standard of value while

Courtesy of Patagonia

consumers use (value-in-use) its products. The craftsmanship of its products is guaranteed. Patagonia believes in the quality of its products so much that it offers consumers the option (and actually prefers they take up that option) to fix products that have simply worn out, rather than having them buy new products. Through its ‘Repair is Radical Act’ and ‘Worn Wear’ initiatives, Patagonia builds more value with consumers by providing them with instructions on how to maintain, care for and repair their products. To many consumers, this is a sign of a high-quality

Background Founded and headquartered in Ventura, California, USA, Patagonia is a privately held company that is renowned for designing high-quality outdoor clothing and surfing, hiking and fishing. There are 32 Patagonia stores in the United States and 36 internationally. Three are located in Australia – at Burleigh Heads, Queensland; Byron Bay, New South Wales; and Torquay, Victoria. In addition to its physical retail stores, Patagonia offers an online store with its full range of products, which can be ordered from anywhere in the world. With annual revenue nearing US$750 million, it would seem that Patagonia is a typical commercial outdoor-clothing company

Courtesy of Patagonia

equipment for sports such as skiing, snowboarding, mountaineering, rock climbing,

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473

product and represents value for money in the consumption process. It also marks

(See .) Most

a transition to the disposal point in the consumption process that makes Patagonia

areas of Patagonia’s business portfolio are accessible at its physical retail outlets

different from many other organisations.

and online store to communicate with consumers about the previous and ongoing

Often, when consumers finish using a product it is simply disposed of. Many organisations overlook this opportunity to reconnect or to continue creating value with consumers. For Patagonia, the disposal point in the consumption process

strategic initiatives. This allows consumers to interact with all facets of Patagonia’s business in person or digitally 24/7.

is perhaps where it creates the most value with consumers. At the disposal

Targeting

consumption point, consumers are encouraged not to buy new products they do

The result of Patagonia’s mission, and non-traditional strategic objectives, is a clear

not really need – a testament to Patagonia’s focus on designing durable premium

position of differentiation from its competition in consumers’ minds. Part of how

products. In addition, opportunities for other consumers to purchase and reuse

Patagonia has been able to establish its market position is through understanding

old, but still useable, products and to facilitate the repair or recycling of worn-out

its marketing environment and target audience. Much of Patagonia’s growth over

Patagonia gear are provided. Providing opportunities to create value with customers

the last seven years occurred during the fall-out of the Global Financial Crisis.

at the disposal point of the consumption process helps build deep and continuous

Rather than cut back on its marketing visibility or reduce the quality of products

relationships with consumers. Thus, consumers remain constantly connected to the

to offer cheaper products or to achieve better price margins, Patagonia relied on

company, which belies Patagonia’s consumer-centric and sustainable marketing

communicating its philosophy and focusing on the enduring quality and value of its

approach. But where does Patagonia’s consumer-oriented, sustainable, non-

products. In turn, this fulfilled consumer needs linked to larger sociocultural trends,

traditional marketing approach stem from?

such as frugality, value for money, reusing, repairing and recycling, during this time

Mission and strategy

period. Patagonia understood that many target consumers had a desire to spend their discretionary income more wisely on fewer, but high-quality, products that

Akin to most successful organisations, Patagonia’s approach stems from its

would last. Consumers appreciated a company that also committed to offering

founder, Yvon Chouinard. As current Patagonia CEO Rose Marcarlo states, ‘Yvon

pathways to purchase quality, used products or help them repair products they

Chouinard’s very basic philosophy has always been to make the very best product,

already owned. From Patagonia’s understanding of the marketing environment and

make it as durable as possible.’ On the surface, Chouinard’s philosophy seems to be

consumer trends during a difficult economic period, it was able to build authentic

product-oriented, which may not seem different from many similar organisations.

relationships with its consumers and better position itself against competitors.

However, the market orientation and practice of Patagonia’s philosophy with

However, some sceptics question Patagonia’s approach. Some believe

various stakeholders is what makes Chouinard’s approach unique. As he states, ‘…

Patagonia’s high prices and promotional materials are targeted to affluent

my lifelong mission is to prove business can indeed have a simpatico relationship

consumers who have the luxury of time to pursue adventures in exotic locations,

with the natural world.’ Ultimately, it is this philosophy that underpins Patagonia’s

rather than less-affluent budget-conscious consumers looking for value for

market-oriented mission statement: Build the best product, cause no unnecessary

money in durable products. Several of Patagonia’s stores are located in high

harm, use business to inspire and implement solutions to the environmental crisis.

socioeconomic areas, indicating some potential insight to the latter strategy.

Patagonia’s mission statement sheds light on the purpose, values and experience

Others note that Patagonia’s pathways for fixing and purchasing used Patagonia

that the company is trying to create for its stakeholders.

equipment are simply marketing strategies that steer consumers towards trading

However, when it comes to setting strategic objectives that support the

up and purchasing additional products they might be interested in. Despite some

company’s mission, Patagonia takes what many would consider to be a

scepticism on the authenticity of altruism embedded in Patagonia’s initiatives, the

counterintuitive approach. Patagonia’s recent strategy is actually focused on

company continues to maintain double-digit growth.

restraining growth. Many would consider this the antithesis of running a successful company in a capitalistic global market. Ironically, instilling objectives that many

Corporate social responsibility (CSR)

would consider to be anti-growth has generated double-digit growth. As founder

Along with well-positioned value propositions and consumer value-creation

Chouinard has been quoted, ‘I know it sounds crazy, but every time I have made a

opportunities, Patagonia’s corporate social-responsibility initiatives are often

decision that is best for the planet, I have made money. Our customers know that –

considered exemplary. Patagonia is widely noted as developing CSR initiatives

and they want to be part of that environmental commitment.’

that go above and beyond most other commercial companies. It has established

Patagonia also continues to diversify other areas of its business portfolio under

the Sustainable Apparel Coalition of organisations, which includes companies

the same philosophical mission. For example, Patagonia Provisions is a division

such as Target and Walmart. Patagonia founder Yvon Chouinard co-authored an

that looks to source sustainably produced food products designed to be taken on

award-winning book, The Responsible Company, which acts as a blueprint for

outdoor excursions. Its aim is to educate consumers about where food comes from

organisations that want to improve their CSR. In addition, Patagonia has also

and what is involved with sustainable food production. In addition, Patagonia has

provided consultation services to companies, such as Nike, that want advice on

also recently invested in Yerdle, a company that helps people reduce new product

enhancing their CSR. Other CSR initiatives Patagonia has developed include: the

consumption. Finally, Patagonia is listed as a ‘B-corp’ or benefit corporation.

Footprint Chronicles, which helps educate and connect consumers to the social

This entails being part of a consortium of businesses that share information and

and environmental impacts of the products they buy; the Worn Wear initiative,

resources with each other, aiming to create mutual value for all stakeholders in

which encourages consumers to fix their worn products by providing them

responsible ways beyond simply maximising profits. A review of Patagonia’s B-corp

with guides for caring and repairing products; the 1% for the Planet initiative,

annual report indicates numerous strategic objectives – beyond profit – that

which awards funds via its Environmental Grants Department to not-for-profit

exemplify the augmented value the company provides consumers of its products.

organisations that promote environmental sustainability and conservation; and

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Appendix 1  Case studies

the Cleanest Line Common Thread initiative, which supports recycling and/or

Patagonia’s anti-consumption and anti-growth approach? Would Patagonia’s

reselling and reusing products consumers no longer have a need for. All of these

marketing strategy and approach to business be suitable for all organisations?

initiatives contribute to Patagonia’s classification as a B-corp. Indeed, Patagonia’s CSR initiatives help further build the sense of value that consumers receive in consuming Patagonia products, by satisfying both immediate and future needs of its stakeholders. Beyond developing ethical and impactful CSR initiatives, Patagonia is unique in the way it embeds CSR into the organisation. Patagonia integrates and promotes its CSR initiatives in tandem with its products to further enhance consumer value. Many organisations develop CSR initiatives of merit, but few integrate and promote them in a way that demonstrate value via a connection to the consumer experience of using the products. Building narratives is Patagonia’s strategy for demonstrating to consumers the connection between its CSR initiatives and product value. For example, Patagonia’s annual catalogue is not simply a glossy magazine with pictures of its products and information about prices. Its catalogue is put together more like a coffee-table book that is filled with stories of people wearing Patagonia products, often partaking in adventures that connect with the company’s CSR initiatives. Patagonia also produces ‘mini-documentaries’ that demonstrate its manufacturing process by telling stories about its producers and suppliers in its supply chain through the Footprint Chronicles initiative. Patagonia also encourages consumers to interact on its website and share stories about their personal experiences with Patagonia products. Some stories are then showcased in a short documentary about how consumers have worn and repaired Patagonia products over the years, underpinning its Worn Wear CSR initiative. Using promotional elements that not only communicate and create visibility for its products, but also incorporate its CSR initiatives, helps make Patagonia’s CSR initiatives more tangible for consumers to connect with and become inspired by. Patagonia continues to be a leader in CSR and to build relationships that grow its consumer base through authentic value-creation opportunities across the marketing process. It accomplishes this with counterintuitive marketing strategies

Justify your answer. ❻ What types of CSR marketing initiatives does Patagonia employ? How might Patagonia continue to improve their CSR initiatives?

Sources

‘B-corp annual report – Patagonia’, 2014, available at , accessed 27 February 2016. Baer, D, ‘How Patagonia’s new CEO is increasing profits while trying to save the world’, Fast Company, 28 February 2014, available at , accessed 29 February 2016. Bradley, R, ‘The woman driving Patagonia to be (even more) radical’, Fortune, 14 September 2015, available at , accessed 3 March 2016. Chouinard, Y & Stanely, V, The Responsible Company, 2012, Ventura, CA: Patagonia. ‘Footprint−Patagonia’, 2016, available at , accessed 4 March 2016. ‘Inside Patagonia – Patagonia’, 2016, available at , accessed 3 March 2015. Mackinnon, J B, ‘Patagonia’s anti-growth strategy’, The New Yorker, 21 May 2015, available at , accessed 2 March 2016. PYMNTS, ‘Retail growth by not growing’, PYMNTS, 2 December 2015, accessed 1 March 2016. Ryan, K, ‘The bottom line: Patagonia, North Face, and the myth of green consumerism’, Groundswell Stories, 31 July 2014, available at , accessed 28 February 2016. Sacks, D, ‘Patagonia CEO Rose Marcario fights the fights worth fighting’, Fast Company, 6 January 2015, available at , accessed 29 February 2016. Stock, K, ‘Patagonia’s “buy less” plea spurs more buying’, Bloomberg Business, 28 August 2013, available at , accessed 1 March 2016. ‘Worn wear stories – Patagonia’, 2016, available at , accessed 28 February 2016.

that are anchored to its mission of creating the best-quality product with as little impact as possible on the world’s environment. Although some may question Patagonia’s altruism within its marketing strategies and consider it risky to develop business strategies that are anti-growth, Patagonia has experienced consistent growth over the last decade. Patagonia’s dedication to being a responsible B-corp that designs products and develops CSR initiatives that are integrated and promoted with a high level of integrity, demonstrates its ability to fulfil short-term consumer needs and focus on long-term value, which benefits all stakeholders it influences.

Discussion questions ❶ What marketing approach does Patagonia utilise? Justify your answer. ❷ What type of value might consumers associate with Patagonia products? What are some examples of how Patagonia creates various types of value with consumers via building relationships? ❸ Thinking about the target marketing process, how does Patagonia segment its target audience? Describe a profile of a typical Patagonia consumer. ❹ Think about the macro- and microenvironmental factors that influence organisations. What types of trends has Patagonia observed in the macro- and/ or microlevel environments? How have these trends influenced Patagonia’s marketing strategy? ❺ What other companies or industries may benefit or not benefit from utilising

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Supermarket wars:The battle continues!

from Australian sources (so just who are ‘the fresh food people’?). Both believe in

Jan Charbonneau University of Tasmania, Australia

obligatory smartphone app for ordering.

ethical sourcing, offering sow-stall-free pork and Fairtrade chocolate. Both offer the convenience of online shopping by delivery or ‘click and collect’ and have the Both use traditional (television and flyers) and online (websites and social media) media for promotion, and make extensive use of their celebrity chefs (Jamie

Every day, a fierce battle rages in Australia. At stake, the $88 billion Aussies spend

Oliver for Woolies; Curtis Stone and Heston Blumenthal for Coles) for product

annually on groceries (IBIS World, 2016). Yes … Australian consumers spend

development, branding and promotion. And both sponsor popular television-

$88 billion per year on milk, bread, toilet paper, chicken, frozen pizzas, pet food

cooking competitions (so, if I want to ‘cook like a Masterchef’, where should I

and chocolate bars.

shop?), ensuring maximum exposure for their brands and stores.

Aussies are spoiled for choice when it comes to where they spend their

But the main battleground for these two giants is price. Supermarkets are high-

$88 billion, from corner stores to large suburban supermarkets and endless options

volume, low-margin businesses. Cost of goods sold typically account for 75 per cent,

in between. Yet, for many years, two main players have dominated Australia’s

with overhead, including staff and stores, adding another 18 per cent. That leaves about

supermarket sector – Woolworths and Coles. While figures vary, the estimates are

7 cents out of every $1 of that annual $88 billion sales – and then, of course, there

that this duopoly control 60–80 per cent of the market. By comparison, in the United

are taxes and interest to pay! So, keeping customers is vital – but today’s customer

Kingdom, the two major chains (Tesco and Sainsbury) control 48 per cent, and in

is extremely price sensitive. According to the 2008 Grocery Inquiry, the majority

the United States, the top two control about 20 per cent (Wal-Mart and Kroger).

of consumers are likely to change supermarkets for as little as a 5 per cent price

If you think these two supermarket giants have been around forever, it’s because

difference (Australian Competition and Consumer Commission, 2008). Woolworths’

they nearly have. Woolworths – often affectionately called Woolies – opened its

own research suggests that 68 per cent of consumers actively look for price discounts,

first outlet in Sydney in 1924 as a ‘handy place where good things are cheap’.

with 47 per cent buying on price alone (Woolworths, 2014).

Today, Woolies employs over 111 000 Aussies at its almost 1000 supermarkets.

The two giants satisfy their consumers’ price sensitivity through sales promotion

Coles started as Australia’s first variety store in Melbourne in 1914, expanding into

pricing, offering regular weekly and daily specials, bulk buys and special promotions,

today’s network of almost 2300 stores and employing over 100 000 Australians

such as ‘Buy one, get one free’ and ‘Buy this, get that’. In the last couple of years,

who serve its weekly 20 million customers.

however, Coles and Woolies have gone one step further, with ‘everyday low prices’ – no need to wait for a sale, prices on these items are permanently reduced!

Australia’s giants battle it out

Since 2011, Coles has permanently reduced the price of 2000 products (Coles,

Since 2008, Woolies and Coles have been locked in a heated battle for each and

2015) and, in 2015, Woolworths invested $200 million in lower prices (Woolworths,

every Aussie supermarket dollar. Previous higher prices and lower quality had lost

2015). To get an idea as to just how competitive these two players are, when Coles

Coles significant market share, something they were determined to fix. As these

reduced the everyday price of its roast chickens to $8.00, Woolworths responded

two giants battle it out in each aspect of the marketing mix, it is often difficult to

by lowering theirs to $7.90!

determine who is winning as each move by one is countered by the other.

The winners in this price battle are clearly the consumers. Coles, for example,

keeping units, or individual products). Both supermarkets cater for every price

(Coles, 2015). But many of these in-store specials or ‘everyday low prices’ are

range, stocking their shelves from floor to ceiling with the big brands Aussies

‘brought to you by’ distributors, suppliers and producers. While supermarkets often

cannot live without; speciality offerings, such as ‘gluten-free’; lower-priced ‘basics’;

reduce their margins for special sales, the majority of the price reductions are the

and shelf after shelf of home brands.

result of lower wholesale prices.

Both are loyal Aussie companies, accessing 96 per cent of their fresh fruit and

So, why would a distributor, supplier or producer reduce its wholesale price,

vegetables, 100 per cent of their fresh milk and 100 per cent of their fresh meat

not just for weekly specials as they have historically done, but permanently? Like

sammybez/Alamy

claims its ‘big red hand’ can save Aussie households an average of $640 per year

martin berry/Alamy

The average supermarket contains between 20 000 and 40 000 SKUs (stock

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Appendix 1  Case studies

their supermarket customers, they are under pressure to generate sales, but with the added threat of having shelf allocations changed, ‘shelving costs’ increased or, worse, their products de-listed and replaced with home brands or parallel imports (brands purchased at lower prices overseas and imported) if they do not support price reductions. Next time you are in the supermarket, check out the number of home brands and you will quickly realise this is a bona fide threat. Despite this ongoing competition-based price battle, with each supermarket trying to best the other with its combination of sales promotion and ‘everyday low’ pricing, both Coles and Woolworths carefully manage pricing of their entire mix of products to ensure that overall profit does not suffer – thereby playing a very delicate balancing game. BUT – and it is a very large ‘but’ – change is afoot in supermarket land. Consumer demand and shopping behaviours have been changing, and new competitors are grabbing market share.

Australia’s changing shoppers

New players entering and old players changing While Coles and Woolies are Australia’s undisputed supermarket giants, they are facing some major competition. Perhaps the biggest threat to these giants is a player that opened its first Australian store in 2001 and offers fewer SKUs (around 1000) in smaller premises – ALDI. Although a new entrant in the Australian market, ALDI has a comparable history to Coles and Woolies, opening its first store in Germany in 1913. ALDI now has more than 7000 stores across three continents, including over 400 in Australia, with more on the way. ALDI stores are smaller – about 830 square metres – compared to Coles’ and Woolies’ average 4000 square metres (IBIS World, 2016). But ALDI manages to cram these smaller premises full of bargains on Aussies’ most-demanded and popular products, many under its own private label. ALDI bills itself as a ‘discount supermarket offering great quality at incredibly low prices’. Projections are that ALDI will hit $15 billion in annual sales by 2020, taking a serious bite out of the giants’ market share (AFN, 2016a).

In 2013, Woolworths commissioned a report analysing the changes to Australian

ALDI has already surpassed IGA (Independent Grocers of Australia) to become

supermarket shopping behaviours over the past 25 years (Woolworths, 2013).

Australia’s third-largest supermarket with market share of over 12 per cent, and

The report, Trolley Trends, revealed Australia has become a more cosmopolitan society,

is a key driver of reduced prices in the sector overall (Chung, 2016). And, for the

with Aussies developing a taste for such foods as lamb kofkas and chicken korma.

foreseeable future, each new ALDI store takes market share from existing players,

Even the traditional Aussie ‘roast and three veg’ dinner has changed and is now more

rather than cannibalising any existing ALDI stores.

likely to be roast chicken, not beef, with pasta or rice, not potatoes. Today’s shopper

While it is no longer number three, don’t rule out IGA just yet. IGA, the

looks for a wider range of fresh and healthy foods and spends more time preparing

backbone of many smaller communities, not only has expansion plans – it is now a

restaurant-style foods at home. ‘Superfoods’ such as kale, and ‘exotic’ ingredients such

player in the price game. Price reductions across the IGA network are supported by

as lemongrass, are now regularly stocked items. And, believe it or not, the second-

the efforts of Metcash, the wholesale, distribution and marketing company that has

best-selling grocery category is fresh fruit, surpassing staples such as milk (Han, 2015).

harnessed the purchasing power of 2400 independent grocers and convenience

Aussies have also changed their shopping behaviour, increasingly using

stores. IGA is now able to price-match hundreds of routinely purchased products

supermarkets like a pantry. Gone is the big weekly shop, with Aussies now

against the lower of Woolworths’ or Coles’ everyday shelf prices, ensuring ‘it

shopping an average of 2.5 times per week and buying, each time, an average

pays to shop independent’. Should the big players be worried? IGA shoppers are

9.5 products worth $36. Have you noticed more shopping baskets at store entries,

Australia’s most loyal, with 30 per cent of those who mainly shop at IGA only

trolleys getting smaller and even the stores themselves shrinking in size (e.g.

shopping at IGA – this compares to 25 per cent for Woolies, 24 per cent for Coles

Woolworths Metro)?

and 7 per cent for ALDI (AFN, 2015).

So, what about the supermarket of the future? Woolworths’ 2014 Future of

And, in a somewhat ironic twist, upmarket retailer David Jones, owned by

Fresh report suggests that for 2034’s main customers, now labelled Generation

South African Woolworths Holdings (not affiliated with Woolworths Australia)

Alpha, supermarket shopping will be more of a social experience. These hyper-

intends to move into the premium end of the grocery market, appealing to

connected consumers will view the local shopping centre as their ‘new village

Australia’s increasingly discerning ‘foodies’ (AFN, 2016b). In 2008, Woolies tried

green’, a place to connect with friends and neighbours. Their physical shopping

to do the same with its own ‘posh grocer’ – Thomas Dux – but could not make it

experience will focus on fresh and local produce and foodstuffs, with common

work, eventually closing down the brand. Perhaps another ‘Woolies’ can make it

household items most likely home-delivered (no more lugging 10-kilo bags of dog

work – time will tell.

food) and perhaps ordered automatically (via their ‘smart’ refrigerator/pantry).

Competition is likely to heat up even further as German discount chain Lidl,

2034’s shoppers will demand a ‘back-to-basics approach – food that is organic,

the fourth-largest retailer in the world, has signalled its intention to move ‘down

local, fresh and delivered daily’, focusing on the impact on their personal health.

under’, registering trademarks and assessing property.

Buying fresh is already important to four out of five Australians but 2034’s customer will be increasingly interested in the ‘social health’ aspect of their

Innovation for competitive advantage

purchases – the impact on ‘communities, growers, local farmers, and the

So, how will Australia’s grocers achieve and sustain competitive advantage?

environment’ – investigating the provenance of their purchases (e.g. its source,

Management guru Peter Drucker stated many years ago that the only sustainable

how it was made). Approximately half of all households are forecast to be singles

competitive advantage is innovation.

and couples without children so the focus on convenience is expected to continue –

Consider the transformation in business models as power has shifted from

watch as Australia’s supermarkets roll out more items designed to ‘save time’, such

suppliers to customers. Who would have thought that the world’s major source of

as pre-cut vegetables and healthy takeaway and fresh meals.

short-term accommodation would not own one room (think AirBnB) or the world’s

And, interestingly, price and value for money are expected to still remain

biggest taxi service would not own a car (think Uber). So, to remain relevant,

paramount – good news for shoppers, but perhaps not such good news for

Australia’s supermarkets, from the largest to the smallest, need to innovate in

supermarkets, distributors, suppliers and producers.

response to changing shopper behaviours and changing competitors.

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How do they do that? In its 2015 annual report, Woolworths nicely articulated the answer for supermarkets: ‘… innovating to meet market challenges and finding new ways to delight our customers … firmly embedding the customer at the core

477

how (and, indeed, if) each could create a unique position and sustainable competitive advantage in the supermarket sector. ❺ The focus on price and value for money is expected to continue into the

of all decision making’. So, for consumers, watch this space: Supermarket wars –

foreseeable future, with prices expected to continue going ‘down, down, down’.

the battle continues!

Discuss the short-term and long-term impacts of supermarket price wars.

Discussion questions ❶ How do Australia’s supermarkets provide value for their customers? ❷ Access Woolworths’ reports, Trolley Trends and Future of Fresh. Select one supermarket and prepare a report indicating how it could take advantage of the insights in these two reports. ❸ Identify four family or friends – two of whom do their main shopping (at least 75 per cent) at one of Australia’s main three supermarkets only (Coles, Woolies, ALDI), and the other two who routinely shop in at least two supermarkets. Interview each to determine: • •

why they are – or are not – ‘store loyal’ how they believe each of Australia’s main three supermarkets have responded to changes in the way that Australians shop

•

which supermarket they believe has the lowest prices, and why

•

how important they believe price is to supermarket selection

•

which supermarket they believe is winning ‘supermarket wars’, and why

•

any recommendations they would make to their preferred supermarkets (e.g. new products, opening hours, layout and so on). Based on the responses, prepare a report for one of the supermarkets as

to opportunities for competitive advantage. ❹ Visit , and . Compare and contrast the marketing mixes for these three supermarkets and discuss

Sources





AFN, 2015, ‘Aldi vs IGA: When does loyalty count?’, , 9 September. AFN, 2016a, ‘Aldi Australia’s $15 billion sales prediction, Morgan Stanley’, , 20 April. AFN, 2016b, ‘Will the David Jones entry into premium groceries be a success?’, , 15 February. Australian Competition and Consumer Commission, 2008, Report of the ACCC Inquiry into the Competitiveness of Retail Prices for Standard Groceries, , July. Chung, Frank, 2016, ‘Moody’s rings Aldi alarm bell for Coles, Woolies’, , 22 April. Coles, 2015, 2015 Annual Report, . Han, Esther, 2015, ‘Australia’s growing love for fresh fruit transforms typical grocery basket’, , 13 September. Hogan, Andrea, 2016, ‘The top 20 supermarket brands Australians say they cannot do without’, , 23 March. IBIS World, 2016, Supermarkets and Grocery Stores in Australia: Market Research Report, , February. Stuart Alexander, ‘Market overview’, . Woolworths, 2013, Woolworths Trolley Trends, . Woolworths, 2014, Future of Fresh, . Woolworths, 2015, Annual Report 2015, .

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Appendix 1  Case studies

Realestate.com.au: From garage start-up to market leader

The business model: Consumers versus customers

Geoff Fripp The University of Sydney, Australia

clarify the difference between what they call their ‘customers’ and what they call

Before we review how realestate.com.au became established, it is necessary to their ‘consumers’, as this will help us understand their business model and strategy. The firm views the visitors to their website as their consumers. These are people looking to buy, sell or rent property, as well as those just interested in viewing

Introduction

properties for sale. As these consumers access realestate.com.au’s services for free, they are not classified as customers. Instead, the firm’s customers are the real estate agents who take out paid subscriptions, as well as the media agencies who realestate.com.au

take out advertising space on their website.

Realestate.com.au is an Australian digital advertising business specialising in residential property listings, and is owned and operated by REA Group (ASX: REA). They are the market leader, with 95 per cent of all properties for sale being placed on their website. They have achieved strong levels of consumer engagement, with their website averaging almost 900 million page views per month in 2015. (REA Group, 2016) This is an impressive market position for a firm that was only set up in 1995 and did not start trading as realestate.com.au until 1998. The business was initially established by Marty Howell and Karl Sabljak, who first ran the operation out of their garage with the help of two family members (Kohler, 2005). Fast forward 20 years and, today, realestate.com.au is the prime asset of the REA Group, a publicly listed Australian company with an annual turnover in excess of $600 million and a net profit of $214.5 million in 2015–16 (REA Group, 2016). The Group have expanded operations into commercial property listings, media advertising, strategic partnerships and international operations. So how did a ‘garage start-up’ prove to be so successful and change the way Australians buy and sell property? And how do they still manage to remain the market leader when their main competitor (Domain, ) is a subsidiary of a major media operator in Australia? Let’s review their history and their current marketing strategy to find out the answers to these questions.

The internet world in 1995

It is important to note that while it is the customers that are the main sources of revenue, it is consumers that actually provide the value to the firm. This is because the greater the number of consumers visiting the website, the greater amount that the firm is able to charge for its listings and advertising space.

The challenges of new product adoption As you are probably aware, there are many industries that have been ‘disrupted’ due to the internet and its capabilities. And there are numerous success stories of new players becoming the market leader during the internet era, such as iTunes, Amazon and even Seek.com.au in Australia. But imagine the challenge that realestate.com.au was facing in the late 1990s as a service firm trying to sell intangible benefits. They had to convince real estate agencies to change from their traditional promotional practices of newspaper advertising to start spending money on online advertising. It is always difficult to break an established system that is working well for every party involved. Buyers were accustomed to scanning newspaper ads or viewing a real estate business’s shopfront window, and agents were content in getting the property vendor to ‘invest’ in a newspaper advertising budget that showcased, not only the property, but the real estate agency as well. Therefore, realestate.com.au had to clearly communicate the relative advantages of online advertising over traditional advertising. There were several key benefits that realestate.com.au communicated to agents, including: •

outside the geographic reach of the newspaper, such as interstate and international investors. •

It is likely that most students reviewing this case study would have grown up with the internet but, back in 1995, the internet was a relatively new concept. At that

au business in 1995 demonstrated a lot of foresight regarding the potential impact of the internet.

This extra information would deliver better-qualified prospects, who were already knowledgeable about the property, resulting in a more efficient sales

users, which was less than 1 per cent of the world’s population (Internet World and YouTube only started in 2005 (Hosch, 2015), the launch of the realestate.com.

The agents could provide more information for potential buyers, such as photographs and floor plans.

•

time, it is estimated that only around 16 million people worldwide were internet Statistics, 2015). And, keeping in mind that Google was not established until 1998

Online advertising will promote the property to potential buyers who are

process. •

Being an online advertiser would create a point-of-difference for the agency and lead to more clients in the long term. With its ongoing selling efforts (driven by extra staff numbers), realestate.com.au

managed to slowly gain traction and, by 2001, the team had achieved 15 per cent

While there are some advantages of being first to market, it also carries the

agent penetration, which represented around 1200 agencies (Baker, 2008).

burden of being responsible for educating the market – in this case, about the

But this rate of growth proved expensive and, by the late 1990s, the expenditure of

benefits of this new technology. Fortunately for realestate.com.au, Fairfax Media

the firm far exceeded revenues. As a consequence, they needed to bring in equity

(with their Domain website) did not follow them into online property advertising

partners (such as Macquarie Bank in 1998), resulting in the founding owners’

for another four years (Delvin, 2005), giving them some breathing space to get

share of the company being substantially diluted over a series of capital-raising

established and create their market.

transactions.

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The slow-moving dominant player Until the mid-1990s, the classified advertising section of the newspaper (property and jobs listings, in particular) were considered to be ‘rivers of gold’ by the major newspapers. This is because classified advertising generated high and almost ‘guaranteed’ profits, year after year. However, with the advent of the internet, the newspapers, like many other established industry leaders at the time, did not recognise the threat of this new technology. Typically, industry leaders perceived the online channel as a minor threat due to its low level of consumer usage and much lower profit margins – at the time. It was not until 1999 that Fairfax Media decided to set up its own online property-search website. And, in order to protect its newspaper advertising revenue, they decided to build a new brand and launched with domain.com.au (rather than leveraging their existing newspaper brand/s). Their initial strategy was built around heavy (and free) promotion in their own newspapers. They believed that, with their strong readership base, they would be able to catch-up and eventually dominate the online advertising market as well as they did the traditional newspaper advertising market. But they had given their competitor a four-year head start in signing up agents, and realestate.com.au had around 1000 agency relationships by that time.

Today’s continued success: It’s all about consumer engagement While the above discussion provides an overview of how realestate.com.au achieved its early success, we need to explore how they have managed to maintain their market dominance, particularly given the competitive threats they were (and still are) facing. A key success factor for realestate.com.au is their higher level of consumer engagement. This is a competitive advantage that they choose to publicise

Realestate.com.au have also introduced third-party provided services, such as access to a home-loan broker and a utility transfer service (where consumers can organise relocation of services with all their utility suppliers with one request). These services have the dual benefit of improving the overall service to the consumer, while also enhancing the firm’s revenue position. As you can see, realestate.com.au are developing their website to become a ‘one-stop shop’ for all consumer needs.

Information and inspiration Realestate.com.au’s research indicated that many consumers were viewing properties for general interest outside of their buying/selling property cycle. In other words, the website was starting to become a form of ‘entertainment’ for their audience. Management decided to reinforce this perception by developing engaging content, both online and in television advertising. The firm also decided to tap into the general interest in property, as demonstrated by the success of television shows such as The Block and Selling Houses Australia. And, in 2015, they launched their own web series called ‘Australia Lives Here’. This series profiles Australian celebrities, sports stars, actors and television chefs, allowing viewers to ‘tour’ inside their homes and to find out what makes a celebrity’s property their ‘home’. They have also launched a lifestyle content section on their website, to give consumers personal insights and inspiration about creating and styling a home. These extra facilities represent a move towards branded entertainment, where the website is engaging and entertaining its audience, rather than simply being a functional information tool. These services encourage consumers to regularly visit the website and perhaps start thinking about their next property. And even if such initiatives do not trigger the need for a property purchase, they bring more traffic to

regularly. For example, here are some key metrics that have appeared in their media

the website, which helps drive advertising revenues.

releases and investor presentations (REA Group, 2016):

Using advertising to broaden positioning

•

Ninety-five per cent of all properties in Australia are listed with realestate.com. au, as opposed to 72 per cent for Domain.

•

Realestate.com.au averaged 889 million monthly page views in 2016, which is 5 times more than Domain.

•

Realestate.com.au calculate that they control 85 per cent ‘share-of-time’ that consumers spend on realestate.com.au and Domain.

•

The realestate.com.au user’s average dwell-time on site is 6.1 times longer than for Domain. There are two main areas that drive realestate.com.au’s consumer engagement,

namely product design and website features, and entertainment and information.

479

In 2014, Arnold Schwarzenegger became the spokesperson for realestate.com. au. Schwarzenegger, as a high-profile Hollywood actor, was virtually guaranteed to achieve cut-through and most likely to go viral. This advertainment series consisted of seven television commercials that were humorous in nature, based on the premise that Schwarzenegger had confused Australia with his home country of Austria. To launch the television commercial, the firm booked space on all free-to-air channels, plus subscription channels, plus main digital-advertising channels – all at the same time – in order to maximise the commercial’s reach. The firm targeted

Product design and website features

the 6.20 pm time slot as this was the peak usage time for technology by Australian

In terms of product design, it is clear that realestate.com.au are a fast adopter of

consumers. Accordingly, the television ad was able to reach 2.7 million people in

technology and generally lead the property-advertising market with innovation.

the first night alone (realestate.com.au, 2014).

Being at risk of becoming a generic offering, the firm needs to ensure they offer

The key goal of the television commercial was not brand awareness, but was

clear service differentiation. In addition to regular improvements to their website

designed to broaden the firm’s positioning from being simply a property-search

in terms of simplicity and ease of use, some of the extra functionality they have

website to being a full one-stop shop for all property needs.

recently introduced includes: budget

Growing revenues: From price penetration to value-added pricing

a price-lookup service that estimates the value of virtually every property in

When the firm first started in the late 1990s, the concept of online advertising

Australia

was new and consumers generally turned to newspaper listings for their property

•

a ‘find an agent’ guide to help choose the best real estate agency

search. This traditional consumer behaviour, as well as the relatively low level of

•

a renovation calculator to help consumers estimate the total cost of potential

internet penetration at the time, meant that the start-up business had to price its

renovations.

services quite low initially.

• •

a ‘discover’ facility that helps consumers identify suburbs within their financial

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Appendix 1  Case studies

Market-penetration pricing is designed to reduce financial risk and remove price as an obstacle to the sale in order to maximise sales. Like many internet-based businesses at the time, the firm’s focus was on maximising the customer base, with the plan of dominating the market and eventually generating strong revenue due to their large-scale size. (Note: You may be aware that Facebook did not engage in advertising in its first years in order to achieve strong usage levels before doing so.) Despite a few shaky years where the firm’s investment in growth exceeded their revenue and most of their capital injections, the overall revenue plan has worked. With almost 900 million page views per month, realestate.com.au has the ability to reach virtually all serious property buyers in the country. And along with their 65 per cent audience exclusivity (REA Group, 2016), their dominant position gives the firm the ability to charge higher subscription fees per month to the real estate agencies, as well as higher rates for their advertisers. Another advantage of their traffic volume is the degree of competition between real estate agencies. By offering the option for a property to be listed higher in the consumer’s online search results, realestate.com.au has been able to continue to grow revenue. Many agents are now choosing this extra option (known as depth products) and, in many cases, passing the extra cost on to the property vendor. This has the overall effect of increasing the revenue per listing, while having thousands of real estate agents effectively acting as a salesforce selling advertising to the end-consumer.

Migration to mobile and their future Realestate.com.au is tapping into the trend of consumers using multiple devices. Australians now spend more time on their devices than they do watching television, and consumers tend to carry a device with them most of the time. The firm has recognised that consumers access their website via multiple devices and have provided consumers with the ability to access their realestate.com.au account from any device and automatically sync their preferences and favourite property selections. In 2015, the number of visits to the firm’s website via smartphones accounted for over 20 per cent of their total traffic (REA Group, 2016). As a result, the firm is focused upon consumer retention across all devices and technologies. For example, at the start of 2016, the firm announced that their app had been downloaded more than 5 million times (realestate.com.au, 2016). And, in 2015, they were first to market with an app for the Apple Watch, which sends property alerts to consumers for relevant and nearby properties (a form of location-based marketing). It is likely that the digital property-advertising market in Australia is approaching maturity and, with 95 per cent agent penetration, there are only limited growth

prospects for the firm domestically without the addition of new services. This is why the REA Group overall is now pursuing international expansion.

Discussion questions ❶ There are several extra services and website features discussed in the case. Outline the firm’s product offering, using the three levels of products model. In which of the three levels do you think realestate.com.au have achieved their greatest degree of service differentiation? ❷ The case suggests that the firm’s revenues are reaching maturity in the Australian market. What new product ideas do you have for the firm? (Please consider both the firm’s consumers and their customers.) ❸ What are the competitive advantages of Fairfax Media (with their Domain website)? What marketing activities would you recommend for them to implement in order to challenge realestate.com.au for the market leadership over time? ❹ The product was adapted over time because of the relative advantages and extra benefits doing so offered to the market. Other than these superior product benefits, what were the other factors that contributed to the success of this new product? ❺ Do you agree with REA Group’s pricing approach? Why, or why not? As part of your answer, outline the risks inherent in the firm’s approach to pricing strategy.

References

Baker, S, 2008. Property Portal Watch [Online], , accessed 14 February 2016. Delvin, D, 2005. Sydney Morning Herald [Online], , accessed 13 February 2016. Hosch, W L, 2015. Encyclopedia Britannica [Online], , accessed 12 February 2016. Internet World Statistics, 2015. Internet World Stats [Online], , accessed 14 February 2016. Kohler, A, 2005. Sydney Morning Herald [Online], , accessed 13 February 2016. REA Group, 2016. REA Group Investor Presentation FY 2016 [Online], , accessed 14 February 2016. realestate.com.au, 2014. Media release: Arnold Schwarzenegger fronts new realestate. com.au brand campaign [Online], , accessed 12 February 2016. realestate.com.au, 2016. Media release: More than 5 million downloads [Online], , accessed 11 February 2016.

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Appendix 1  Case studies

Tasmanian Walking Company: Balancing luxury and adventure in a sustainable experience

481

the organic skincare range supplied by LI’TYA (Li’tya, 2016). Before introducing this new activity, TWC had to adapt certain treatments to ensure they maintained their focus on sustainable resource usage. Their outdoor bathing pavilion, for example, was only possible through the installation of additional rainwater tanks. If, during summer, rainwater is scarce, TWC cease offering this spa treatment.

Gemma Lewis, PhD University of Tasmania, Australia

In 2014, the new owners of TWC achieved their vision of adding a third product to the eco-tourism operation: the Wineglass Bay Sail Walk. This land-and-water tourism experience guides customers in small groups around Maria Island, Freycinet Peninsula and Schouten Island. During the day, guests walk among the coastal wilderness and, of a night, enjoy three-course dinners aboard the company’s luxury yacht, Lady Eugenie. In October 2017, the company will launch a fourth eco-tourism product targeted to the true adventure seeker, the Three Capes Lodge Walk, in Tasmania’s Tasmanian Walking Company

rugged south. This experience will offer customers a second long-distance and challenging bushwalk experience, similar to that offered by the Cradle Mountain Overland Track.

Managing customer expectations and creating value Ensuring their guests have realistic expectations and are prepared for walking in the alpine or coastal wilderness can be challenging for TWC. On the TWC website, potential customers can click on a page titled, ‘Which walk is right for me?’, where

For over 25 years, the Tasmanian Walking Company (TWC) has been marketing

they match up their interests and fitness levels with the three different walks currently

multi-day guided walks; enabling people of all backgrounds and fitness levels

on offer. A detailed itinerary for each walk is also available online, so that consumers

to experience some of the world’s most iconic mountain and coastal scenery.

can learn about what to expect on each day of their multi-day walk experience.

The founder, Ken Latona, was a pioneer in establishing accommodation-based walks

At their company headquarters, TWC’s small marketing and sales team are

in Australia. Using his architectural expertise, he won the right to design and develop

responsible for managing the company’s customer database and implementing

the Cradle Mountain huts on Tasmania’s world-famous Overland Track. To this day,

their pre- and post-walk communications strategies. Part of this process is gaining

these remain the only private accommodation offering along the track. The Cradle

insight into customer needs and identifying opportunities for new target markets

Mountain Huts Walk has been enhanced and improved since its beginning some

or new products. The sales team are also responsible for interacting with customers,

30 years ago. The most challenging and, at six days, the longest of TWC’s

and managing the online reservations and booking system.

experiences, the walk takes guests into the heart of Tasmania’s World Heritagelisted Cradle Mountain–Lake St Clair National Park.

Once consumers decide on their walking experience, TWC use pre-walk communications and direct marketing to generate the sale and ensure their

TWC’s domestic customer profile comprises of mostly mature (45–65

customers have all the necessary preparatory information. After their initial

years of age) consumers living in urban areas and who are seeking a luxury,

enquiry, customers are personally emailed an itinerary, a ‘gear list’ and a link to

adventure- and nature-based experience. They tend to be retired professionals

frequently asked questions (FAQs). TWC have also produced short videos (which

(e.g. doctors, lawyers) – in other words individuals with a high disposable income

are emailed to customers or made available online) in which their guides explain

and willingness to pay for a guided nature walk, rather than undertaking the

the importance of certain equipment, such as proper hiking boots, thermal clothing

experience independently.

and gaiters. In most cases, guests will have four to five real-time conversations

In addition to targeting high-income consumers in the Australian states of

with TWC prior to arriving for their walk. This approach enables TWC to fully

Victoria, New South Wales and Queensland, TWC target overseas tourists, and have

understand the customers’ needs and, in turn, customers can ask questions and

successfully raised their profile (via international trade shows) in the United States,

volunteer feedback. TWC’s small marketing team pride themselves on their ability

the United Kingdom and Japan. Interestingly, although Chinese tourists rank

to provide this one-to-one interaction and personal service. They understand that

Australian beaches, the Australian wildlife and Australian food and wine as their

multi-day walks are out of the comfort zone for many of their customers; hence,

top three attractions (Tourism Australia, 2015), they are not currently a target

they place significant emphasis on ensuring guests arrive in Tasmania feeling happy

market for TWC – possibly because they are less interested in consuming these

and excited, rather than nervous and anxious.

experiences while undertaking a multi-day adventure walk.

When customers arrive at the company’s headquarters to commence their

After many years offering just the one walking experience, TWC added to their

walking experience, they are personally greeted by the guides and, over coffee, go

product portfolio in 1999 when they launched the four-day Bay of Fires Lodge Walk.

through a hands-on induction process and final briefing. All guests are required to

This walk allows the company to tap into a new market segment – consumers

bring appropriate walking gear, which is checked by guides prior to departing for

looking for a beach-walk experience rather than bushwalking (Tasmanian Walking

the walking experience. During these formalities, TWC guides are also getting to

Co., 2016). More recently, TWC have built an ecologically sustainable day spa at

know the guests and establishing a positive dynamic among the group, which is

the award-winning Bay of Fires Lodge, where guests can enjoy treatments using

never more than 10 people.

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Appendix 1  Case studies

TWC guides are subject to intense training to ensure they deliver high levels of

Keeping the company’s online community and social media presence up-to-

service and hospitality. They are the company’s most important asset. Their actions,

date is time-consuming for a small business and presents additional challenges

knowledge of flora, fauna, history and geology, and their engaging personalities, all

in terms of user-controlled content. The high-quality and personal experience on

add significant value to their relationships with customers and between the guests

offer does mean that the majority of customer-created content in which TWC is

themselves. TWC staff are profiled on the TWC website and social media so that

tagged, is positive. However, like all businesses, TWC must manage the risk of

customers can begin to establish a personal relationship with the guides/company

negative word of mouth spreading via this medium. They do so via their post-walk

as they do their research.

communications with customers; in addition, guides are instructed to report any

Personal selling and marketing communications

issues with the company in their follow-up reports.

Current and future customer needs

Not surprisingly, guided multi-day walks that combine sustainable adventure travel

Understanding customer needs, both now and in the future, is a vital element

and contemporary luxuries are not a product every tourist can afford – for example,

of TWC’s marketing success and their new product development strategy. Even

a TWC walk currently retails for approximately $3000 per person. TWC purposely

when customers demand new features, such as day spa treatments, within the

avoid targeting mass markets with their product, as maintaining small groups and

guided-walk experience, TWC are able to deliver. Collaboration at an industry

a feeling of exclusivity adds value to the consumer experience. Each walk is priced

level assists TWC to generate ideas from external sources, and stay on top of

as a package, inclusive of transport to and from the destination, accommodation,

market trends. The company are founding members of Great Walks Australia

all meals and a personal guide. Customers are expected to provide all of their own

and Great Walks of Tasmania. Both networks comprise only guided walks that

walking equipment, and can pay extra for spa treatments during the Bay of Fires

epitomise quality and best practice in the industry. Great Walks of Australia, for

Lodge Walk.

example, has just nine walks in their collection, two of which are TWC products

Through attending travel and tourism trade shows, such as the Australian

(Great Walks of Australia, 2016). Similarly, Great Walks of Tasmania currently has

Tourism Exchange (ATE), TWC are slowly building up their profile in international and

only six members. As a member of these networks, TWC obtain new ideas for

overseas markets. ATE connects Australian tourism businesses with wholesalers and

additional services they can add to their product, and benefit from referral activity

retailers from around the world, via a mix of scheduled one-on-one appointments

between businesses.

and broader networking events (ATE, 2016). TWC participate in this event on an

Although other members of these networks offer similar walking experiences,

annual basis. In preparation for their attendance at the ATE, TWC’s personal selling

TWC do not view them strictly as competitors. Instead, by encouraging customers

and sales-promotion activities commence approximately two months prior, as they

to experience other walks around Australia, TWC and their fellow network

identify – online – the wholesalers and retailers they would like to meet with at

members are adding to demand for the sector as a whole. Once customers have

the actual event. ATE organisers then match up TWC’s preferences with those

had their first guided-walking experience, they tend to want to experience a second

wholesalers and retailers that have opted to speak to them. Upon receiving the

or third walk in a new location. For example, if a customer has visited Tasmania and

schedule, TWC’s Director of Sales and Marketing prepares herself for a busy four

completed a Maria Island walk (a product offered by another walking company),

days of 15-minute meetings with approximately 100 inbound tour operators and

their interest and desire to complete a different guided walk on their next trip

wholesalers, such as Flight Centre Global, where she explains the TWC product and

is enhanced by the high-quality experience they have already had. TWC invest

what new features are available for the coming tourist season.

heavily in managing relationships with their customers so they will return and

In terms of marketing to the domestic market, TWC work closely with public

experience another product in the TWC portfolio, or experience the same walk

relations specialists to attract the ‘right’ type of journalists and media personalities

again in a few years’ time. They do so by keeping in touch with their customer base

to participate in their guided walks. After immersing themselves in the experience,

via e-newsletters and social media, and offer return customers a discounted price

journalists produce stories about the TWC offering, which are published in both

on their next TWC walk.

print magazines and online travel blogs. Importantly, TWC can then share these stories, visual imagery and testimonials via their own website and social media.

Managing the product life cycle (PLC) is another important aspect of TWC’s marketing strategy. The Cradle Mountain Huts Walk is the most mature of their

In addition to utilising testimonials by others, TWC encourage their customers to share their own experiences (post-walk) via social media – and, in particular, photos they have taken. This type of promotion is a key part of TWC’s advertising strategy, and helps to engage new and future customers in an online community. When TWC upload their own imagery and posts, they avoid using hard sales tactics and can subtly share content that is engaging and educational. TWC also ensure the season, so that followers get an accurate idea of what to expect if they were to experience a certain walk at that time of the year. For example, in winter, TWC will upload and share images of walkers going through snow and complement this with comments such as ‘Rug up and get walking’ or ‘With the first autumn snows falling in the mountains, it’s time to start making your winter plans.’ TWC also share high-quality educational videos on their Facebook page so potential customers can learn about native Tasmanian wildlife.

Tasmanian Walking Company

that any of their company blog and social media posts are relevant according to

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Appendix 1  Case studies

483

products; however, TWC prevent sales from going into decline by continually

(also known as the ‘Green Army’), to remove weeds from wildlife sanctuaries or

improving – among other things – the sustainable accommodation, food and wine

to clean up rubbish from natural areas, such as Forester Beach (along the Bay

on offer. The worldwide reputation of Cradle Mountain also helps TWC maintain

of Fires Lodge Walk). Furthermore, when the company require new materials

demand for this product. In addition, TWC maintain their exclusive rights to being

such as staff uniforms, they conduct extensive research to ensure they purchase

the only private-accommodation provider along the Overland Track (all other

from businesses who share the same values as TWC. Dealing with like-minded

walkers have tents and public huts as their only accommodation option). This gives

companies is another important component of TWC’s sustainable marketing

the company a significant advantage in terms of access; even when the weather is

strategy, and helps to validate the message that they uphold their environmental

poor, TWC can still offer their customers a comfortable winter-walking experience.

and social responsibilities.

Other products in the TWC range are at different stages of the PLC. The Bay of Fires Lodge Walk and Wineglass Bay Sail Walk, for example, are arguably in

Where to next?

the growth phase, while the upcoming Three Capes Walk is still in the product

Like any other small, eco-tourism business, TWC are subject to the same challenges

development phase. Having a range of walks at different stages in the PLC helps

of seasonality, external market trends and competition. Yet, their clear focus on

ensure that TWC maintain their profits well into the future. Furthermore, renting

providing high-quality adventure experiences within the natural environment has

the Bay of Fires Lodge out to other businesses during the off-season for walking,

provided them with a source of competitive advantage, which the owners are

such as to photographers to run photography workshops, provides another revenue

planning to grow in years to come. Maintaining their points of difference requires

stream for the business.

a triple-bottom-line approach to protecting and enhancing nature and making a

Social and environmental sustainability

profit. Similarly, TWC must attract passionate and authentic staff to deliver their high-quality experience and uphold their company values. Having recently won Gold in the ecotourism category at the Qantas Australian Tourism Awards, TWC’s

Despite changing ownership over the years, TWC’s core values have remained

future looks very bright.

the same. The flat-structured company is built on the notion of environmental

Discussion questions

sustainability and social responsibility. Their tag-line ‘It’s in our nature’ has a dual meaning. First, the walks are based in Tasmania, which is the company’s ‘natural’ and physical environment. Second, and more importantly, every staff member employed by TWC is deeply passionate about environmentally sustainable adventure travel, and upholds these values in the luxury experience and knowledge they provide. Nature and environmental responsibility are very much integral to the organisation and underpin TWC’s marketing strategy. Sustainability is also a key element of the TWC brand. Right from the beginning, the company have used environmentally sustainable practices and materials to build their guest accommodation, which is a perfect example of providing modest luxury experiences in the natural environment. All buildings are solar powered; rainwater is collected in tanks and then recycled; heating uses renewable gas; and food and living supplies are brought in and all litter taken away. These actions have assisted the company to gain Advanced Ecotourism certification, and win numerous awards at a national and state level. The company also follow bestpractice track guidelines on all of their walks, which ensure customers and guides follow designated trails, remove all waste and recycle wherever possible. Given their location in a World Heritage-listed national park, the Cradle Mountain huts are subject to the highest levels of environmental scrutiny. However, TWC embrace these standards and, through their sustainable marketing, ensure they leave the natural environment in a better condition than when they arrived. Through their sustainable marketing initiatives, TWC are focused not only on enhancing the natural environment for future customers to enjoy, but also on giving back to the community. The company, for example, buy almost all of their produce and supplies locally. They make a point of using local cafés to source

Note: Students are encouraged to visit the TWC website () for further and up-to-date information. ❶ Identify what you think makes the TWC market offering unique. What is the likely combination of tangible goods and pure services involved in each of TWC’s guided walking products? ❷ What challenges do TWC face in terms of ensuring their product offering and business model remain sustainable? How might a company of this size manage an increase in demand while also ensuring the natural environment is protected? ❸ How do TWC use direct marketing to build one-to-one relationships with their customers? What are the benefits of TWC’s using direct marketing with their customers? ❹ Why are networks and industry relationships important to TWC? What other strategies could an eco-tourism business of this size use to source ideas and incorporate into its new product development strategy?

References

Australian Tourism Exchange (ATE), 2016, ‘About ATE16’, , accessed 29 July 2016. Great Walks of Australia, 2016, ‘The walks’, , accessed 5 August 2016. Li’tya, 2016, ‘About Li’tya’, , accessed 29 July 2016. Tasmanian Walking Co., 2016, ‘Your walking tour guides’, , accessed 29 July 2016. Tourism Australia, 2015, ‘China: Market profile’, , accessed 24 October 2016.

packed lunches for their customers as they travel to the starting point of their

Acknowledgements

walk. This helps to support the local economies and business community in remote

The author wishes to thank Tasmanian Walking Co., and in particular, Ros Young

Tasmanian towns such as Derby and Sheffield, and provides regular and significant

(Director of Sales and Marketing), for generously providing information and

food orders that keep locals employed. In addition, TWC staff regularly volunteer to

imagery for the purposes of this case study. For more information on Tasmanian

work with environmental organisations, such as Conservation Volunteers Australia

Walking Co., visit their website: .

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Appendix

2

The marketing plan: An introduction

As a marketing manager, you will need a good marketing plan to provide direction

Finally, marketing research helps marketers learn more about their customers’

and focus for your brand, product, company or other type of marketing organisation.

requirements, expectations, perceptions and satisfaction levels. This deeper

With a detailed plan, any marketing organisation will be better prepared to meet

understanding provides a foundation for building competitive advantage through

demand by launching a new product or building sales for existing offerings.

well-informed segmenting, targeting, differentiating and positioning decisions.

Non-profit organisations also use marketing plans to guide their fundraising and

Thus, the marketing plan should outline what marketing research will be conducted

outreach efforts. Even government agencies put together marketing plans for

and how the findings will be applied.

initiatives such as building public awareness of proper nutrition and stimulating

The role of relationships

area tourism.

The purpose and content of a marketing plan

The marketing plan shows how the company will establish and maintain profitable customer relationships. In the process, however, it also shapes a number of internal and external relationships. First, it affects how marketing personnel work with

Unlike a business plan, which offers a broad overview of the entire organisation’s

each other and with other departments to deliver value and satisfy customers.

mission, objectives, strategy and resource allocation, a marketing plan has a more

Second, it affects how the company works with suppliers, distributors and strategic

limited scope. It serves to document how the organisation’s strategic objectives

alliance partners to achieve the objectives listed in the plan. Third, it influences

will be achieved through specific marketing strategies and tactics, with the

the company’s dealings with other stakeholders, including government regulators,

customer as the starting point. It is also linked to the plans of other departments

the media and the community at large. All of these relationships are important to

within the organisation. Suppose a marketing plan calls for selling 200 000 units

the organisation’s success, so they should be considered when a marketing plan

annually. The production department must gear up to make that many units, the

is being developed.

finance department must arrange funding to cover the expenses, the human resources department must be ready to hire and train staff, and so on. Without

From marketing plan to marketing action

the appropriate level of organisational support and resources, no marketing plan

Companies generally create annual marketing plans, although some plans

can succeed.

cover a longer period. Marketers start planning well in advance of the

Although its exact length and layout will vary from organisation to organisation,

implementation date to allow time for marketing research, thorough analysis,

a marketing plan usually contains the sections described in Chapter 2. Smaller

management review and coordination between departments. Then, after

businesses may create shorter or less-formal marketing plans whereas corporations

each action program begins, marketers monitor ongoing results, compare

frequently require highly structured marketing plans. To guide implementation

them with projections, analyse any differences and take corrective steps as

effectively, every part of the plan must be described in considerable detail.

needed. Some marketers also prepare contingency plans for implementation if

Sometimes, a company will post its marketing plans on an intranet site, which

certain conditions emerge. Because of inevitable and sometimes unpredictable

allows managers and employees in different locations to consult specific sections

environmental changes, marketers must be ready to update and adapt

and collaborate on additions or changes.

marketing plans at any time. For effective implementation and control, the marketing plan should

The role of research

define how progress towards objectives will be measured. Managers typically

Marketing plans are not created in a vacuum. To develop successful strategies and

use budgets, schedules and performance standards for monitoring and

action programs, marketers need up-to-date information about the environment,

evaluating results. With budgets, they can compare planned expenditures

the competition and the market segments to be served. Often, analysis of

with actual expenditures for a given week, month or other period. Schedules

internal data is the starting point for assessing the current marketing situation,

allow management to see when tasks were supposed to be completed –

supplemented by marketing intelligence and research investigating the overall

and when they were actually completed. Performance standards track the

market, the competition, key issues, and threats and opportunities. As the plan is

outcomes of marketing programs to see whether the company is moving

put into effect, marketers use a variety of research techniques to measure progress

towards its objectives. Some examples of performance standards are market

towards objectives and to identify areas for improvement should results fall short

share, sales volume, product profitability and customer satisfaction. (See

of projections.

Appendix 3.)

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Appendix 2  The marketing plan: An introduction

Sample marketing plan for SonicaTab tablet

485

by higher demand for easy-to-use tablets with expanded communications, entertainment and storage functionality.

We begin this sample marketing plan by repeating the summary table from

Current marketing situation

Chapter 2 in Table A2.1. This section takes you inside the sample marketing plan for Sonica, a

Sonica, founded some eight years ago by two entrepreneurs with experience in the

manufacturer of smartphones and tablets. The company’s first product was the

microcomputer market, is about to enter the mature tablet PC market. Multifunction

Sonica Z101, a multimedia, mobile/WiFi-enabled smartphone running Google’s

mobile phones, email devices and wireless communication devices such as the

Android operating system (OS). In that market, Sonica entered competition with

tablet have become commonplace for both personal and professional use. Research

Apple (iPhones), Microsoft (Lumia), Motorola (Moto G), HTC (One), Samsung

shows that between the launch of the iPad in 2010 and mid-2016, Apple sold more

(Galaxy), LG (Optimus) and other well-established rivals in a crowded, fast-changing

than 300 million tablets worldwide.1 Where the laptop market grew from 2 million

marketplace for smartphones that combine communication, entertainment and

unit sales in 1990 to just 29 million in 10 years, tablets have grown in sales at a

storage functionality.

faster rate and are already cannibalising the sales of laptops and e-reader devices

Now, Sonica plans to use its technological expertise and enter the market for tablet PCs with a range of products under a sub-brand – SonicaTab. The competitors are Apple (iPad range), Lenovo (Yoga tablet range), Samsung (Galaxy tablet range), Sony (Experia), Google (Nexus tablets), among others. We now turn our discussion to explain more about what each section of the plan should contain, and why.

such as the Kindle and Kobo, as users want lightweight always-on devices that synchronise with and mimic their smartphones in terms of apps and functionality. Competition is therefore more intense even as demand flattens, industry consolidation continues and pricing pressures squeeze profitability. Forrester forecast that, by 2017, the greater proportion of the worldwide population will live in the Asia-Pacific region and that some 34 per cent of tablet owners will reside here.2 They also forecast that businesses will own some 20 per cent of these tablets.

Executive summary

Moreover, the education system in many countries will either subsidise student

Sonica is preparing to launch its SonicaTab range into a relatively mature market.

purchases or give tablets away and, thus, the institutional market is predicted to be

Our product range offers a competitively unique combination of advanced features

even larger. To gain market share in the dynamic Asia-Pacific region, Sonica must

and functionality at a value-added price. We are targeting specific segments in

carefully target specific segments with features that deliver benefits valued by each

the consumer and business markets, taking advantage of opportunities indicated

customer group.

Table A2.1  Contents of a marketing plan Section

Purpose

Executive summary

Presents a brief summary of the main goals and recommendations of the plan for management review, helping top management to find the plan’s major points quickly. A table of contents should follow the executive summary.

Current marketing situation

Describes the target market and company’s position in it, including information about the market, product performance, competition and distribution. This section includes: • A market description, which defines the market and major segments, then reviews customer needs and factors in the marketing environment that may affect customer purchasing. • A product review, which shows sales, prices and gross margins of the major products in the product line. • A review of competition, which identifies the main competitors and assesses their market positions and strategies for product quality, pricing, distribution and promotion. • A review of marketing channels and logistics, which evaluates recent sales trends and other developments in major distribution channels.

Threats and opportunities analysis

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

Objectives and issues

States the marketing objectives the company would like to attain during the plan’s term and discusses key issues that will affect their attainment.

Marketing strategy

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

Action programs

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

Budgets

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

Controls

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

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Appendix 2  The marketing plan: An introduction

Market description

•

music

Sonica’s market consists of consumers, business and institutional users who prefer a single device for communication, information storage and exchange,

Battery: Built-in 6500mAh battery, giving up to 8 hours video and 60 hours

•

WiFi: Built-in WiFi 802.11 ac/n/g/b/a, dual-band support (2.4GHz, 5GHz), WiFi direct, offering wireless web and email and instant messaging

and entertainment on the go. Specific segments being targeted during the first year include professionals, corporations, students, entrepreneurs and medical

•

Bluetooth 3.0

users. Table A2.2 shows how the SonicaTab201 addresses the needs of targeted

•

Processor: NVidia Tegra 4 quad core (ARM Cortex–A15) CPU with NVIDEA graphics

consumer and business segments. Buyers can choose between models based on several different operating

•

Location: A-GPS for directions and maps

systems, including systems from Apple, Microsoft and Google. Sonica licenses

•

Sensors: Gyroscope, accelerometer, ambient light sensor, compass

an Android-based system because it is somewhat less vulnerable to attack by

•

Sound: Stereo headphone jack (3.5 mm), dock connector port with digital music/video/television recording, wireless downloading and playback

hackers and viruses and is favoured by consumers of such successful models as the Samsung Galaxy Tab range. Hard drives and removable memory cards are popular

•

mobile office suite (Lite)

fast 64Gb (64-gigabyte) external memory card for information and entertainment storage, and WiFi access only. This will allow users to transfer photographs and

•

Video and pictures: Integrated rear 8MP HD (1080p) digital camera with LED flash and video capability plus 2MP front camera

other data from the tablet to a home or office computer via Bluetooth or to sync with Cloud-based data storage, such as Google Drive and Dropbox.com.

Office mobility: Organisation functions, including calendar, address book and synchronisation together with other Google mobile service features and

tablet options. Sonica is equipping its entry-level 10.1-inch model with an ultra-

•

Style: Interchangeable case/skin wardrobe of different colours and patterns

Technology costs are decreasing even as capabilities are increasing, which makes value-priced models more appealing to consumers and to business users with

Optional extras

older devices who want to trade up to new, high-end multifunction units.

•

128Gb external ROM

•

LTE chipset for mobile data

Product review

•

Our base product, the SonicaTab201, offers the following standard features with

desktop dock and charger A higher-priced SonicaTab model – the SonicaTab202 – will offer a 4G (LTE)

the prevailing Android OS version:

data SIM card slot (backward compatible) for cellular internet access and a

All models

second SIM card slot for telephony, and come with a full mobile office suite of

• •

Display: 10.1-inch (3200 × 2000 pixels); 16:9 widescreen colour screen for

apps (e.g. Docs To Go™ or Microsoft Office and PrinterShare). The camera specs

easy viewing (auto rotating)

on this model will be increased to a 13 megapixel rear camera and a 5 megapixel

Memory: 4Gb internal RAM and 64Gb external ROM

front camera.

Table A2.2  Segment needs and corresponding features/benefits of SonicaTabs Targeted segment

Customer need

Corresponding feature/benefit

Professionals (consumer market)

• Stay in touch conveniently and securely while on the go • Perform many functions hands-free without carrying multiple gadgets

• Built-in data SIM card slot; wireless email/web access from anywhere; Android OS less vulnerable to hackers • Voice-activated applications are convenient; global positioning system (GPS) function and dual cameras add value

Students (consumer market)

• Perform many functions without carrying a laptop and smartphone • Express style and individuality

• Compatible with numerous applications (apps) and peripherals for convenient, cost-effective communication and entertainment, and online course delivery • Wardrobe of tablet cases and skins

Corporate users (business market)

• Security and adaptability for proprietary tasks • Obtain driving directions to business meetings

• Customisable to fit corporate tasks and networks; Android-based OS less vulnerable to hackers • Built-in GPS allows voice-directed navigation and access to Google MapsTM

Entrepreneurs (business market)

• Organise and access contacts, schedule details, business and financial files • Stay in touch

• Cellular and WiFi access to calendar, address book, information files for checking appointments and data, connecting with contacts • Cellular and WiFi, syncing with corporate Windows Exchange servers for email, calendar and tasks

Medical users (business market)

• Update, access and exchange medical records • Photograph medical situations to maintain a visual record

• Removable memory card and data SIM card and WiFi access to information, together with recording, reduces paperwork and increases productivity • Built-in dual cameras allow fast and easy photography; stores images for later retrieval

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First-year sales revenues are projected to be $60 million, based on sales of

•

606 060 SonicaTab201 units at a wholesale price of $99 each. During the second year, we plan to introduce the SonicaTab202, also with the prevailing version of

Discount retail chains. Chains such as Big W, Kmart and Target will carry the SonicaTab range.

•

the Android OS, as a higher-end tablet product offering cellular internet access and increased data storage as standard features.

487

Electronics specialty stores. Chains such as Harris Technology, Harvey Norman and JB Hi-Fi will feature the SonicaTab range.

•

Online retailers. Dick Smith, MobiCity.com.au, DealsDirect.com, dStore.com. au, Kmart online and Big W Online will carry and, for a promotional fee, will

Competitive review The emergence of lower-priced 7-inch tablets has increased competitive pressure. Competition from specialised devices for e-book reading is also a major factor. Key competitors include Apple (iPad range), Lenovo (Yoga and IdeaTab ranges), Samsung (Galaxy Tab range), Google (Nexus tablet range), LG (Optimus range), Amazon (Kindle range), Kobo (e-book reader range), Sony (Experia) and those brands, models and pricing that students complete in Table A2.3 following their own research.

give the SonicaTab range prominent placement on their homepages during the introduction. Initially, our channel strategy will focus on the Australasian (Australia and New Zealand) market; according to demand, we plan to expand into South-East Asia and beyond, with appropriate logistical support.

Channels and logistics review

Strengths, weaknesses, opportunities and threats analysis

The SonicaTab range will be distributed through a network of retailers in the top

Sonica has several powerful strengths on which to build, but our main weakness

20 Australasian and South-East Asian markets. Among the most important channel

is lack of brand awareness and image. While Sonica-brand smartphones have

partners signalling acceptance to the Sonica key account manager are:

been on the market for five years, the decision has been made to use a sub-brand

•

Office supply stores. Chains such as Officeworks will carry SonicaTab products

for the various ranges of products – SonicaTab in the case of the tablet range.

in stores, in catalogues and online.

The main opportunity is demand for tablets that deliver a number of valued benefits.

Table A2.3  Self-researched sample of competitive brands, models and pricing Competitor brand

Model

Features

Price

A

B

C

D

F

G

Hint: See the Android Tablet Review at prevailing at the time of your research.

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Appendix 2  The marketing plan: An introduction

We also face the threat of ever-higher competition from consumer electronics

bought entry-level models are replacing older models with more advanced

manufacturers, as well as downward pricing pressure. Table A2.4 summarises the

models that offer more battery time.

SonicaTab201’s main strengths, weaknesses, opportunities and threats.

2. Cost-efficient technology. Better technology is now available at a lower cost than ever before. Thus, Sonica can incorporate advanced features at a value-

Strengths Sonica can build on three important strengths: 1. Innovative product. The SonicaTab range of tablets offers a combination of features that would otherwise require customers to carry a laptop computer in addition to a smartphone. 2. Security. Our range of tablets uses the Android-based OS, which is less

added price that allows for reasonable profits. 3. Anti-establishment image. Millennials (those born between 1977 and 2000) maintain a higher aversion to mass-marketing messages and established global corporations than do Gen Xers and baby boomers.

Threats

vulnerable to hackers and other security threats that can result in stolen or

We face three main threats at the introduction of the SonicaTab201:

corrupted data. Moreover, there is a considerable base of knowledgeable

1. Increased competition. More companies are entering the Australasian and

users who are willing to help others (e.g. subscribers to xda-developers.com).

South-East Asian markets with tablet models that offer some, but not all, of

3. Pricing. Our top-model tablet is priced lower than competing higher-end

the features and benefits provided by the SonicaTab product range. Therefore,

models – none of which offer the same bundle of features as this price-

Sonica’s marketing communications must stress our clear differentiation and

penetration strategy, which gives us an edge with price-conscious customers. A ‘more for less’ positioning strategy.

value-added pricing. 2. Downward pressure on pricing. Increased competition and market-share strategies are pushing tablet prices down. Still, our objective of seeking a

Weaknesses

10 per cent profit on second-year sales of the original model is realistic, given

By waiting to enter the tablet market in the hope that some consolidation of

the lower margins in this market.

competitors would occur, Sonica has learned from the successes and mistakes of

3. Compressed product life cycle. Like smartphones, tablets have reached the

others. Nonetheless, we have two main weaknesses:

maturity stage of their life cycle more quickly than did earlier technology

1. Lack of brand awareness. Sonica (SonicaTab) has no established brand

products. We have contingency plans to keep sales growing by adding new

or image, whereas Apple and the others have strong brand recognition.

features, targeting additional segments and adjusting prices as needed.

We will address this issue with aggressive marketing communication and trade promotion. 2. Physical specifications. The SonicaTab201 is as thin and light as most competing models even though it incorporates multiple features, offers sizeable storage capacity and is compatible with numerous peripheral devices. However, the higher-end model with more desirable features offered at higher prices will not be released until year 2. To counteract this weakness, we will emphasise our base-model product’s benefits and value-added pricing, two compelling competitive strengths.

Opportunities Sonica can take advantage of three main market opportunçities: 1. Increasing demand for multitasking multimedia tablets. The market for light,

Objectives and issues We have set aggressive but achievable objectives for the first and second years of market entry.

First-year objectives During SonicaTab201’s initial year on the market, we are aiming for unit-sales volume of 606 060.

Second-year objectives Our second-year objectives are to sell a combined total of one million units of our two models and to achieve breakeven early in this period.

Issues

portable, multitasking devices is growing much faster than did the market

In relation to the product launch, our major issue is the ability to establish

for single-use devices. Growth will accelerate as dual-mode capabilities

SonicaTab as a well-regarded brand name linked to a meaningful positioning.

become mainstream, giving customers the flexibility to interact over mobile or

We will invest heavily in marketing to create a memorable and distinctive brand

internet connections. Tablet PCs are already commonplace in public, work and

image that projects innovation, quality and value. We also must measure awareness

educational settings, which is boosting primary demand. Also, customers who

and response so that we can adjust our marketing efforts as necessary.

Table A2.4  SonicaTab’s strengths, weaknesses, opportunities and threats Strengths

Weaknesses

• Innovative combination of functions in one portable device • Security due to Android-based OS • Value pricing

• Lack of brand awareness and image • Higher-end model not released until year 2

Opportunities

Threats

• Increased demand for multimedia, multifunction tablets • Cost-efficient technology

• Intense competition • Downward pricing pressure • Compressed product life cycle

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489

Marketing strategy

including Facebook, Google+ and Twitter. The SonicaTab brand will also incorporate

Sonica’s marketing strategy will employ a range of marketing tools and is based

location-based services by Facebook to help drive traffic to retail locations. A mobile-

on a product-differentiation positioning strategy. Our primary consumer target

phone ad campaign will provide additional support to the online efforts.

is middle- to upper-income professionals who need a portable tablet that

There will be coordinated public relations efforts to build the SonicaTab

synchronises with their smartphones and allows them to coordinate their busy

brand and support the differentiation message. To create buzz, we will host a

schedules, communicate with family and colleagues, get driving directions, and

user-generated video contest on our website in the first three months. To attract,

provides them entertainment on the go using such apps as Tunein radio and Kodi

retain and motivate channel partners for a push strategy, we will use trade sales

Media Player. Our secondary consumer target is high-school, university/college and

promotions and personal selling. Our personal and digital communications will

graduate students who want a multimedia, responsive device. This segment can be

encourage purchases through channel partners rather than from our website until

described demographically by age (16–30 years) and education status.

the SonicaTab sub-brand has been established, at which time we will consider

Our primary business target is mid- to large-sized corporations that want

employing direct and digital marketing. The SonicaTab domain name has been

to help their managers and employees stay in touch and input or access critical

registered in the global (.com) and various Asian domains such as Australia (.com.

data when out of the office. This segment consists of companies with more than

au), New Zealand (.co.nz) and Malaysia (.com.my).

$10 million in annual sales and more than 100 employees. We are also targeting entrepreneurs and small-business owners, as well as medical users who want to

People and process: Relationship management

update or access patients’ medical records while reducing paperwork.

We plan to use social media, primarily forums such as XDA-Developers.com, Phandroid.com and Whirlpool.net.au, to assist knowledgeable users whom we

Positioning

regard as opinion leaders to provide guidance to other social media users on

Using product differentiation, we are positioning the Sonica as the most versatile,

setting up and getting the best performance from the SonicaTab. We also plan to

convenient and value-added model for personal and professional use. Our marketing

invite those who buy Sonica products to register with the company via our website.

will focus on the performance of the device with respect to its responsiveness

In this way, we will offer specialised assistance and keep users informed of product

in terms of multiple communication, entertainment and information access, thus

updates and more via a quarterly SonicaTab newsletter. Marketing channel network

differentiating the SonicaTab201 on the basis of a ‘more for less’ value strategy.

partners will be provided with the newsletter and will also be given secure access

Product strategy The SonicaTab201, including all the features described in the earlier ‘Product review’ section, will be sold with a one-year warranty. We will introduce a high-

to a key-account team-managed forum and inventory system so that they can see stock levels of all Sonica products and accessories. Technical assistance will also be available to channel partners via this secure website.

end model (the SonicaTab202) during the following year. Building the SonicaTab

Marketing research

sub-brand is an integral part of our product strategy. The brand and logo (Sonica’s

Using research, we are identifying the specific features and benefits that our target

distinctive yellow thunderbolt) will be displayed on the product and its packaging,

market segments value. Feedback from market tests, surveys and focus groups will

and be reinforced by its prominence in the introductory marketing campaign.

help us develop the SonicaTab201 and 202 models. We are also measuring and

Pricing strategy The SonicaTab201 will be introduced at $99 wholesale/$149 estimated retail price per unit. We expect to lower the price of this first model when we expand the product line by launching the SonicaTab202, which are forecast to wholesale at $129 per unit. These prices reflect a strategy of (1) attracting desirable channel partners and (2) taking share from other established competitors.

Placement strategy Our placement strategy is to use selective marketing channel partners, thereby making SonicaTab models available through well-known stores and online retailers. During the first year, we will add channel partners until we have coverage in all major Australian and New Zealand markets and the product is included in the major electronics catalogues and websites. We will also target distribution through mobile-phone outlets maintained by major carriers such as Optus, Telstra and Vodafone. In support of our channel partners, Sonica will provide demonstration products, detailed specification handouts, and full-colour photos and displays featuring the product. Finally, we plan to arrange special payment terms for retailers that place volume orders.

analysing customers’ attitudes towards competing brands and products. Brand awareness research will help us determine the effectiveness and efficiency of our messages and media. We will also reward customers who register with our database and agree to be surveyed from time to time. Such surveys will allow us to monitor customer satisfaction and thereby monitor market reaction to the SonicaTab range as it unfolds.

Marketing organisation Sonica’s chief marketing officer, Jade Nguyen, holds overall responsibility for all of the company’s marketing activities. Figure A2.1 shows the structure of the marketing organisation. Sonica has hired Worldwide Marketing to handle national sales campaigns, trade and consumer sales promotions, and public relations efforts.

Action programs The SonicaTab201 will be introduced in February. Following are summaries of the action programs we will use during the first six months of next year to achieve our stated objectives.

January

Marketing communications strategy

We will launch a $200 000 trade sales promotion campaign and exhibit at the

The typical SonicaTab target customer spends more time online than with traditional

major industry trade shows to educate dealers and generate channel support for

media channels. A core component for this strategy will be building web and mobile

the product launch in February. The brand website and other sites such as Facebook

brand sites, and driving traffic to those sites by creating a presence on social networks,

will present teaser information about the product as well as availability dates and

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Appendix 2  The marketing plan: An introduction

locations. Also, we will create buzz by providing samples to selected product reviewers, opinion leaders, influential bloggers and celebrities. Our training staff will work with retail sales personnel at major chains to explain the SonicaTab201’s features, benefits and advantages.

April We will hold a trade sales contest offering prizes for the salesperson and retail organisation that sell the most Sonica tablets during the four-week period.

May

February The full brand website and social network campaign will launch with full efforts on Facebook, Google+ and Twitter. This campaign will drive the ‘Expect more’

A mobile-phone ad campaign will provide additional support, driving web traffic to the brand website and social network sites as well as driving traffic to retailers.

slogan as well as illustrate the ways that SonicaTab delivers more than expected.

June

The campaign will show how many functions the SonicaTab can perform and

We will mount a radio campaign with a new voice-over tagline promoting the

emphasise the convenience of a single, powerful hand-held device that delivers

SonicaTab201 as birthday, Mother’s Day and Father’s Day gifts. We will also exhibit

product features, desirable benefits and values. This campaign will be supported by

at the semi-annual electronics trade show and provide channel partners with new

point-of-sale signage as well as by online-only ads and video tours.

competitive comparison handouts as a sales aid. In addition, we will tally and analyse the results of customer satisfaction surveys for use in future promotions

March As the multimedia advertising campaign continues, we will add consumer

and to provide feedback for product and marketing activities.

sales promotions, such as a contest in which consumers post videos to

Budgets

our website, showing how they use the SonicaTab in creative and unusual

Total first-year sales revenue for the SonicaTab201 is projected at $60 million,

ways. We will also distribute new point-of-purchase displays to support our

with an average wholesale price of $99 per unit and variable cost per unit of

supporting retailers.

$45 for unit-sales volume of 606 060. We anticipate a first-year loss of up to

Jade Nguyen Chief Marketing Officer

Tony Calella National Sales Manager

Janet Wu Marketing Communications Manager

Alan Ellis Product Manager Smartphones

Val Singh Key Account Manager

Carlos Jacob Website and Social Media Developer

Tiffany Charles NSW, QLD & NT Sales Manager

Katie O’Connell Advertising & PR Manager

Viktor Chenkov VIC, SA, TAS & WA Sales Manager

Sheila Taggart Retail Sales Analyst

Melissa Wing Product Manager SonicaTab

Gary Grey Product Development Manager

Ray Charlton Logistics Manager

Figure A2.1  Sonica Marketing Organisation

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491

$10 million on the SonicaTab201 model. Breakeven calculations indicate that the

Strengths

SonicaTab201 will become profitable after the sales volume exceeds 569 444,

Strengths are internal capabilities that can help the company reach its objectives.

late in the product’s first year of sales. Our breakeven analysis of Sonica’s first tablet product assumes per-unit wholesale revenue of $99 per unit, variable cost of $45 per unit, and estimated first-year fixed costs of $30 750 000. Based on these assumptions, the breakeven calculation is: BEP =

30 750 000     = 569 444 units (99 − 45)

Weaknesses Weaknesses are internal elements that may interfere with the company’s ability to achieve its objectives.

Opportunities Opportunities are external elements that the company may be able to exploit to

Controls

its advantage.

We are planning tight control measures to closely monitor quality and customer-service

Threats

satisfaction. The latter will be measured with both end-users and marketing channel partners. This will enable us to react very quickly in correcting any problems that may occur. Other early warning signals that will be monitored for signs of deviation from

Threats are current or emerging external elements that could potentially challenge the company’s performance.

the plan include monthly sales (by segment and channel) and monthly expenses.

Objectives and issues

Given the market’s volatility, we are developing contingency plans to address fast-

The company’s objectives should be defined in specific terms so that management

moving environmental changes, such as new technology and new competition.

can measure progress and plan corrective action if needed to stay on track.

Marketing plan tools Turning to additional resources, please note that Pearson (the publisher of this book) offers two valuable resources to assist you in developing a marketing plan: •

The Marketing Plan Handbook by Marian Burk Wood explains the process of creating a marketing plan, complete with detailed checklists and dozens of real-world examples.

•

Marketing Plan Pro is an award-winning software package that includes sample plans, step-by-step guides, an introductory video, help wizards, and customisable charts for documenting a marketing plan.

Key terms: A summary Executive summary This section summarises the main goals, recommendations and points as an overview for senior managers who will read and approve the marketing plan. Generally, a table of contents follows this section, for management convenience.

Current marketing situation

This section describes any major issues that might affect the company’s marketing strategy and implementation.

Positioning A positioning built on meaningful differentiation, supported by appropriate strategy and implementation, can help the company build competitive advantage.

Marketing tools These sections summarise the broad logic that will guide decisions made about the marketing tools to be used during the period covered by the plan.

Marketing research This section shows how marketing research will be used to support development, implementation and evaluation of strategies and action programs.

Marketing organisation The marketing department may be organised by function, as in this sample, by geography, by product or by customer (or some combination).

In this section, marketing managers discuss the overall market, identify the market

Action programs

segments they will target, and provide information about the company’s current

Action programs should be coordinated with the resources and activities of other

situation.

departments, including production, finance and purchasing.

Market description

Budgets

Describing the targeted segments in detail provides context for the marketing

Managers use budgets to project profitability and plan for each marketing

strategies and detailed action programs discussed later in the plan.

program’s expenditures, scheduling and operations.

Benefits and product features

Controls

Table A2.1 clarifies the benefits that product features will deliver to satisfy the needs of customers in each targeted segment.

Product review The product review summarises the main features for all of the company’s products, organised by product line, type of customer, market, or order of product introduction.

Competitive review The purpose of a competitive review is to identify key competitors, describe their market positions and briefly discuss their strategies.

Controls help management assess results after the plan is implemented, identify any problems or performance variations, and initiate corrective action.

References

1 ‘Global Apple iPad sales from 3rd fiscal quarter of 2010 to second fiscal quarter of 2016 (in million units)’, statista, , accessed June 2016. 2 Michael O’Grady’s Blog, ‘34% of tablet owners worldwide will be in Asia Pacific by 2017’, 17 January 2013, Forrester, , accessed June 2016.

Channels and logistics review In this section, marketers list the most important channels, provide an overview of each channel arrangement, and identify developing issues in channels and logistics.

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Appendix

3

Marketing analytics spotlights

Spotlight 1: An overview of measures In the foreword to leading business author and academic Tim Ambler’s Marketing and the Bottom Line, Sir Peter Davis, a former marketing director and CEO of the giant UK retailer, Sainsbury PLC, points out that ‘measurement is the company’s nervous system’, and that while financial metrics are important, on their own they can be misleading. In short, companies must know where they stand in terms of customer preference, and they must use many measures to establish this relative position. In this appendix, we explore these analytic measures – also called marketing metrics – in a very practical way. We begin our investigation of marketing metrics with an overview of the measures employed by companies, based on their claimed use and their perceived importance to business. First, we discuss briefly the theoretical perspectives that lie behind the use of such measures.

• Control theory. Here, the aim is to monitor a set of measures as a particular strategic plan, and subsidiary operational plans, are implemented, and to adjust the implementation where necessary. In the process, the company examines

UK study wherein they showed the metrics from two perspectives – one where the level of review (i.e. the metrics are reported to top management) is measured, and the other where the level of importance to marketing management is measured. In this appendix, we use the latter perspective only to inform the order in which we discuss the metrics (analytic measures). As might be expected, financial measures (largely rearward-looking accounting measures) are the most widely employed metrics. However, non-financial measures, such as awareness and brand knowledge, are increasingly being used in industry and in academic research. In another study, Professor Farris and his US colleagues list 114 marketing metrics in their summary table. Interestingly, after allowing for terminology differences, only 12 of the 20 UK measures, set out in terms of importance in Table A3.1.1, have a corresponding entry in the Farris summary table. Given the space limitations in this book, we examine the individual measures shown in Table A3.1.1, with the justification that their importance to marketing management warrants their inclusion. We acknowledge that the many other metrics we are not including

its strategic goals, checks whether they are being achieved, identifies where

may well be of higher importance in some industries.

the company makes or loses money and, lastly, notes the return on investment

Source: Quotation concerning measurement from Dan Taylor, ‘A case for analytics’, Social Media, 15 April 2012, , accessed January 2016.

in various marketing mix elements.

• Agency theory. Here, the implication is that ‘when it is more difficult to evaluate marketing results, more reliance is likely to be placed on marketing expenditure controls … [and] … specialist marketers are likely to propose metrics that will justify prospective expenditure (budgets) and past activities’.

• Institutional theory. This theory suggests that ‘the cultural values and the history of the specific company, as well as those of its industry sector’ will determine the action the business takes in selecting particular metrics, and which are reported to top management.

• Market orientation. Here, the extent to which top management are focused on customers and competitors influences the metrics used and which are reported to top management. This will vary by industry, particularly between consumer-products marketers and business-to-business (B2B) marketers.

• Brand equity. This intangible asset represents the degree to which using a particular brand (as opposed to using no brand at all) means that the company’s products are less affected by competitors’ price movements. While we can measure a brand’s value in financial terms – its asset value, if you will – this is not the same thing as brand equity. Nevertheless, there is growing pressure to measure the value of this intangible asset. There are many measures employed by companies in various industry sectors, and they may be collapsed into primary groups. These companies are working on the basis that ‘if you’re not measuring, you’re not marketing’.

Spotlight 2: Consumer attitudes 2.1 Awareness As we indicated in Spotlight 1, we walk you through each of the analytic measures mentioned in Table A3.1.1. The first of these is awareness. We tend to think of a hierarchy of effects model whereby, for many products, customers move stepwise from gaining awareness of products (e.g. from a free trial pack of dental floss inserted in a magazine) in a product category (e.g. oral hygiene) to brand(s) in that category (e.g. Colgate), to forming attitudes towards the category and brands, and from there to using the product and hopefully our brand. Awareness is one of the basic measures of marketing communication effectiveness – basic in the sense that, if you have never heard of dental floss, you are unlikely to consider this product as a solution to a problem such as bad breath. If you are not aware of a brand and its meaning, you are unlikely to trust it enough to buy it – and you certainly are unlikely to recommend it to others. In other words, you are unaware of the brand in the context of this product category. Professor Farris and his colleagues define awareness thus: Awareness: The percentage of potential customers or consumers who recognise – or name – a given brand. Marketers tend to use approaches to measuring awareness that are both aided

We have presented the groups in Table A3.1.1 as ‘Spotlights’. In part, these

(ad awareness – ‘Have you seen this ad …?’) and unaided (top of mind – ‘Which

analytic constructs are the outcome of Tim Ambler and his team’s major two-stage

brands of dental floss come to mind?’). Consumers may be asked to complete a

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Table A3.1.1  Marketing analytic measures Spotlight no.



Analytic construct

Analytic measures

1

Overview

2

Consumer attitudes

Awareness Perceived quality Relevance to customer Customer satisfaction Perceived differentiation Brand/product knowledge

3

Customer behaviour

Number of new customers Loyalty leads generated Conversions

4

Trade customer

Distribution/availability and stockturns Customer satisfaction Number of complaints

5

Relative to competitor

Relative customer satisfaction Relative perceived quality Share of voice

6

Innovation

Number of new products Demand estimates Forecasting

7

Digital marketing metrics

Search engine marketing Digital marketing measures ranging from average views per visit to average mobile page views per visit and measures of engagement

8

Accounting for marketing

Pricing and breakeven analysis Sales and gross margins Profit and marketing budget Analytic ratios Financial analysis of marketing tactics

Source: Adapted from research by Tim Ambler, Flora Kokkinaki & Stefano Putoni, ‘Assessing marketing performance: Reasons for metrics selection’, Journal of Marketing Management, 20, 2004, p. 491. Copyright © Westburn Publishers Limited, reprinted by permission of Taylor & Francis Ltd, www.tandfonline.com, on behalf of Westburn Publishers Limited. Quotations from Tim Ambler, Flora Kokkinaki & Stefano Putoni, ‘Assessing marketing performance: Reasons for metrics selection’, Journal of Marketing Management, 20, 2004, pp. 475–98. See also Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006; and Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003.

positioning statement as a measure of brand knowledge – for example, ‘Zoom-

if they intend to purchase the product. Taking a quantitative research approach, a

Zoom …’ (where the indicator of the consumer’s knowledge of this brand of motor

mail survey or omnibus diary survey may contain the statements and rating scales

vehicle would be ‘Mazda’).

to assess attitudes shown in Table A3.2.1.

In this Spotlight, we move from awareness to examining perceived quality as

The response in this attitudinal survey is that the potential buyer agrees that

part of a discussion of measuring attitudes. We also discuss usage, but leave the

the Google Pixel XL mobile phone has many desirable features. However, it seems

main measures concerning how we account for brand usage to Spotlight 8.

it is a brand of mobile phone that people may not like others to see them using,

Sources: Definition from Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006, p. 35. See also Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003.

nor is the Google Pixel XL a mobile phone this female respondent would like to

2.2  Perceived quality and 2.3  Relevance to customer

use. Certainly, the perceived quality relative to other brands is higher. This female mobile-phone user sees the Pixel XL to be a very large handset with its 5.5-inch display. The respondent does not see the brand/product as being relevant to her as she indicates she would not choose this brand or model over all other brands. The question here is why the potential buyer agrees the Pixel XL has many desirable features and is a high-quality offering (perceived quality) but still does

In Analytic measure 2.1, we discussed the first of the important measures of

not see the Pixel XL as a mobile phone she would buy (relevance to customer).

marketing performance set out in Table A3.1.1 – awareness. Here, we move

Questions that further research would need to answer come to mind: Is the size of

forward and examine the related analytic measures: perceived quality, relative

the handset an issue? If so, and if this view is found to be widely held then Google

perceived quality and relevance of the product to customers.

would need to promote the smaller Pixel 5.0-inch. Another question relates to the

Advertising agencies and/or their clients often monitor attitudes to brands (e.g.

manufacturer’s name. Previous Google Android mobile phones – branded with the

Samsung) and products (e.g. Galaxy S7) to establish what current and potential

Nexus name – were made by HTC, Samsung, LG and Huawei. The Nexus 6P was

users believe, and how strongly they hold these beliefs. Marketers want to know if

the first from Huawei. The Nexus 5X was made by LG, as was the earlier Nexus 5.

consumers like the brand and see it as being relevant to them, or perhaps as fitting

In reality, such monitoring may be undertaken before, during and after a

their image (as they perceive it and/or want to be seen by others) and, ultimately,

promotional campaign for a new product. The campaign may have been designed

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Appendix 3  Marketing analytics spotlights

Table A3.2.1  Perceived quality Disagree very strongly

Disagree strongly

Disagree somewhat

Neutral

Agree somewhat

Agree strongly

Agree very strongly

Google Pixel XL has many desirable features.

1

2

3

4

5

6

7

Google Pixel XL is a brand of mobile phone people like to be seen using.

1

2

3

4

5

6

7

Google Pixel XL is a mobile-phone brand for people like me.

1

2

3

4

5

6

7

Google has made sure that Pixel XL is a highquality mobile phone.

1

2

3

4

5

6

7

Google Pixel XL is a higher-quality mobile phone than other brands.

1

2

3

4

5

6

7

Google Pixel XL is a very large handset.

1

2

3

4

5

6

7

I would choose the Google Pixel XL over all other brands.

1

2

3

4

5

6

7

Please circle your response

to prove the superiority of Google’s so-called ‘pure’ Pixel mobile phones over those

Jones and Sasser identified them) will make repeat purchases (remain loyal to

of competitors and may involve resellers competing with plans that prove that the

our product/brand); and, second, there is a greater likelihood that totally satisfied

Pixel offers ‘more for the same’ as competing brands.

customers will recommend the favoured brand/product to others. We could put

We see from this hypothetical response to an attitudinal survey that there

this another way and say that there is a much greater likelihood that dissatisfied

are various components to the overall metric of consumer attitude, with relative

customers will tell many others of their poor experience, for bad news can travel

perceived quality and relevance to the customer being two particularly important

around the world in the time it takes good news to cross the street. Because of

analytic measures. We also see that such attitudinal research may not answer

the ease with which negative word of mouth can spread, particularly in the digital

all the questions that arise, and that quantitative research may need to follow

age, we need to establish the extent of customer satisfaction and the customers’

qualitative research.

intentions of recommending the brand or product.

2.4  Customer satisfaction

way of monitoring performance at various points in the experience of customers at

In Analytic measures 2.2 and 2.3, we examined marketing performance in terms of

a hypothetical hotel – the Big’n’Bright Hotel.

Using the sample survey-based ‘rating scale’ presented in Table A3.2.2 is one

attitude tracking and discussed the highly related measures of perceived quality and

It can be seen from the statements employed in ascertaining customer

relative perceived quality, and relevance of the product to customers. We now turn

satisfaction that the hotel would like to know how satisfied customers are with

to an examination of the next important analytic measure set out in Table A3.1.1 –

the various aspects of their stay. We might view this satisfaction survey as akin to

customer/consumer satisfaction.

monitoring the ‘moments of truth’ for the hotel. When the CEO of Scandinavian

Whatever the product, customer satisfaction is an important performance

Airlines (SAS), Jan Carlzon, spoke of the 50 million 15-second moments of truth, he

measure. Note that, while we are using the term customer interchangeably with

was referring to the annual number of points when customers interact with service

consumer, in practice ‘customer’ covers buyers/users in both consumer markets

staff. From our customer’s point of view in this example, the overall experience

and business-to-business markets, whereas ‘consumer’ is a term usually limited to

was marred somewhat by the check-in experience, and it seems that the business

buyers/users of consumer products, such as groceries.

office facilities were not to his liking. Nevertheless, he rated the overall experience

Customer satisfaction is an important measure for two reasons. First, we are

positively and, although he was not asked about ‘likeability’, we could say that he

more assured that satisfied customers (preferably totally satisfied customers, as

liked the hotel.

Table A3.2.2  Customer satisfaction Please circle your response for each aspect of your stay with the Big’n’Bright Hotel Check-in

Totally dissatisfied

Somewhat dissatisfied

Neither satisfied nor dissatisfied

Somewhat satisfied

Totally satisfied

1

2

3

4

5

Suite presentation

1

2

3

4

5

Bedding

1

2

3

4

5

Restaurant service

1

2

3

4

5

Food quality

1

2

3

4

5

Business office facilities

1

2

3

4

5

Checkout

1

2

3

4

5

Overall, how do you rate your stay with us?

1

2

3

4

5

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Table A3.2.3  Possible recommendation to other business people Please circle your response I would recommend the Big’n’Bright Hotel to other business people.

Very unlikely

Unlikely

Neutral

Likely

Very likely

1

2

3

4

5

Sources: Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006, p. 35. See also Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003; Orville T Jones & Earl Sasser, Jr, ‘Why satisfied customers defect’, Harvard Business Review, November–December 1995, pp. 88–99.

But will he recommend the hotel to other business people? (See Table A3.2.3.)

important when making their purchase decision. Let us examine the Adelaide-based

From the responses given in Table A3.2.2, it would seem that, while relatively

chocolate marketer, Haigh (), and speculate how a newer

satisfied, the customer was not totally satisfied and, because he experienced no

competitor, Cacao (), might position its brand in order to effectively

‘wow factor’, he is unlikely to act as an ‘apostle’ or advocate and refer the hotel to

compete against Haigh and others, such as Koko Black. All three firms market high-

others. He could just as easily talk about his poor experience in the business office

quality chocolates through their own stores and online, but Cacao promises a five-

as about how good a night’s sleep he had, and in all probability he will talk about

hour delivery in Melbourne metro area (only). Moreover, Cacao offers a range of

the negative aspect of his stay rather than any positive experience.

French macarons and other French pastries. In this latter regard, Cacao completes with such smaller companies as Mosaic Patisserie ().

It is important to note that the scale in Table A3.2.3 targets the business segment, as it is often necessary to think in terms of customer segments and not

In this mini case study, we take the hypothetical situation where Cacao conducts

the overall market. Moreover, such tracking needs to be carried out continuously to

blind taste-tests with individuals in the Melbourne CBD and establishes the likelihood

ensure that customer satisfaction levels are maintained or improving.

of their buying the brands tasted. The results are summarised in Table A3.2.4.

2.5  Perceived differentiation

manner, the question becomes how the two companies differentiate themselves

In Analytic measures 2.2 and 2.3, we discussed the related measures perceived

from each other, and from competitors such as Koko Black. Cacao markets a range

quality and relative perceived quality, and relevance of the product to customers.

of chocolates, patisseries and exquisite macarons, both online and through its

We now examine the next important analytic measure set out in Table A3.1.1 –

own boutique stores located in Melbourne in St Kilda, Westfield Doncaster and

perceived differentiation.

Highpoint Shopping Centre. Haigh, on the other hand, has some 14 outlets in

In going head-to-head with hand-crafted packaged quality chocolates in this

three Australian states, is located in four stores in the Melbourne CBD, as well as in

This measure is strongly related to the topic of segmentation, targeting and

Toorak and Hawthorn, and also sells online.

positioning, which is the focus of Chapter 6. You will see more clearly in that chapter that no marketing organisation can successfully meet the demands of the

Clearly, brands such as Haigh and Cacao wish to be perceived as ‘exclusive’

entire market. Even if the organisation thinks it can, and may even do so with

brands, and since each has a limited number of distribution outlets, each is

an innovative new product for a short time, it may be stopped in its ambitions

therefore unable to afford media coverage; in fact, it would be wasteful if Cacao

by competitors. It can be said that success breeds competitors, and one or all

did try to position the brand via mass media advertising. Rather, Cacao tends to use

competitors may force the issue by targeting the most profitable segment or the

direct customer approaches. For example, Cacao also markets directly to five-star

highest-growth segment that offers strong future profits.

hotels, airlines and major corporations. Nevertheless, Cacao could be positioned up against, or away from, the Haigh brand.

In highly contested markets, such as the market for specialty chocolates, each

The research study established that most purchases were for gifts, and the

competitor will usually set about ascertaining which criteria customers regard as being

summary (see Table A3.2.4) relates to this main reason for purchasing quality chocolates. From the summary table it can be seen that, for each of the three product groupings, subjects have indicated they are more likely to purchase Haigh than Cacao. This is perhaps one reason that Cacao also offers gift vouchers. Discussions recorded during the focus groups indicated that subjects saw Haigh as an Australian brand of some long-standing, whereas they saw Cacao as a somewhat lower-quality brand and one they would not be as keen to give as a present. When asked about their ‘ideal brand’, most subjects indicated that Haigh was closest to their ideal gift brand of chocolates and one with which they had an emotional attachment. From this commentary, we can conclude that the two brands are perceived to be differently positioned relative to their ideal gift brand. There is more research that each of these companies could, and no doubt would,

Cacao, cacao.com.au

do to predict future sales in various geographic markets and among segments with different reasons for purchasing chocolates – for example, to treat oneself. Sources: , accessed 8 February 2016; , accessed 8 February 2016; Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003. For details of the Juster probability scale portrayed, see Mike Brennan & Don Esslemont, ‘The accuracy of the Juster scale for predicting purchase rates of branded, fast-moving consumer goods’, Marketing Bulletin, 5, 1994, pp. 47–52.

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Haigh hand-made chocolates 0

0

0

Haigh premium chocolate tablets

Cacao party boxes of hand-made chocolates

0

0

0

Cacao milk, dark or truffle selections

Haigh gift boxes

Cacao wooden gift boxes

Purchase probability

No chance, almost no chance (1 in 100)

1

1

1

1

1

1

Very slight possibility (1 in 10)

2

2

2

2

2

2

Slight possibility (2 in 10)

Table A3.2.4  Chocolate type purchase probability

3

3

3

3

3

3

Some possibility (3 in 10)

4

4

4

4

4

4

Fair possibility (4 in 10)

5

5

5

5

5

5

Fairly good possibility (5 in 10)

6

6

6

6

6

6

Good possibility (6 in 10)

7

7

7

7

7

7

Probable (7 in 10)

8

8

8

8

8

8

Very probable (8 in 10)

9

9

9

9

9

9

Almost sure (9 in 10)

10

10

10

10

10

10

Certain, practically certain (99 in 100)

496

Appendix 3  Marketing analytics spotlights

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2.6  Brand/product knowledge

497

The client’s brand knowledge was gained by word of mouth from a specialist –

In the discussion earlier, we saw that most companies track analytic measures of

the personal trainer, Samantha – rather than from advertising. The question for

brand awareness, attitudes towards the brand, intentions to purchase and usage.

Brooks’ marketing management is to ascertain the percentage of running-shoe users,

When discussing awareness in Analytic measure 2.1, the hierarchy of effects model

and potential users, who hold this brand knowledge. The outcome of quantitative

was introduced. This model relates to the notion that buyers move from a state of

research in the form of a survey containing word association measures, such as

unawareness of a product category (e.g. products for runners) to awareness of a

those in Table A3.2.5, will soon let marketing management know whether they need

set of brands (e.g. Adidas, Brooks, Fila, Nike, Puma and so on) to developing a liking

to communicate this message more widely. If the brand knowledge that Brooks’

for one brand, trialling and developing a preference for one brand, and repeatedly

running shoes are well suited to those with gait and other problems is widely held,

using that brand more often than others. That is, they become brand loyal.

then they need to reinforce this brand knowledge. It may be necessary to ascertain the

Most buyers of products for runners are aware of Nike, ASICS and Brooks. They have

brand knowledge of personal trainers and other fitness professionals – lead users –

probably bought at least one pair of each brand over time and may even like (i.e. hold

to ensure they are spreading this knowledge. Usually, such knowledge is more

positive attitudes towards) each brand for different reasons. But what is their brand

believable when it comes from trusted others, rather than via paid advertising.

knowledge? This is the important analytic measure we examine here. Professor Farris

This is one reason why online communities of interest/practice, such as Coolrunning

and his colleagues provide an easily understood definition of brand/product knowledge:

Australia, , have risen to prominent usage.

‘The percentage of surveyed customers who demonstrate specific knowledge or beliefs about a brand or product.’ At this point, we eavesdrop on a group of joggers working with Samantha, a self-employed personal trainer. In response to a question from one of her clients about why the client’s ankles are troubling her, Samantha says: ‘You have a moderate over-pronation, and you need to consider running shoes that will provide you with extra cushioning and more active stability. I tend to favour Brooks for people in your situation. Take a look at their website for the Brooks model best suited to your needs.’ At home later that day, the client visits the Brooks website to look for a shoe model suitable for joggers in her situation: .

Brand knowledge is associated with the overall brand equity a firm builds up when positioning its brand or brands with particular market segments. Associated brand equity metrics include brand awareness, brand familiarity (also known as brand salience), brand relevance, brand preference, brand availability, brand leadership and brand loyalty. It is important to note that marketing management finds it necessary to measure the standing of their brand relative to competitors. For example, Coca-Cola has built considerable brand equity over time based on people’s awareness of the brand through advertising the packaged product, market leadership and its wide product distribution, which makes it readily available in both packaged and post-mix forms.

Table A3.2.5  Brand knowledge using word association Please complete the sentence by inserting a brand name of your choice in the right-hand column 1. The brand of running shoe that is best suited to those who have a gait problem and require active stability solutions is __________. 2. The model of running shoe that is best suited to those who have a gait problem and require active stability solutions is __________. 3. Air Zoom Odyssey is a stability running shoe carrying the __________ brand. 4. Supernova Sequence boost 8 is a stability running shoe carrying the __________ brand. 5. __________ has enabled connection of a person’s running shoes to an iPod to collect running information. And so on … Sources: Brooks website, , accessed 8 February 2016; Nike website, , accessed 8 February 2016; Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006, p. 36. See also Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003; Roger J Best, Market-Based Management: Strategies for Growing Customer Value and Profitability, 4th edn, Prentice Hall: Upper Saddle River, NJ, 2005.

Answers: 1. Brooks; 2. Adrenaline GTS 14; 3. Nike; 4. Adidas; 5. Nike.

Spotlight 3: Customer behaviour 3.1  Number of new customers

As most markets are of finite size – whether we refer to customer numbers, economic standing or willingness to spend – companies face a strategic decision

We examined the importance of brand knowledge in Spotlight 2 (Analytic

when they target new customers. Such a decision may provoke competitors to

measure 2.6) and now turn our attention to the importance of gaining new

mount marketing programs designed to retain their best customers.

customers. While a great deal of criticism has been levelled at marketing scientists

Another reason why it may be profitable to target new customers is where

and practitioners for focusing on gaining new customers to the apparent

a company has developed an innovation after determining that there is latent or

exclusion of retaining existing customers, the reality is that both groups require

unmet demand for a new product. This innovation might take the form of a complete

attention.

breakthrough product. Or it might be a discontinuous innovation, such as the

Marketing organisations need to retain profitable customers, and also need to

incandescent light bulb, which the development of electricity enabled. Alternatively,

innovate so as to sell more of their product portfolio to existing customers. However,

it might be a continuous innovation, such as a new flavour of carbonated beverage

they also need to draw new, preferably profitable, customers to their products.

that might appeal to an older age group as a mixer drink. The development of such

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new products is often high-risk, given that many products – consumer products in

3.2  Loyalty leads generated

particular – fail at one of the many stages from conceptualisation through to full

We turn now to a discussion of a very important aspect of marketing that is

commercialisation.

connected with customer loyalty – the generation of loyalty leads.

In some instances, the introduction of a new product is accompanied by

Marketing organisations may deal with repertoire markets, where customers

growing market share or an increased percentage of measured demand for the

rarely buy a single brand (e.g. Colgate Fluorogard) in a particular category (e.g. oral

product category. But, rather than retaining customers, new customers are trialling

hygiene). These customers are more likely to buy from a limited set of brands they

the new product, but not repeating their initial purchase. In short, such a product

like – evoked set – and sometimes from even more than one product category.

is doomed. If marketing management does not withdraw such a product, retail

These customers may be relatively loyal to a brand if they purchase it more often

category managers will soon delete the brand.

than they purchase other brands in the set. Where organisations operate in

The marketing annals are replete with case studies where a new use for an

subscription markets (e.g. mobile phones, subscriber television, magazines, direct

existing product has seen existing customers buy more of the product, and also

and online database marketing generally), loyalty is relatively easily measured in a

drawn new customers to the product category and brand. One example is US Arm

more straightforward manner: What do customers buy, how frequently and do they

& Hammer. After many years of promoting its baking soda brand for baking, it

buy products offering the firm the highest profit margin? The simplest measure of

attracted new customers by promoting the product’s benefits as a deodorant for

loyalty is behavioural: Is the customer repeat purchasing? Intention to purchase,

refrigerators. The original brand was retained and sub-brands introduced: new

or purchase probability (see the Juster purchase probability scale in Table A3.3.1),

deodoriser products such as carpet deodoriser and cat litter, and then personal-

is often used as a measure in situations where there is a relatively long interval

care products, household cleaners and industrial products to leverage off the initial

between purchases, as in the case of consumer durables or motor vehicles. Another

success of the Arm & Hammer brand.

measure of loyalty is also a measure of satisfaction – willingness to recommend

The need to acquire profitable new customers has become evident to many

that others adopt the brand, as in the responses in Table A3.3.2.

marketing organisations. Take the example of a bank that offers nine products to

Tim Ambler, senior fellow in marketing with the London Business School, uses

the market. Each of these financial products is based on the simple notion that

the term in-the-head metric to describe brand loyalty. He does so because, while we

borrowers can make better use of the bank’s money than can lenders to the bank –

may measure overt behaviour by analysing databases, in some business sectors it

that is, the borrowers can create more wealth than the lenders can. Any bank

makes more sense to use ‘in-the-head’ measures, such as those shown in Tables A3.3.1

needs to ensure that new products do not cannibalise profits earned from existing

and A3.3.2. Repeat purchase behaviour may be habitual or even indicate customer

customers using existing products, and that any new customers attracted to the

inertia. Alternatively, such behaviour may indicate complete satisfaction with a

new product are likely to take up existing products as well. That is, the bank can

particular brand. So, it is often wise to supplement behavioural measures with

gain a ‘high share of wallet’.

‘in-the-head’ measures.

As can be seen, the number of new customers gained in a particular period is

The database marketer is in a rather different situation to repertoire marketers,

an important marketing metric that needs to be carefully considered by marketing

even though the latter – particularly retailers – are increasingly integrating

managers. The acquisition of new customers goes hand in hand with retaining

marketing research and database information to gain customer insights.

them. It is also related to many other facets of marketing.

The database marketer can more easily monitor purchase behaviour and may even

Sources: See Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006; Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003; Roger J Best, Market-Based Management: Strategies for Growing Customer Value and Profitability, 4th edn, Prentice Hall: Upper Saddle River, NJ, 2005.

introduce mechanisms, such as ‘spotters fees’, designed to have completely satisfied customers provide leads to new customers. Financial services organisations, such as American Express and even insurance companies, have employed these techniques. Great care has to be taken to ensure that the benefits or commissions or incentives

Table A3.3.1  A Juster probability scale How likely are you to attend at least one Socceroos match in the coming season? Please circle the number that corresponds with the likelihood of your attendance. 10

Certain, practically certain

9

Almost sure

8

Very probable

7

Probable

6

Good possibility

5

Fairly good possibility

4

Fair possibility

3

Some possibility

2

Slight possibility

1

Very slight possibility

0

No chance, almost no chance

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Table A3.3.2  Measuring loyalty with ‘in-the-head’ metrics Disagree very strongly

Disagree strongly

Disagree somewhat

Neutral

Agree somewhat

Agree strongly

Agree very strongly

1. When I next buy a new car, I plan to buy another Mazda.

1

2

3

4

5

6

7

2. I would recommend Mazda to my friends.

1

2

3

4

5

6

7

Please circle your response

on offer are not so attractive as to entice the buyer to make the first payment on

marketing organisations can indeed hold the ‘right’ customers – in other words,

behalf of the person who is supposedly being signed up.

those customers who might represent the ‘heavy half’, or those where the marketing

While there are many unproven aspects of the claims of greater profitability that supposedly derives from retaining customers, potential customers are more

organisation holds a ‘higher share of wallet’ – and whether these customers are indeed associated with higher profitability.

likely to adopt a product when there is positive word of mouth for a brand, and

Nevertheless, the fact remains that, at any point in time, every marketing organisation

marketing organisations will benefit where completely satisfied customers provide

faces a market where customers fall along a spectrum shown in Figure A3.3.1 from

leads to these potential customers.

being unaware of the need for a product category and brand, to either purchasing a

Sources: See Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006, pp. 43–4. See also Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003, pp. 133–4; Roger J Best, Market-Based Management: Strategies for Growing Customer Value and Profitability, 4th edn, Prentice Hall: Upper Saddle River, NJ, 2005.

repertoire of brands or perhaps solely purchasing our brand or a competitor’s brand. Those who are unaware of a need or problem are converted to product category use and ultimately to one or more brands within a category. We tend to think of mass media communication and social media as the means of converting the unknowing to various points along the spectrum in the case of fast-moving consumer goods. Often, this notion is presented as a hierarchy of

3.3 Conversions

effects model. However, here, we are simply presenting the idea that all brands face

In our discussion of analytic measures thus far, we have stressed the need to

such a divided marketplace at any point in time. The question becomes a matter of

completely satisfy customers, right from the beginning of the relationship. We have

what it takes to convert the unaware, or indeed to convert those in any group to

emphasised that the marketing focus in earlier times on gaining new customers

another group further along the spectrum.

has given way to engaging with customers at various levels and retaining them.

Taking a business-to-business marketer as our example – a medical equipment

We noted that there are diverging views among researchers as to whether

company marketing a new synthetic-bone product – the company would find that

Aware and demand or ‘subscribe’ to a competitor’s brand

Aware and demand or ‘subscribe’ to our brand exclusively

Aware but use our brand in a ‘repertoire’ of brands

Aware but don’t use our brand

Aware but don’t use our product category

Unaware of want/problem

Figure A3.3.1  The spectrum of awareness and brand use

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Appendix 3  Marketing analytics spotlights

it may need to communicate en masse with surgeons with different specialisations

days at 0–4°C in the case of fresh chickens and a much shorter time period for

via their professional magazines but, in the main, sales representatives are needed

staples such as fresh milk and bread. Chicken stocks are replenished twice a week in

to make one-to-one representations and ultimately close the sale. Let us assume

large supermarkets, but only once a week in smaller stores. This product experiences

the medical representatives involved can only visit one specialist a day because

100 stockturns (turnover rate) each year and is an important and profitable product

much of the representatives’ time – at least half of each day – is spent in operating

category for retailers both large and small. When expressed in sales units, ‘100

theatres guiding surgeons in the use of their products. Let us assume further that

stockturns’ means that the entire stock turns over twice each week:

the typical representative costs the marketing organisation $200 000 per annum,

Chicken stockturns in units = Unit sales x twice weekly = 100 stockturns

including on-costs such as superannuation and motor vehicle costs, and that they

per annum

work 48 weeks per year, taking four weeks’ annual leave each year. One more piece of information is needed – how many half-day equivalent calls does it take to convert a surgeon to trialling the marketer’s product, and to using it exclusively? If it takes six (half-day) calls at approximately $417 per call, and leaving aside any other marketing costs, then the cost of the conversion in this instance is $2502.

Not only are there high stockturns involved with such short-shelf-life products as chicken, but there is also a relatively high gross margin for the retailer (say 30 per cent) when expressed as a percentage of their selling price: Retailer gross margin percentage =

If the marketing organisation has a profit margin of 50 per cent, then the sales

$3.00  = = 0.30 = 30% Unit selling price $10.00 Gross margin

representative needs to sell this surgeon $5004 of the product to simply break even

Returning to stockturns, the inventory turnover rate is the number of times

on the cost of converting the surgeon. As you can see, conversions are an important

an inventory turns over or is sold during a specified time period (usually one year).

analytic measure. This is because it is the multiple conversions in the static-sized

This rate indicates how quickly a business is moving inventory through the

markets that such organisations face that lead to continued profitability and the

organisation. Higher rates indicate that lower investments in inventory are made,

very existence of these organisations.

thus freeing-up funds for other investments. Inventory turnover rate may be

Sources: For more on the implications of salesforce costs, see Spotlight 8. See Tim Ambler, Flora Kokkinaki & Stefano Putoni, ‘Assessing marketing performance: Reasons for metrics selection’, Journal of Marketing Management, 20, 2004, p. 491; Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006; Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003; Roger J Best, Market-Based Management: Strategies for Growing Customer Value and Profitability, 4th edn, Prentice Hall: Upper Saddle River, NJ, 2005; and Graham R Dowling & Mark Uncles, ‘Do customer loyalty programs really work?’, Sloan Review, 38, Summer, 1997, pp. 71–82.

computed on a cost, selling price or unit basis. The formula based on cost is:

Spotlight 4: Trade customer 4.1  Distribution/availability and stockturns Much of the commentary concerning analytic measures involves measuring performance against strategic objectives. One of the most important measures for any marketing organisation, but particularly for fast-moving consumer goods (FMCG) marketers, is distribution level, or the level of availability of the firm’s brands through the distributive trade. In this context, The Nielsen Corporation (formerly known as ACNielsen), , is a byword, having expanded around the world with marketing behemoths, such as Unilever, which needed to monitor their distribution levels. Unilever began as Lever Bros with Sunlight Soap in the 1890s and, with their advertising agencies, Lintas (an acronym for Lever International Advertising Services which morphed into Lintas: Worldwide) and J. Walter Thompson (JWT is now J. Walter Thompson Worldwide with 200 offices in over 90 countries and part of the WPP group), have expanded their global sphere of operations. From Tim Ambler’s perspective, and from our own, distribution level is one of the indicators of brand equity. Numeric distribution in terms of the number of stores stocking is important, but weighted distribution is more important. The metric is expressed as: the total stores carrying the brand expressed as a percentage of those who could but also as weighted by size (turnover) of those stores.

Inventory turnover rate =

Cost of goods sold Average inventory at cost

Please turn to Spotlight 8, Analytic measure 8.4, for more on analytic ratios, such as gross margin percentage and net profit percentage. Given that marketing organisations, such as the biscuit maker Arnott’s , carry an extensive product range under a raft of sub-brands (e.g. Tim Tam, Tiny Teddy, Vita-Weat), they must monitor distribution levels and stock levels to ensure they do not lose shelf-space to competitors and house brands, which would quickly mean an erosion of their brand’s market share and, ultimately, profits. While distribution level is part of the measure of brand equity for the FMCG marketing organisation, it is not the only distribution measure that is important. Both the marketing organisation and the retailer are vitally interested in the return that the particular chain is getting from the cubic metres of shelf-space allocated to the particular brand’s product range. Both organisations will have employed planogram and space-planning tools to budget a particular return and are keen to ensure that this result is achieved. Gone are the days when a marketer could claim that an overall retail market share justified a particular shelf-space allocation through an individual chain. Retailer category managers are much more interested in the planned and actual sales and returns achieved through their own stores, and even more so as their own retail brands increase their share of in-store shelfspace allocation. The product manager monitoring distribution levels will also be concerned with stock levels, and with ensuring that out-of-stock situations do not occur at store level, particularly if in-store promotions are underway and expensive gondola end shelf-space has been paid for. Distribution level is a less-meaningful term in the business-to-business marketing of industrial products (e.g. building materials), for the simple reason that much of this type of product is delivered direct to the end-user. However, companies

As you can see from this succinct definition, retail store size is important, as it

such as CSR deliver products (e.g. Gyprock wall-sheeting) direct to industrial users

influences many other aspects of marketing. For example, such matters as how many

but also distribute through the distributive trade (e.g. Bunnings and Mitre 10) to

deliveries are made to stores each week are involved, whether from the retailer’s

end-users, who range from the home-DIY person to the tradesperson and small

warehouses or delivered store-to-store by those with short-shelf-life products – nine

building company. Unlike the FMCG marketer with its packaged-goods sales and

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distribution-level measurement by The Nielsen Company, it is more difficult to monitor distribution levels in business-to-business markets where direct sales to end-users are not involved.

501

Service levels − percentage of Deliveries in timeframe promised (#) on-time deliveries = All deliveries in timeframe promised (#)

Other marketers, such as Sigma Pharmaceuticals Ltd, ,

Many firms use routing software to ensure that deliveries are made at a time

owner of the Amcal, Guardian and Amcal Max chemist chains, find the task of

that suits the customer. Imagine if a Carlton and United Breweries truck turned

monitoring distribution levels somewhat easier. Their distribution systems are linked

up to deliver to an off-licence liquor outlet with pallets of beer at 7 am, but the

directly to these stores and to banner member and independent stores, making

outlet’s staff only accept deliveries from 10 am to 10 pm. This type of problem

it possible to monitor distribution levels accurately. Thus, it can be seen that the

cascades across other outlets if a truck is held up at any one of its deliveries on a

measurement of distribution levels is important, but varies by industry in terms of

route. Even the number of traffic lights on a delivery route needs to be taken into

the ease with which it can be monitored.

account if schedules and agreed service levels are to be met. This is one reason why

Sources: For more on Unilever, see , accessed 11 February 2016; and for more on WPP and JWT, see , accessed 11 February 2016. Distribution-level metric definition from Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003, p. 134; see also Tim Ambler, Flora Kokkinaki & Stefano Putoni, ‘Assessing marketing performance: Reasons for metrics selection’, Journal of Marketing Management, 20, April 2004, pp. 475–98; Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006; Roger J Best, Market-Based Management: Strategies for Growing Customer Value and Profitability, 4th edn, Prentice Hall: Upper Saddle River, NJ, 2005.

a delivery vehicle makes fewer deliveries in Sydney than in Melbourne, although

4.2  Customer satisfaction and 4.3  Number of complaints In Analytic measure 2.4, we examined customer satisfaction, taking a broad view of the term customer to include both consumers (end-users) and customers (business buyers/users). When examining use of the distributive trade and assessing distribution levels, we refer to a particular type of customer – marketing intermediaries. In this analytic measure, we examine the next important trade customer performance measure – customer complaints – and what it is that dissatisfies marketing intermediaries. In consumer markets, not all dissatisfied people complain to the companies they deal with, even when a warranty may be involved. Many of these consumers may nevertheless spread negative word of mouth about the brand, or about some other aspect of the product, such as its performance, delivery or installation. The study of complaining behaviour draws deeply on the fields of psychology and sociology. Trade customers are far less likely to be reticent and, while the cause of complaints may lead to lower perceptions of the supplier, its brands and contact people, the real issue is that it often opens the door to a trial of a competitor’s brand or product. Such a trial may then lead to its adoption over the original supplier’s product. What problems arise in this context, you ask? And what can be done to remedy the situation? The metrics involved give an inkling of the marketing logistics problems that may cause tensions between suppliers and retailers: out-of-stocks; service levels; and inventory turns. Let us look at each of these metrics and the possible remedies. Out-of-stocks =

Retail stores where brand (or product) is listed but unavailable (#) Total retail stores where brand (or product) is listed (#)

While out-of-stocks occur for genuine unplanned reasons, such as when

this difference between the two locations is closing. Thus, tracking is important. When we turn to examine inventory levels, two metrics are relevant to the discussion: inventory days and inventory turns. Inventory days =

Days in year (365) Inventory turns (I)

As we saw in Analytic measure 4.1, chicken is delivered to large supermarkets twice a week, meaning that the average inventory (I) is some 3.5 days. Employing the inventory days formula (above), we see that 365/3.5 means an inventory turnover (also called stockturn) of just over 100. There are many low-margin, high-volume products – loose sweets among them – but imagine how delighted retailers must be with chicken suppliers because both the gross margin and the sales volume are high. One of the hallmarks of an almost pure service and/or an experiential product is that no inventory is held. In the case of tangible goods, inventory days indicate how quickly finished-goods inventory moves through the sales process. Another measure is employed to analyse inventory turns: Inventory turns =

Product revenues ($) Average inventory ($)

The calculation of inventory turns via this method requires consistency in whether retail selling price or retailer buy price (usually wholesale price) is used for both revenue and average inventory. Assuming sales of shirts of $2 million in a year, and a beginning-of-year inventory level of $500 000 and an end-of-year inventory of $600 000, inventory turns would amount to 3.64. Taking this figure into the inventory days formula, we divide 365 by 3.64 and see that the retailer holds some 100 days’ worth of inventory. Retailers that use a centralised warehouse to stock their stores become dissatisfied when inventory levels are too high in relation to turnover for product categories and for the brands within them. If marketing organisations are failing to entice consumers to their brand, retailers become dissatisfied with the brand marketer’s performance and will ultimately delete the brand. Sources: Formulae from Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006, pp. 186–8. Also see Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003; and Fred Selnes, ‘Antecedents and consequences of trust and satisfaction in buyer–seller relationships’, European Journal of Marketing, 32, 1998, pp. 305–22.

an accident prevents production continuing at planned levels, in such a case,

Spotlight 5: Relative to competitor

retailers need to be kept appraised of the situation, and should understand the

5.1  Relative customer satisfaction

problems facing the supplier. Arguably, they will still give over more shelf-space

In Analytic measure 2.4, we discussed the importance of customer satisfaction and

to a competitor’s brand or product. As academic researchers have pointed out,

how a hotel might measure its performance in various areas ranging from check-in,

communication leads to commitment and trust in such business relationships.

through to the other services on offer, and finally checkout. Customers invariably

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make comparisons between the offerings they experience, particularly in the same

5.2  Relative perceived quality

category. An example of a company measuring relative customer satisfaction

See Analytic measures 2.2 ‘Perceived quality’ and 2.3 ‘Relevance to customer’,

occurs when an airline asks its customers to complete a pencil-and-paper survey

noting that when dealing with relative perceived quality, comparative measures

towards the end of a long-haul flight. The airline would ask customers to rate

are involved.

various aspects of its service, ranging from check-in to in-flight services such as entertainment, food and beverages, and flight-crew attentiveness. The presentation

5.3  Share of voice

and comfort of the aircraft would also be included. The main difference between

Share of voice is an important analytic measure because it indicates the standout

the instrument used in Analytic measure 2.4 and the instrument used to assess

value of the brand or product from marketing communication – traditional

relative customer satisfaction would be in the form of questions that might be

advertising and social media word of mouth, in the main – relative to the overall

framed as shown in Table A3.5.1.

marketing communication in a category. Marketers, senior management and

It is likely that the survey would be more detailed and broken into sections covering on-ground and in-flight services, as the online examples at illustrate. In fact, many airlines, and other companies,

This metric is calculated as follows:

track a multitude of variables over time thereby examining performance trends in

Share of voice (%) =

satisfying customers. However, it is not until the customer is asked to compare the present flight with the last airline they flew with that we see there may have been an incident during check-in that has caused the customer to see the airline in a relatively poor light relative to the last airline used – the hypothetical Airlines of the World (see Table A3.5.2). From this customer’s viewpoint, food and beverage service was perceived to be better than on the last airline flown. Constant polling of customers provides airlines and other companies with a dashboard metric of their relative performance across a range of measures from the customers’ perspective. This enables the airlines to make adjustments where they find performance slipping. Such adjustments may not be simple and may take time, such as where re-training of personnel is involved. Sources: Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006, p. 35. See also Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003; Orville T Jones & Earl Sasser, Jr, ‘Why satisfied customers defect’, Harvard Business Review, November–December 1995, pp. 88–99.

Brand advertising ($, #) Total market advertising ($, #)

In the above formula, advertising can be expressed in terms of dollar expenditure, gross rating points (GRPs) or target audience rating points (TARPs). In essence, share of voice entails estimating a company’s brand advertising relative to the total by all companies in the particular category. Clearly, if more than traditional media advertising is involved – today, that would be online marketing communication – then it would be wise to estimate share of voice separately for advertising and online marketing communication. As we discuss in Analytic measure 7.2, different measures of marketing performance are used when assessing digital media. There are few difficulties in calculating a firm’s brand advertising expenditure, however it is expressed. However, gaining an estimate of total market advertising dollars is more difficult, and even more difficult when expressed as GRPs or TARPs. For this reason, medium-to-large firms that work with full-service advertising agencies, or that use media-planning and -buying agencies, find it easiest to

Table A3.5.1  Customer satisfaction Please provide us with feedback on your experiences during the present flight

Totally dissatisfied

Somewhat dissatisfied

Neither satisfied nor dissatisfied

Somewhat satisfied

Totally satisfied

Check-in ease

1

2

3

4

5

Check-in personnel service

1

2

3

4

5

Airport lounge facilities

1

2

3

4

5

Flight attendant service

1

2

3

4

5

Food and beverage quality

1

2

3

4

5

Overall, how do you rate your flight with us?

1

2

3

4

5

Table A3.5.2  Relative customer satisfaction Thinking about the last airline you flew with, was your present flight … Check-in ease

Very much worse

Somewhat worse

Much the same

Somewhat better

Very much better

1

2

2

4

5

Check-in personnel service

1

2

3

4

5

Airport lounge facilities

1

2

3

4

5

Flight attendant service

1

2

3

4

5

Food and beverage quality

1

2

3

4

5

Which airline did you last fly with?

Airlines of the World

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503

calculate and use the share-of-voice metric. In doing so, it is important to compare

Thus far, we have discussed examples of new products that both capitalise on

‘apples’ with ‘apples’; media costs using rate-card prices must be used, or if

and further build ‘brand equity’ – the ability of the brand to withstand competitive

discounts are obtained in the firm’s brand advertising, then all media costs should

pressure on price. It must, however, be stated that there are many different views

be calculated using the same discounted rates.

on the metrics of brand equity, some based on measuring value. The performance

Marketing managers are interested in establishing this ratio, for as Nielsen

of such innovation is measured by the ‘number of new products’ released in a

Australia states, ‘All things being equal, a brand whose share of voice (SOV)

nominated period. Innovation may also be expressed in terms of actual target unit

is greater than its share of market (SOM) is more likely to gain market share.’

sales, revenue and return on investment. Companies also measure their efficiency

The $64 million question management seeks to answer is: How accurately can they

in bringing new products to market relative to the total number of innovations,

predict market share gains from decreasing, maintaining or increasing advertising

many of which do not reach the commercialisation stage. (See Chapter 8 for a

expenditure in nominated (accounting) periods?

more-detailed discussion on the new-product development process.) Many

Sources: For more on marketing promotion, see Analytic measure 8.5 concerning financial analysis of increasing advertising expenditures. For an explanation of GRPs, see ‘Marketing FAQs’, Marketing Profs, , accessed January 2016. For an explanation of TARPs, see ‘Multimedia buying and planning FAQ/glossary’, , accessed January 2016. For a more-detailed discussion of the relationship between SOV and SOM, see Nikki Clarke, ‘Budgeting for the upturn – Does share of voice matter?’, ACNielsen’s Nielsen Wire, 6 August 2009, available at , accessed 18 February 2016; Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006; and Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003.

companies benchmark themselves against other firms, often outside their own

Spotlight 6: Innovation 6.1  Number of new products The three closely related analytic measures number of new products, demand estimates and forecasting are dealt with in the present discussion under Spotlight 6 and also in Spotlight 8 when discussing the profit implications. Innovation is the lifeblood of most marketing organisations. Many organisations have new-business development managers and new-product development managers. Others have research and development and/or innovation directors. While many companies have a surfeit of new products under development, the quality of these so-called innovations is often questionable. When we examine internal measures, we see that 3M is one company that ensures it measures the proportion of new-products sales to total sales on an ongoing basis. So, what do we mean by ‘innovation’? In the marketing context, we highlight Tim Ambler’s definition:

industry as they take on work outside their so-called traditional line of business. Such moves allowed Harley-Davidson to successfully manufacture motor-vehicle wiring harnesses, and therefore to survive financially, returning to its pre-eminent position in the motorcycle market.

6.2 Demand estimates As we illustrate in Chapter 8 during the discussion of product life-cycle strategies, new products are often unprofitable during the development and introduction stages even though the lack of any effective competitors may enable a higherthan-normal profit margin to be taken. As sales volumes rise during the growth stage, in particular, and before competitors arrive on the scene, costs per unit of sales decline and profits may rise even though margins may fall while meeting competitor pricing (see Figure 8.2 in Chapter 8). We express ‘revenue on new products’ as the percentage of sales generated by products in a nominated period, or sometimes over the past few periods. ‘Margin on new products’ is the dollar or percentage profit margin on new products released in a nominated period. In our examination of accounting for marketing in Spotlight 8, we introduce a company manufacturing computer monitors – BCM – to discuss various aspects of pricing, sales and profits. In the present analytic measure, we employ a different company for illustrative purposes. Here, we discuss SMTV’s plans to launch a dedicated Netflix USB connector that allows digital televisions with USB ports to have dedicated high-speed internet for Netflix and Skype services. This product allows internet access for these devices where the home is wired with appropriate

Innovation – management inspired changes that alter the firm’s position

ethernet cabling from the cable modem supplied by service providers, such as

in the market [in a given period]. Such innovations may be introducing new

Telstra’s Bigpond and Optus, or has wireless (WiFi) access throughout the home.

brands and products, finding new customer segments for existing products,

SMTV finds that it needs more information regarding demand in order to assess

perhaps overseas, or new ways of selling, servicing or using the brand.

the feasibility of attaining the needed sales levels. This information is also needed

Apple is one company that has built its sales on its reputation for innovation.

for production and other decisions. For example, production schedules need to be

When Apple’s co-founder, the late Steve Jobs, stood before the ‘faithful’ aficionados

developed, and marketing tactics need to be planned.

each year, he was expected to launch a new product. The current CEO, Tim Cook,

The total market demand for a product or service is the total volume that would

has continued this practice. In turn, the iPod range, iPhone and iPad each met

be bought by a defined consumer group in a defined geographic area in a defined

the market’s expectations and those of the company’s shareholders; however,

time period in a defined marketing environment under a defined level and mix of

the company may now be overly reliant on the iPhone. Taiwanese firm HTC

industry marketing effort. Total market demand is not a fixed number but a function

meets similar expectations for innovation with various smartphones – which use

of the stated conditions. For example, next year’s total market demand for this type

Google’s Android operating system and Windows 10 – to compete with Apple’s

of product will depend on how much other companies spend on marketing products,

iPhone. Microsoft Corporation is renowned for innovation, not only in the realm

such as Google Chromecast, including the take-up of internet services, ethernet in

of computer and smartphone software, but also in video gaming with the Xbox.

the home and smart televisions. It also depends on many environmental factors,

Alphabet, the parent company of Google and other companies, innovates on many

government regulations, economic conditions and the level of consumer confidence

fronts – ranging from Google Search and advertising, and Android OS, to Nexus

in a given market. The upper limit of market demand is called market potential.

mobile phones, self-driving cars and more. In February 2016, Alphabet became the world’s most valuable company.

One general but practical method that SMTV might use for estimating total market demand uses three variables: (1) the number of prospective buyers, (2) the

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quantity purchased by an average buyer per year and (3) the price of an average

certain that its assumptions are reasonable and defendable. As can be seen, the

unit. Using these numbers, SMTV can estimate total market demand as follows:

overall market potential in dollar sales can vary widely given the average price

Q=n×q×p where Q = total market demand n = number of buyers in the market q = quantity purchased by an average buyer per year p = price of an average unit A variation of this approach is the chain ratio method. This method involves multiplying a base number by a chain of adjusting percentages. For example, SMTV’s product is designed for internet-connected homes, whether using ethernet cabling or wireless internal connection. Thus, consumers whose homes already have fast-internet connection are potential buyers. These households do not need to own smart television sets that are connected to the internet (see for examples and explanations). Finally, not all television-owning internet-connected households will be willing and able to purchase this product. SMTV can estimate demand in Australia using a chain of calculations such as the following: Of the total number of households in Australia,

• the percentage of computer-owning households with broadband internet access using ethernet in the home

• the percentage of smart TV-owning households with broadband internet access using ethernet in the home

• the percentage of these households willing and able to buy this device.

used. For this reason, SMTV will use unit sales potential to determine its sales estimate for next year. Market potential in terms of units is 293 760. Assuming that SMTV forecasts it will have a 5.0 per cent market share in the first year after launching this product, then it can forecast unit sales at: 293 760 units × 0.05 = 14 688 units At a retail selling price of $99 less the 30 per cent retailers expect as their gross margin per unit, this translates into company sales of: 14 688 units × ($99 × 0.70) = $1 017 878 The calculated unit volume estimate may be well within SMTV’s production capacity, but not their expectations. As discussed in Spotlight 8 with a different product example, it comes down to whether this product provides a profit and whether this profit meets the company’s return on investment expectations. To assess expected profits, we would need to examine the budgeted expenses for launching this product. We do this with a different product in Spotlight 8 by preparing a projected profit-and-loss statement and comparing this with the actual profit-and-loss statement. We also examine various analytic ratios needed for management decision-making.

6.3 Forecasting In this analytic measure, we take a mini case-study approach to provide an example of forecasting. The entrepreneurs behind a new company – Purest Mountain

The Australian Bureau of Statistics estimates there are approximately

Water brand, which offers a new flavoured-mineral-water product, sourced from

8.5 million households in Australia. According to ACMA, , households

mountain water – decided to adopt a forecasting technique they had used to great

have more than one television set (mean = 2.2), meaning there are over 18 million

effect in their previous management roles in larger companies. They had been able

sets in Australian homes. However, it is the main digital television with integrated

to use regression analysis to establish that demand for soft drinks in general was

digital tuner (as opposed to a separate digital set-top box or digital television

dependent on two variables. The first factor they used was an index of economic

recorder) that interests SMTV. It was estimated that some 80 per cent of the main

activity, as predicted by the industry, while the other was a seasonality factor.

televisions in use had an integrated digital tuner. Research showed that many

Both entrepreneurs had studied marketing and had been taught that

households had purchased a new television set in the past three years, and that

promotional expenditure (levels and quality), in part, determine demand.

this would probably continue, depending on the number of events being broadcast,

They had, however, calculated that promotional expenditure levels by the industry

such as the Soccer World Cup. It was estimated that some 60 per cent of televisions

were factored up or down depending on the industry’s assessment of overall

were more than four years old and that, of these, 30 per cent could be considered

economic activity. That is, if the economy was in growth mode, and consumer

televisions with suitable USB port access. Furthermore, SMTV’s research using ABS

confidence was high, then the beverage industry would spend more on marketing

data indicates that nearly 80 per cent of all households had broadband (256 kBps

effort in general, and on promotion in particular. If there were predictions for a decline

or greater) connections as opposed to dial-up connections. Finally, the company’s

in overall economic activity and a concomitant decline in consumer confidence,

research also reveals that 30 per cent of households possess the discretionary

then the beverage industry would reduce its marketing effort accordingly.

income needed, and are willing, to buy a product such as this. Then, the total number of households willing and able to purchase this product is: 8.5 million households × 0.80 × 0.8 × 0.60 × 30 × 30 = 293 760 households Households need to purchase only one device because it is likely that only the main television would have internet access. Assuming the average retail price across all brands is $99 for this product, the estimate of total market demand is as follows:

The beverages industry association used the Delphi Method, or jury of executive opinion, to obtain a forecast of likely demand from others in the beverages industry as well as other consumer-goods marketers. This method is often used to predict future outcomes where iterative measurement is used, and overcomes direct challenges by the participants to their forecasts. In this instance, it involved the company planners sending in their forecasts of economic activity to the association. The association then prepared an anonymous summary. This summary showing the anonymous predictions (companies not disclosed) was then sent back to the company planners,

293 760 households × 1 device per household × $99.00 = $29 million

who were asked to make a further prediction. They were also asked to provide

This simple chain of calculations gives SMTV only a rough estimate of potential

explanations where their initial estimates were outside the mid-range of responses

demand. However, more-detailed chains involving additional segments and other

and whether they were holding to this figure or thereabouts. This process was

qualifying factors would yield more accurate and refined estimates. Still, these are

repeated three times, in this case, at which stage it was decided that the range of

only estimates of market potential. They rely heavily on assumptions regarding

responses had converged to the point where a single index figure could be published

adjusting percentages, average quantity and average price. Thus, SMTV must make

for the member companies. The index the executives developed took account of­

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time-series data in calculating the appropriate mean (100) and from which point

that even advanced satellite technology could not allow accurate prediction, other

all other time points would be referenced. This meant that where a downturn in the

than El Niño effects, the entrepreneurs also used the ‘art’ of long-range weather

economy was predicted, they would arrive at an index figure below 100, depending

forecasters. By taking into account the predictions of the meteorologists as well as

on the predicted severity of the downturn. As an example, their index for July 2016

the predictions of independent forecasters on a 70:30 weighted basis, they would

was 90, while for December 2016 it was 105. Table A3.6.1 indicates the calculated

arrive at their index. For different months of the year, they could arrive at an index

index for the second financial year of operation 2016/17, on a monthly basis.

figure such that, in the second year of operation, it was predicted there would be

The second factor involved calculating an index that took into account both the time of year and the input of long-range weather forecasters. Recognising

a cool, wet winter followed by a long, hot, dry summer. Table A3.6.2 details the monthly index figures for 2016/17.

Table A3.6.1  Economic index (EI), 2016/17 July

Aug

Sept

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

June

90

92

95

95

97

105

107

100

100

102

98

102

Table A3.6.2  Seasonality index (SI), 2016/17 July

Aug

Sept

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

June

80

83

85

90

93

110

120

125

120

110

90

85

The formula Pure Mountain Water used to forecast demand for the period ahead (i + 1, where i is the current period) follows:

Overall sales of mineral water (in six-packs of 375-mL bottles) through the second half of 2016 are shown in Table A3.6.3. Pure Mountain Water’s market share of the above unit sales is shown in

Forecast demandi + 1 = Actual demandi × EIi+1 × SIi+1 EIi

Table A3.6.4.

SIi

Table A3.6.3 Mineral water sales (375-mL six-pack, millions), 2016/17 Victoria, New South Wales, South Australia and Tasmania Actual sales July–Dec 2016, forecast sales Jan–June 2017 not shown July

Aug

Sept

Oct

Nov

Dec

7.71

8.18

8.52

9.78

9.23

12.2

Jan

Feb

Mar

Apr

May

June

Table A3.6.4  Pure Mountain Water mineral-water market share, 2016/17 Victoria, New South Wales, South Australia and Tasmania Actual share July–Dec 2016, targeted share Jan–June 2017 July

Aug

Sept

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

June

2.5%

2.6%

3.0%

2.8%

2.9%

3.1%

3.2%

2.7%

2.5%

2.6%

2.2%

1.9%

Sources: For discussion on the financial implications of extending the product line, see Spotlight 8, Analytic measure 8.5. Definition from Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003, pp. 152–3; and Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006.

Spotlight 7: Digital marketing metrics 7.1  Search engine marketing In Chapter 13, we suggest that many marketing organisations employ strategies that involve using a combination of more traditional media and direct and digital marketing tools and techniques, or using the latter on their own. While direct and

By following such video tutorials, you will learn how to set up and budget campaigns that are targeted geographically and by time. There are also video tutorials, such as , that enable you to set up and monitor custom dashboards for a website. Figure A3.7.1 presents a custom Google metrics dashboard for mobile commerce. More importantly, you will see the metrics available and how to make comparisons

digital marketers are vitally interested in average revenue per user (ARPU), they also

with competitive sites and obtain more detailed information on visits to the

monitor performance on such intervening variables as brand awareness, knowledge

website in terms of where people come from, and on which days and hours

and intentions to purchase, and satisfaction levels. These are just a few of the analytic

they visited. Likewise, detailed information is available on pageviews and other

measures associated with marketing communication and post-purchase loyalty.

aspects, such as average time on site (‘dwell-time’). We can also see which

The marketing organisation employing search engine marketing and

search engines people use (most will come from Google), the percentage of

using Google Adwords specifically as part of its direct and digital marketing

visitors coming from referring sites (click-throughs from websites carrying

communication strategy has analytic tools provided by Google available to them.

Google ads) and those visitors coming directly to the site. Analysis of ‘Traffic

There are many online videos available to learn how to set up an Adwords campaign

Sources’ also enables us to assess the performance of Keywords, Adwords

and yield results. For example, see .

Campaigns, Keyword Positions and much more, including the performance

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506

Appendix 3  Marketing analytics spotlights

Figure A3.7.1  Custom Google metrics dashboard for mobile commerce Source: Graham Charlton, ‘10 useful Google Analytics custom dashboards’, econsultancy, 30 May 2013, , accessed 24 February 2016. Google and the Google logo are registered trademarks of Google Inc., used with permission.

of the versions of the ads used. Various customisations are possible on the

protocol (VOIP) telephones – offering more benefits to salespeople and others in

widgets and dashboard and can also be viewed on the new reporting metrics

the company, and thus becoming must-have and often costly tools. It is more a

–for example, new visitors or search traffic. Cost Data Import enables users to

case of the task of communicating interactively with customers becoming easier

see the performance of paid marketing channels, including non-Google paid

and more productive in subscriber markets, but much more difficult in the case of

searches.

repertoire markets faced by the marketers of FMCGs. In the latter case, marketers

We suggest you spend time becoming familiar with the metrics Google provides

are finding that customers are turning to many different media channels, and that

by viewing Help Resources provided in the View Reports and other areas at Google.

those born between 1977 and 2000 (Generation Y) are very connected with those

We finish with the reminder that, if it cannot be measured, then it is not marketing.

they have decided to form relationships with and see technologies, such as mobile

In this context, Google Analytics is a boon to marketing. This is particularly true as

phones and the internet, as a means of maintaining and enhancing their social

Google data enable real-time analysis.

relationships.

Sources: Jayson DeMers, ‘The definitive guide to Google Analytics for SEO professionals’, Search Engine Guide, , accessed 19 February 2016. View the Google AdWords Help Centre, , accessed 19 February 2016, for Adwords Help and the metrics behind search engine marketing. See also Danny Sullivan, ‘How search engines rank web pages’, SearchEngineWatch, 23 September 2013, , accessed 11 February 2016; and Albert-László Barabási & Réka Albert, ‘Emergence of scaling in random networks’, Science, 286(5439), 1999, pp. 509–12.

A brief summary of the history of the web since it was first used commercially is presented below, from which we see various attempts at using this digital technology to communicate, transact and maintain relationships, with different performance measures used. 1

Web 1.0 to Web 1.5 (about 1994–2006). During this period, the main performance measure was eyeballs – that is, the number of people visiting a domaiçn name site (e.g. ). Metrics such as hits soon fell from favour as even a blank spacer graphic (e.g. blank.jpg) was

7.2  Digital marketing measures

regarded as a hit. Page impressions (page views), which are downloads

When it comes to digital marketing, change is very noticeable and, in many

of particular pages by unique visitors, became a more important website

instances, the changes are quite disruptive. Why is there disruption? It is not just

performance measure and are still monitored and recorded in web

a case of new technologies – such as 5G mobile phones and voice-over-internet

server log files. Where people signed up to purchase or receive product

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information on an ongoing basis, online marketers were able to develop

viewing more pages on single visits to a website (average page views per visit)

customer profiles much as any direct marketer was already doing, but now

and by visiting sites more often. Arguably, it is preferable to engage with high-

more easily and less expensively. Stickiness was another way of expressing

frequency visitors. Medium- and low-frequency visitors cost more to service and

loyalty. By this we mean that, if the customer keeps coming back to a site

may well buy less. While it is possible to measure the transaction aspect of such

to search for information or to purchase, the online marketer can monitor

sites in terms of sales and profits (e.g. average revenue per visit), the issue remains

usage of the website in terms of entry pages, upstream and downstream

of which website elements most influence such aspects as brand awareness,

sites visited (information provided by network-centric research companies

knowledge and liking, and how these in turn influence financial performance

such as Connexity Hitwise) and click-throughs from display and banner ads

measures. One aspect that is necessary where mobile app campaigns are involved

to gain information, view videos or purchase, and match this information

is to link a website’s AdWords and Google Analytics accounts so as to analyse

to known customer profiles and exit pages. Websites can be customised

performance. Additionally, we suggest that content analysis of websites using a

and offer tailored products/services to individual visitors whose profiles

validated research tool in tandem with an examination of objective (e.g. third-party

are maintained in databases. Important metrics such as conversion rates

financial reports) and subjective (i.e. self-reported by managers) marketing (e.g.

(ratio of visitors to purchases) and channel profitability were, and still

market share) and financial performance measures (e.g. sales and profit) is one

are, monitored.

answer to this question.

Web 2.0 (about 2006–07). During this period, stickiness came to be thought

As streaming media is increasingly used in marketing websites, the web

of more in terms of dwell-time on a site. Where people might see a logo for

analytics task becomes more complex. RSS and website-delivered commercials for

two seconds at the end of a television commercial, they might see the ‘hero’

PCs and mobile phones are examples of streaming media. Various key performance

brand for a few minutes if product placement in a television series or movie

indicators are used when monitoring streaming media, such as the ratio of stream

has been orchestrated. But if people visit a website and their attention is held

views to page views, the percentage of completed stream views and average

for (say) 15 minutes on successive pages that feature the brand, then we can

mobile page views per visit, among others. As with all marketing effort, it is

say that the attrition rate is lowered. We do not see people defecting to other

important to provide updated content that compels people to return to a website.

sites as they move deeper into long scrolling pages (in a magazine format site,

The ultimate aim is to convert visitors to subscribers and to convert subscribers into

such as ) or further along a website (television sequential

sales and profits.

images/pages format, such as Coca Cola’s website for Great Britain which is

Sources: See ‘Is a mobile-first approach really best? This may be the year mobile eclipses desktop spend, but should marketers go all in?’, , accessed 24 February 2016. See also Graham Charlton, ‘10 useful Google Analytics custom dashboards’, econsultancy, , accessed 24 February 2016; Michael Wiegand, ‘The perfect Google Analytics dashboard’, Portent,